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AT&T’s ‘Free Call’ Bill: $2 Million

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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.

46 Responses to “AT&T’s ‘Free Call’ Bill: $2 Million”

  1. Further, we all pay for the universal phone service access we all enjoy, one way or another; through access fees and taxes. One way or another, the costs must be paid in order for us to pick up the phone and know that our calls to the mountains of Wyoming will be connected. The whole point of giving the rural companies a rate advantage is to help them support the rural environment which is, per capita, much more expensive to support. We will need to continue to support that infrastructure, either from fees the carriers pay, or from funds given to those rural companies by government subsidies. I don’t know about you, but I would much prefer to see the the market cover these than bureaucrats. In this case, the market will be more efficient, and the market will reward the rural innovators. We, the people, created AT&T. Now it is time for AT&T to stop inhibiting market creativity with bullying tactics.

  2. Don’t feel sorry for AT&T. There is a natural check and balance here that AT&T doesn’t discuss. As a rural LEC’s revenues increases (from ENTREPRENUERIAL effort), their state regulators will eventually lower their approved tarrifs and their portion of the universal fee.

    Let the free enterprise system work. Better rural LEC support themselves via entrepreneurial effort (like AT&T is attacking) rather than continued subsidies. How else will our rural phones be supported? Next time you travel in the countryside, count the number of telephone poles to some of those farms. Those didn’t magically sprout!

    Also, VoIP calls haven’t even begun to be regulated yet. AT&T is simply using its monopolistic muscle to kill competition. It is the nature of the beast.

  3. On the subject of ATT/SBC predatory “business” practices: I come from a community where there is a single local exchange under SBC contro, with approximately 2000 customers.

    By local exchange, I mean that any call to any other exchange, no matter how nearby, is a long distance charge call. The local exchange includes the county’s largest town (the county seat), but all but one of the other towns in the county are served by independent telcos.

    ALL calls from the local exchange to these other communities and to most rural areas of the county are charged long distance fees.

    ATT/SBC gets termination compensation, I believe, for all calls from these other communities into the county seat or to any of the 2000 customers in the “local calling area”. This has been going on since local community leaders made a very bad decision in the 20’s and sold the local system to SBC’s predecessor, Southwestern Bell.

    SBC is making a bloddy mint off of this arrangement, and refuses to sell this exchange to an independent which is far superior in technology and service, and which has the rest of the county and parts of several adjacent counties in a single local exchange! It makes us want to scream, but there is no one to hear…

  4. “InterState Access costs:
    for the I/CLEC’s in question:
    Thus the caller might pay 2.5 to 5 cents (or nothing in an all you can talk plan) per minute to their carrier. Then the call goes out for less than a penny to the international country.
    Cost for overhead: switch & rack space
    (techs) website, etc”

    OK so why would not Independent telcos everywhere in the US all be able to offer these “no cost” long distance services on an arbitrage basis completely without publicity. Word of mouth basis. The volume could be low enough and build slowly enough to avoid notice. Technical arrangements could distribute the local termination across the number space available, avoiding termination spikes for any given number.

    Such a service could be, would be only a “friends and family” benefit to the independent’s customers, and contribut only a small amount to the revenues of the company. But these are mostly cooperatives in rural settings, and the benefits of additional cash flow do flow directly to the customers, and are significant to cash strapped cooperative telco capitalization opportunities.

  5. It is not illegal nor wrong under the current telecom tariffs or laws. ATT is by far THE worst company in America for USA consumers.

    ATT is monopolistic and use lawyers like we use toilet paper. Since deregulation in 1984 we have seen ATT regain 80% of the lines in America in less than 23 years.

    ATT’s network is out of date and the USA ranks 18th in the world for broadband speed and penetration.

    Hopefully one day soon ATT will be split up once and forever. Unlikely until we change lobbyist and our political system though.

  6. Schemes like WILL NOT and SHOULD NOT survive. They are plain wrong. If the lawsuit does not end the schemes, I hope mobile operators and VoIP providers to start blocking the access numbers of such services. I can’t believe that US consumers are selling their morals so cheaply. At the end, there are so many low cost unlimited plans to those destinations. At the end, think about it – OK, you save one penny per minute, but that minute costs AT&T 7 cents per minute. Then, half of those 7 cents go straight into the pocket of foreign nationals that really don’t care that AT&T will try to compensate from the loss one way or another, i.e. the US consumer will pay for it anyway. It’s plain wrong and it’s time to end it!


    I think if the Court ever rule on AT&T’s side, this will limit emmission trading which is part of the international policy to make our enviornment better. Financial, interest rate abritrage has been doing that legally for years. Besides no disclosing, what Earon did on their energry trade were legal. This subsidy is part of our American public policy to encourage a level playing field and brings telecommunications and TV signals to all parts of the country, instead of creating isolated spots. So I dont think the Superior court will rule this as “illegal”, it is just the law were passed and technology catches up. Look at IRS, there were still tons of loop holes, but life goes on. Even internet purchase are tax free, is that a loop hole and make eCommerce sites illegal? I think the find needle that will break a camel’s back is how good each side’s lawyers are, how they lobbby, how they do the PRs.

  8. Also:

    InterState Access costs:
    for the I/CLEC’s in question:


    Thus the caller might pay 2.5 to 5 cents (or nothing in an all you can talk plan) per minute to their carrier. Then the call goes out for less than a penny to the international country.

    Cost for overhead: switch & rack space
    (techs) website, etc

    Call comes in: LEC logs the CABs billing of .071 deducts the cost of .01 for the international call – both sides split: .061 or make about 3 cents a piece per MINUTE. Do 1 million minutes per month and you are each getting $30K IF the carriers PAY the cabs billing.

    Most of the big carriers like ATT use their money and legal clout to wear you do and pay out only a fraction of what is owed.

    No one broke the law here – ATT is the 100,000 pound gorilla who beat them down with lawyers. Why ? they want to scare away anyone else who dares to think of trying this. Yes, even if they spend $2 million in legal fee’s.

  9. Ok – look at FreeConference dot com <- they were sold for $42 MILLION Dollars. They partnered with CLEC’s who gave them back a piece of the CABS and recip comp the Lec’s recieved from the IXC’s and other LEC’s.

    It is called Arbitrage – ATT puts out a flat rate 5 cents per minute to call long distance and averages out its cost to terminate & originate calls across each NPA NXX. In some cases due to the NECA rules and HR 1555 (telecom reform act) they can go upside down – IA stinks in terms of access costs – extremely high. Alot of crap goes on with the IA lec’s – every week new scams come across my desk.

    They haul traffic out of IA to a switch in MN and then run it back to IA and call it interstate traffic. Then they bill the IXC’s for CAB’s fee’s as if it is intrastate, etc.

    The stupider carriers like GC & Q pay the fee’s.

    Future Phone and others ARE NOT breaking the law, they are participating in a loop hole. The countries they terminate to for free are less than a penny for wholesale cost.

    The normal split is 50/50 or 60/40 (60 for the marketer like Future Phone) –

    This goes on in UK & Germany by the way as well.

  10. AT&T always cries foul when the rules are not set-up the way they like them. They are the ones who promoted this pay for terminating on a carriers line system. Then they cry foul when someone leverages it against them.

    They also say websites should pay for access to their internet pipes. Even though the consumer already pays a monthly fee. Careful with AT&T they always try to bend the rules for their purposes.

  11. Paul Kapustka

    To answer a previous question I think FuturePhone and the LECs were splitting the take. Again, only speculation since I haven’t seen any solid info anywhere and FuturePhone folks are not to be found. Tom, any better info?

  12. Seems to depends whose ox is being gored. As the nation’s largest local carrier, at&t collects billions in access charges from calls terminated on lines its subscribers are already paying rent for (although at less than $.14/min – a consequence of outmoded regulation.

    In fact SBC once sued the old AT&T for disguising LD calls as local to avoid this toll.

    More thoughts on this at

  13. John Thacker

    “It seems to me what Futurephone is doing is really not much different than terminating the call to the PSTN.”

    Yes, legally, it’s unclear to me too that there’s a case. It’s quite obviously against the spirit of the regulations, which assume that the number of calls terminating in these out of the way locations will be capped. But illegal? Not necessarily.

    “Also, if you think this is a troublesome example of “regulatory arbitrage”, what about the “emissions trading” economies that are being created as a result of US environmental policy.”

    Well, the NOx and SOx emissions trading systems in the US have led to a incredibly fast reduction in NOx and SOx emissions (faster than the original EPA projections under a traditional command-and-control regulation scheme) at a cheap cost. So I’m not sure how it’s necessarily a troublesome example. The worldwide carbon markets are a result of Kyoto, and have less to do with the US.

    Criticisms of either have mostly to do with the methods of allocation of credits, which indeed does have room for rent-seeking, or in the actual targets set. Though, the credit allocation is no worse than the existing problems of grandfathering old power plants versus the expensive New Source Review that a new plant would take (which currently favors 40-year old dirty plants run by incumbents and discourages incremental upgrades), and the actual targets set is no different from the setting of targets in a command-and-control regulation scheme.

    For information about the wildly successful SOx emissions trading program in the US (the Acid Rain Program), see here.

  14. How does FuturePhone and other like companies extract the termination fee from Superior Coop and other LECs? Seems to me that the LEC must pass on a portion of the per minute subsidy to FuturePhone, and this is probably not in the spirit of the regulations. So while it can be argued FuturePhone may not have done anything illegal, I can certainly see Superior Coop, Great Lakes, and others having to defend spending their subsidy by paying customers to receive phone calls.

  15. Also, if you think this is a troublesome example of “regulatory arbitrage”, what about the “emissions trading” economies that are being created as a result of US environmental policy.

  16. 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.

  17. John Thacker

    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 that John Smythe mentions.

  18. John Thacker

    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.

  19. Paul Kapustka

    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.

  20. 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.

  21. 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.

  22. 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”!