Blog Post

Qwest: ‘Free’ Calls cost us ‘Millions’

Stay on Top of Enterprise Technology Trends

Get updates impacting your industry from our GigaOm Research Community
Join the Community!

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, Fonpods and 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), 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,, 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.

35 Responses to “Qwest: ‘Free’ Calls cost us ‘Millions’”

    • Rondee does not have the problems the other free conference call services have been facing. This is because Rondee has never been involved in the sort of practices that the carriers have been complaining about. Rondee’s conferencing bridge is in a Tier 1 metropolitan market (San Diego: 619-276-6333).

      Andre Vanier, Co-Founder, Rondee, Inc.

  1. anony mouse

    The FCC ruled on a similar aspect already, and this could actually help the LECs and others on that side of the fence. Audiotext v AT&T from 2000-2004 (it took a few years to resolve the case). The basic premise of this case is audiotext negotiated a low rate (5 cents/min) to the UK then proceeded to call a bunch of 700 numbers they were paid 13 cents/min for. It cost AT&T more than that to terminate the call.

    While audiotext was calling themselves, something not alledged here, the base of paying less per minute than it costs to complete the call and revenue sharing remains the same.

     35.  Although we by no means endorse the kind of business conduct that AudioText admittedly engaged in here, we have no authority to depart from the well-settled filed tariff doctrine simply because we wish to censure certain business conduct.  Instead, the Act places the burden on carriers such as AT&T to protect themselves against customer conduct they deem unfair or undesirable by incorporating appropriate safeguards in their contract and/or tariff provisions.  In this case, AT&T failed to take such protective measures before contracting with AudioText.  Accordingly, because we find that AT&T's suspension of AudioText's service on September 15, 2000 was not authorized under section 2.9.6. of the tariff, we rule in AudioText's favor on these counts.

    The FCC ruled completely in audiotexts favour and stated that AT&T violated their tariff when they shut off audiotexts service and (redundant claims were tossed merely becuase they were redundant and were not reviewed).
    they have a pdf as well, but this ensures that everyone can read it easily.

  2. Free conference companies are figting back.

    Remember that Qwest and AT&T think they are doing favors for people or end users. They are saying these calls cost us millions of dollars, but who paid the bill? The customers pay Qwest and AT&T for their bills, but then Qwest and AT&T don’t pay the companies. Who is in the wrong there?
    Cingular and AT&T jam phone networks at night for text and toll free numbers for the american idol show. Maybe these calls should be blocked from the local side?

    Cingular, the provider of mobile services to the show, rang up an astonishing 41.5 million text messages from the show’s voting system. In the quarter that just ended in March — smack dab in middle of “Idol” season — the company reported a 9% increase in revenue and a profit of $350 million, and attributed it partly to “Idol.”

    Cingular has jumped heavily on the “Idol” wagon as the show’s popularity has grown. It now sells ringtones of “Idol” performances as they happen. And it recently launched a service that allows the 70 million MySpace subscribers to sell their own “Idol”-like karaoke performances as ringtones via the site.

    Others gleefully join in. Coke pays a hefty sponsorship fee but gets prominent product-placement throughout the program. Vidgame firm Konami is said to be planning an ambitious “Idol” game. And in licensing that may really stretch the brand-extension cord, Mattel has “Barbie American Idol — Rockin’ Recording Studio” while the costume firm Disguise offers the “Future American Idol Toddler Costume.”

  3. No deal has been struck. The Iowa telco’s have in fact sued AT&T in New York for nonpayment. These are published rates and this activity has been going on for years. It is part of the design of telecom regs. The big guys attack what they pay, but not what they collect. In fact, this creates the opportunity for them to make money off of the long distance fees people pay to get to the free conferencing or chat service (that part is not free). this allows the FCC to find a way to subsidize rural guys without raising the universal service fund fees, and it has created an entirely new market as it has lowered the cost of conferencing and chat to levels that the old bell monopolies can’t stand.

    This is all a bullying ploy to keep new players out of the market. And it is working. But the correct venue is the FCC which sets and reviews these rates (and the volumes sold under them) every two years. We are in the middle of that process now, which is why Qwest and AT&T are pursuing these groundless suits. They know no one likes being sued and even a worthless suit is expensive for startups and these small, unsophisticated rural guys.

    But don’t believe the nonsense in their one sided corporate spin.

  4. Why is At&t AND Quest suing? You would think that Quest would wait to see what happens with AT&T’s suite before getting into a costly legal battle. It’s like throwing a big juicy steak into what could be shark infested waters, and then jumping in yourself before it hits the water.

    I’d bet anything that AT&T struck some sort of deal already and Quest is trying to get in on it too and so they don’t get screwed down the line when this arbitrage is officially allowed by the courts.

  5. I believe that the genesis of the problems started when Qwest decided to price to the competition instead of the cost. Although many long-distance businesses have adopted this unreasonable approach to business – it doesn’t mean that they will make money doing so.

    Qwest management isn’t upset with the results of their UNLIMITED long distance plans (142,000 new customers last year).

    I remember a day when a caller had to pay a per-minute rate based on where they were calling. I suppose if it cost 5 cents to get to one of the rural phone companies (as stated by Qwest in their lawsuit) Qwest management should probably charge their customer 5 cents or more to get there. If they don’t I suppose they are going to lose some money – that is not hard to figure out. If Qwest does lose money, it is not the Iowa telephone companies fault, after all it is Qwest that charges the customer. The Iowa phone companies have been forced to lower their rates time and time again – just so the Qwest management can lower their rates even more – or offer UNLIMITED long distance plans.

    Qwest management states that it cost 5 cents to get to Iowa and on Qwest’s website they post rates of 5 and 7 cents when they charge per minute for long distance – so where is the problem – so where is the damage.

    Obviously a big phone company smack down on the little rural independent phone companies.

  6. I have been in telecom for about 20 years. I have to say that this whole thing seems like one giant scare tactic. has been “shut down” and “seized by Quest”? This is not how the law works in the great USA. A big company cannot simply seize the property of another company becuase they disagree with what they are doing. It’s all BS. Look at There is a big red banner across the page “This service is no longer available.” COME ON. Whoever shut down Futurephone wanted everyone to know that it is shutdown. If it was the FCC or AT&T or whoever, it would have just been taken down, or fwd to some other domain name. My guess? AT&T threw Fututrephone some $$ to shelf them, and put that banner up to scare any other people away from the business. Same thing woith Quest and Fonpod. The big telecos are trying to bully these companies out of a great idea and loophole in telecom. It’s what America’s all about! They just built a better mousetrap, and the bug companies see a big problem, and are doing whatever they can do to stop it, including creating a scare on the internet….

  7. Ol' Yeller

    Interesting article and good dialog. This may not be technically illegal, but it is a loophole that will get closed one way or another.

    If these services provide real value they will find other ways to make their offerings economic for themselves and their users.

  8. last I knew, Jaxtr was doing this too. We looked at it at one time for a component of Jangl services, but right, wrong or indiffernet, it’s dicey, risky, and may become expensive and defocusing to defend. Best to stay clear if you’re a voice app company.

  9. Anonymous but realistic

    Sorry to disagree with you all, but when your phone service costs rise because of this “free” service I don’t want to hear you change your story. Nothing is FREE, if you don’t know that by now you all need a refresher course in economics (or you have all been living off of your parents too long). The ruling was made so a small phone company could make money. If large companies say Qwest or AT&T would pull service or raise the cost of doing business in rural America consider how much it would cost a small phone company or start-up (or you the rural phone user) to have service out where you live. Sure the large companies make money (can you honestly tell me you are not overpaid for what you do?), but if it will cost them half a mil to run and maintain a phone line to you and your neighbors, how long do you think you will have phone service (or internet service)? Now, if I’m your rural service provider and my up line changes my rates to make up for that half mil, and I pass it onto my customers who the farther they live from me the more it costs us both, are you (the one living out in the middle of no where) willing to absorb the costs? I think you should consider what it has and does cost a company to keep that phone line up and running. For those who I think are really enjoying this free service, the ones living in a less rural more city like environment, making long distance and international calls at what will I’m sure become my expense. I hope I learn how to get something for free that you will have to pay for. Don’t think it costs much to run copper wire…go buy a roll of speaker wire (about 50 cents a foot from your local retailer), now throw in switches and the employment of the installers, and those who maintain the network. Same with fiber, and cell towers…oh that’s right everyone wants cell phones and service everywhere, yet no one wants a tower in their back yard. Grow up, pay for what you use, and shut up.

  10. 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 ( 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.

  11. 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.

  12. Anonymous


    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 ( 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.

  13. 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.

  14. John Thacker

    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.