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Summary:

The clock is ticking on start-ups that are capitalizing on the Iowa-based free calling schemes, as incumbents use their immense political, legal and fiscal muscles to shut down some of these services. Like Allfreecalls.net, Fonpods and FreeConferenceCall.com are the latest to find a bullseye painted on […]

The clock is ticking on start-ups that are capitalizing on the Iowa-based free calling schemes, as incumbents use their immense political, legal and fiscal muscles to shut down some of these services.

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Like Allfreecalls.net, Fonpods and FreeConferenceCall.com are the latest to find a bullseye painted on them, thanks to Qwest. UPDATE, 9:00 p.m. PST, 2/23: Looks like the Fonpods site is offline. Who’s next?

In a lawsuit filed Feb. 20, Qwest joined the list of long-distance carriers who are bringing legal heat on the Iowa-based “free calling” schemes. In its case the Denver-based Qwest alleges that the “fraudulent, unfair and illegal” free-dialing schemes had resulted in “millions” of dollars of increased expenses for Qwest, including monthly bills that were as high as $500,000 from one rural Iowa telco.

Like AT&T’s earlier suit, Qwest’s was filed in the U.S. District Court for the Southern District of Iowa, Central Division. It seeks to stop free-calling concerns as well as their rural Iowa telco infrastructure partners from continuing with the operations that use regulatory-fee arbitrage and VoIP to provide international or higher-service calls (such as conference calls or chat) for only the price of a long-distance call to Iowa.

Unlike AT&T’s suit, however, the Qwest pressure has not yet shut down operations of some of the named defendants, a list that includes Fonpods (dial-up podcasts), FreeConferenceCall.com and HotLiveSexChat (please feel free to find that link yourself), whose websites all seem operational. The free international calling service advertised by FuturePhone, an AT&T as well as a Qwest defendant, remains offline.

Another Iowa-centric “free” calls provider, Allfreecalls.net, was also forced offline recently by what the company called “increasing pressure from a large USA based carrier.” In a blog post Thursday, Allfreecalls CEO Pat Phelan said the service would be working again soon. Phelan would not comment further on the situation via email or phone (not even via, say, Skype).

In case you missed all this the first time around, here are the basics of the situation: When a long-distance call is “terminated,” if a long-distance provider like AT&T or Qwest 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 both Qwest and 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, or to provide other services, like conference calling or chat sessions. The profit comes from some method of subtracting the money paid for foreign terminations or other services from the amount gained from the long-distance providers by “terminating” calls in Iowa.

According to the Qwest suit, the Iowa rural telcos were then splitting proceeds with the free-call companies, just one of the acts Qwest deems illegal by several state and FCC statutes. Both Qwest and AT&T maintain that since the calls are actually not “terminated” in Iowa, but are in reality international long-distance calls or higher-service calls connected elsewhere, the long-distance providers should not have to pay the Iowa telcos any termination fees.

According to the Qwest lawsuit (as well as another filing with the Iowa Utilities commission), the “free” services caught on pretty quickly, with long-distance minutes provided by Qwest to one small rural telco jumping from an average of 15,000 minutes per month in June, 2006, to 6.4 million minutes per month by November, 2006. That spike, Qwest’s suit says, resulted in a monthly bill of $500,000 from that single rural carrier, part of a scenario that piled up bills totaling in the millions of dollars. Qwest’s suit names six telco defendants, as well as a list of “free call” concerns.

Like AT&T, Qwest seeks relief from the telco bills with its lawsuit, which may put the free-call startups on the rocks simply through the ability to delay any payments while the matter is under legal dispute. Repeated calls and emails to two of the Iowa telcos central in both disputes — Superior (Iowa) Telephone Cooperative and Great Lakes Communications Corp. — have gone unreturned.

While we wait for more phone calls and emails to be returned (or more legal filings), here are some more fun factiods from the Qwest filing:

– According to Qwest, it is legal by FCC statute for Qwest or other long-distance providers to block such “free” calling schemes; but to do so, Qwest must know the exact phone number of said service. In Iowa, Qwest charges, the rural telcos have engaged in a serious shell game by switching phone numbers around (sometimes on a daily basis) to avoid such detection. Qwest’s lawsuit noted that Superior Coop, located in the rural northwest Iowa town of the same name, has only 175 access lines for its handful of residents, but has at its disposal more than 10,000 local phone numbers; another rural telco with 1,746 access lines, Qwest says, has more than 280,000 numbers to work with.

– Unlike some of the free-calling outfits, whose websites seemingly purposely hide corporate information, Fonpods seems well above-board, even having scored a spot at DEMOfall in 2006. A quick call to Fonpods Thursday night linked us to a podcast of NPR’s All Things Considered, so it may be interesting to see what happens to Fonpods’ content list as the lawsuits progress.

  1. I just wonder if this would bring down the free mVOIP provider TruPhone too?

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  2. Snapvine.com also uses the Iowa loophole for their MySpace voice message system. It’s how they make money I guess. Call it is the ‘Iowa’ business model.

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  3. I spoke with Pat via Skype last week and had a pretty interesting conversation:
    http://www.bestdamntech.com/bdtsp-interview-with-pat-phelan-from-allfreecallsnet/

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  4. Hmm. I’m still not totally convinced that it’s illegal, and I’m also concerned that a ruling that it is would set very bad precedents for legitimate services.

    At the same time, this clearly is abuse of the regulatory system. The system was set up to subsidize rural access (one of many such subsidies, such as the Universal Service Fund), and this definitely perverts the original intent.

    Personally, I’d rather see a regulatory reform that perhaps finds a different way to subsidize rural services, if necessary. There is legitimate phone arbitrage, and it shouldn’t be illegal. I’m just not sure how a ruling that this is illegal would properly distinguish between legitimate arbitrage and this kind of thing. Certainly the “it doesn’t really terminate” argument could have negative repercussions.

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  5. A big reason why all these startups are in Iowa is because they use Vapps powerful API to easily do the telephone part, without needing to buy their own switches, pull T# lines, learn phone programming etc. So the CLEC gets a cut, Vapps gets a cut, and the small startups like snapvine,foneshow,etc get the rest, which is probably by the time it gets to them not even a penny a minute. Not exactly a lucrative loophole, but more like a convenient place to run telco out of with low startup costs/overhead.

    Illegal… doubtful. Pissed off telcos who have been robbing consumers for years… definitely.

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  6. Probably the most sensible comment in the whole affair. Thanks Marcus

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  7. Marcus:

    Based on what I hear, it’s the other way around: the startup takes care of the conference bridge capex and gets a penny or two of the terminating revenue, the telco keeps the rest, but it’s still all negotiable.

    Even with Vapps (http://www.vapps.com/) or any other conferencing bridge product, you still need a Class 5 switch to receive all the traffic. Why do you think softswitch vendors such as Metaswitch have done so well in Iowa? =) The other option is to lease switching capacity from another LEC.

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  8. It’s easy to believe that the telco’s side, whe all you are reading is there law suits.

    The service providers had valid/lawful contracts witht the Iowa telco’s.

    The tarriff’s that they billed for were valid at the time the call’s were made.

    The reason that these suits are bing filed in Iowa court is that the telco’s don’t want to go in front of the FCC. It’s there way of strong arming by not paying. This will go in front of the FCC and the telco’s will lose.

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  9. It’s a shame about Fonpods, but “illegal” rev share is not the only way to provide what is otherwise a great service. For example, Earkive (www.earkive.com) is completely legit: They don’t rely on anything in Iowa, have a sponsored service offered for free to the podcasting community that the company pays for, and have better functionality.

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  10. Marcus,

    Foneshow does not terminate in Iowa or use the CLEC “biz model”.

    Erik Schwartz
    Foneshow LLC
    Co-Founder

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