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Summary:

Guess who got stuck with a big bill for all those “free” international calls touted by outfits like FuturePhone? None other than AT&T, which has filed a lawsuit in Iowa claiming that “deceitful and unlawful schemes” like FuturePhone’s caused a jump from $2,000 per month to […]

Guess who got stuck with a big bill for all those “free” international calls touted by outfits like FuturePhone? None other than AT&T, which has filed a lawsuit in Iowa claiming that “deceitful and unlawful schemes” like FuturePhone’s caused a jump from $2,000 per month to $2 million per month in the fees billed AT&T by an Iowa rural telco.

Filed in the U.S. District Court for the Southern District of Iowa, Central Division, AT&T’s lawsuit seeks to stop FuturePhone as well as the telcos who provide local infrastructure from continuing with their operations that use regulatory-fee arbitrage and VoIP to provide international calls for only the price of a long-distance call to Iowa. Though the case was just filed on Jan. 29, it has already apparently caused FuturePhone to shutter its service, and has produced nothing but “no comment” replies from the Iowa LECs we contacted who were also named in the suit.

“This is just the latest in a long line of get-rich-quick schemes that bilk others to make a profit,” said an AT&T spokesperson. The lawsuit claims that operations like FuturePhone’s are in violation of several statutes, including Iowa state laws as well as previous FCC decisions.

Some background, for those not familiar with how intricate cross-network billing can get: When a long-distance call is “terminated,” if a long-distance provider like AT&T doesn’t own the local lines where that call is going to, it must pay a fee to the company that does. Even though such termination fees are typically higher in rural areas, since there are usually relatively few customers in the sticks big long-distance providers can easily balance the cost with their other businesses.

In Iowa, higher than average termination fees (as much as 13 cents per minute, according to AT&T) have been lately combined with fiber-based Internet access to provide a pretty good place for a VoIP-based gateway, which can then provide a way to cheaply reach foreign PSTNs. The loophole comes from some method of subtracting the money paid for foreign terminations from the amount gained by terminating calls in Iowa. While the margins are pennies-or-less per call, the lure of avoiding the high cost of international calls apparently caught on quickly, to the tune of hundreds of thousands of minutes a month, according to AT&T.

And when AT&T’s average monthly bill to one such Iowa telco, the Superior Telephone Cooperative, went from $2,000 to $2,000,000, it was time for Ma Bell to call the fine-suited folks at Sidley Austin LLP to try to close the loophole down.

Boiled down, AT&T’s main argument is that because the calls are not actually “terminated” in Iowa — AT&T says Iowa is just a midpoint in what is really an international call — AT&T shouldn’t have to pay the LECs the termination fees. Telco legal sources we talked to said that while the suit’s merit can certainly be contested, what it does immediately is give AT&T a legal reason to stall payments of such monthly bills, which could effectively strong-arm the startups out of business.

In FuturePhone’s case it seemed to have done the trick, since FuturePhone’s website still carries a big red “this service is discontinued” banner, and contact numbers for the company have all apparently been disconnected. The person who answered the phone at Superior Coop referred us to another Iowa LEC, Great Lakes Communications, which was also named in AT&T’s suit. There, we talked by phone to someone who would only identify himself as “Josh,” who said when asked about FuturePhone, “I’m not going to tell you that stuff.”

While some free-call operations (including Free Call Planet, also named in AT&T’s suit) still seem to be operating in Iowa, AT&T did leave room for yet-unnamed firms at both the website and telco level to be added to the suit. The bottom line, for firms seeking to make a buck by using regulatory loopholes: Good luck in court, because the legal equivalent of the Yankees just showed up in Mudville.

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  1. Thanks for digging this info and confirming the long held suspicion.

    But it is not clear to me why the margin is “pennies or less”. Since the rate to reach the canonical 30 countries is 2 cents (SkypeOut rate), one would think the margin is a cool dime a minute.

    And these were once considered “disruptors”!

  2. Aswath, the wholesale rate of termination to a number of countries in less than 1 cent per minutes (Skype have to make money!), which enabled companies like Futurephone to exist. A shame for US consumers that the loophole is going to be closed. Services that work on an arbitrage principle have been successful in the UK, see for e.g. http://www.dialabroad.co.uk/mobileplus.

    Regards,

    John

  3. Sorry, that link should have been:

    http://www.dialabroad.co.uk/mobile/plus

  4. Have you talked to any of the defendants? On the surface AT&T’s claim sounds reasonable but telecom regulation is VERY complex. If AT&T says its a scam, it does not make it one. These guys are a free info service. I think they read the rule book and found a legal loop-hole. Check it out.

  5. A dime a minute Aswath would mean 200 million minutes!!!!!
    I believe this is a carrier/FCC issue and will be sorted out

  6. John, this means dime is a lower bound, right? So my point still stands? Also, isn’t regulatory arbitrage a sign of poorly implemented social policy? By the way, Reliance India gives me about 10 cents/min via a toll free number. I think that compares favorably with Dialpad’s 5 pence/min.

    Pat, it is more like 20M minutes – just a nit. But I am missing your point. Are you suggesting that AT&T’s claim is unreasonable? It could be.

  7. David, so far none of the defendants that I have been able to find has commented (or even had a working phone, in FuturePhone’s case). More than ready to hear their side. Aswath, you may be right on the margins, but I don’t simply want to trust AT&T’s allegations of pricing. So until we hear from a FuturePhone or an Iowa telco, we’re all guessing at the margins.

  8. John Smythe–

    The difference is the complicated regulation that makes the termination fees to rural locales higher than elsewhere. It’s people taking advantage of the rural subsidy.

    If there were no differential pricing with a subsidy for the rural areas, then the arbitrage would be perfectly fine. But this takes advantage of the (perhaps stupid) regulations.

  9. The idea is that regulators, both nationally and at the local level, want to encourage rural phone service. It costs considerably more to install and service phones per customer when the population density is lower. So, a variety of methods are used, such as the Universal Service Fee.

    One of the methods is call termination fees. Rural providers get paid extra money to terminate calls, in an effort to subsidize their business and encourage rural phone service, and the tax is paid by the big carriers but ultimately by other consumers. Like any subsidy, it causes distortions, but so long as people didn’t figure out how to arbitrage it, it survived and the big carriers could absorb the small cost. (After all, the inherent number of calls that people wish to really terminate in rural areas is limited.)

    Now, with this arbitrage exposing the problems, there are two options:

    1) Reform the subsidies, perhaps dropping them entirely and subsidizing rural service in other ways (if at all)
    2) Prohibit the arbitrage.

    I’d have to prefer 1), because I think that a law prohibiting the arbitrage would interfere with real disruptive uses, ones like dialabroad.co.uk that John Smythe mentions.

  10. Unless there is something in AT&T’s agreement capping the minutes the LEC can bill AT&T to terminate the calls, this does not seem illegal, but I am not a lawyer. Unethical perhaps, but I’d imagine AT&T might have a difficult time proving their case. More likely it was the threat of legal reprisal that caused FuturePhone to panic and shutter their service. I’d also imagine AT&T could terminate their agreement at any time. It seems to me what Futurephone is doing is really not much different than terminating the call to the PSTN. Once they have the call, it seems they would be free to do with it what they wish, and if that means converting it to SIP and sending it across the pond, so be it. I’d have to imagine they were using SIP and then purchasing wholesale terminations from different geographic providers. I doubt very much they were using Skype to transport their commerical calls. If they can bill AT&T for the termination at $0.13 and route the call to Eastern Europe for, say, $0.08, there is a profit delta of approx $0.05 per minute. Termination rates with SIP providers vary from location to location, and change all the time. They could have had a softswitch and an application performing LCR (Least Cost Routing) to these various international routes. You can even have multiple providers for each international termination, and monitor for QoS on each route.

    The question seems to be if they are in clear violation of their agreement with AT&T. Even if AT&T’s case is week, their lawyering is likely considerably more skillful than FuturePhones, and the costs associated with defending themselves from lawsuit(s) from AT&T would likely drive them out of business anyhow.

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