Blog Post

AT&T: Free calls may cost $250 M

How much could the so-called Free Calling schemes cost AT&T this year? More than $250 million, if you are to believe a letter AT&T chief lobbyist Jim Cicconi sent to FCC chairman Kevin Martin last week.

As the phone giant’s latest move, Cicconi’s missive to his good friend Mr. Martin should finally engage the FCC into taking some kind of action sooner, not later, on the free-calling issue. According to the AT&T, if left unchecked the free-calling operations could cost Ma Bell more than $250 million in added fees this year alone. Rural telcos and Internet concerns behind the free-calling operations, meanwhile, also want the FCC to intervene on their behalf, and force AT&T to pay its bills and refrain from blocking calls to the services. So let the games begin!

While there is plenty of froth to pick apart in the letter sent by Cicconi (such as allegations of porn-chat lines, network congestion, etc. etc.), the fact that AT&T’s senior executive vice president for external and legal affairs is now involved means that the FCC is likely to respond tout suite. The first and easy guess is that Martin will probably err in favor of AT&T, since many moves made under his reign atop the FCC have been in lockstep with the big telco’s strategic vision. So far, there has been no public statement by the FCC on the matter.

However, AT&T’s decision to appeal directly to Martin and the FCC may be a sign that Ma Bell’s earlier legal forays may not win the day. Certainly, the Internet companies (like free international caller Futurephone) and Iowa telcos are getting bolder of late, returning to make public statements and filing lawsuits of their own, after initially staying silent in the face of AT&T’s legal might (which some call outright bullying).

Since Cicconi’s April 4 letter (which is expected to be posted on the FCC site soon, we’ll link when it is) also brings up the question of Universal Service outlays to the rural telcos, this issue could spread far beyond the question of call-termination fees and Internet telephony to the massively thorny issue of USF itself. In the meantime, AT&T spokesman Michael Balmoris confirmed Monday that AT&T’s wireless arm is no longer attempting to block calls to services like FreeConference.com, but that the company will continue to pursue the underlying regulatory issues to stop what it calls the “unlawful kickbacks” between the rural telcos and Internet calling providers. More soon from all parties, we’re sure.

18 Responses to “AT&T: Free calls may cost $250 M”

  1. Anonymous

    The 3.78 cpm NECA rate that Josh mentions is only a portion of the revenue: you also have to add on the terminating access the telco charges the IXC. Remember, it’s only if the exchange steps out of the NECA pool that the telco charges the IXC a different but usually price for terminating access.

  2. charlie charleson

    AT & T wants to offer flat rate pricing but ONLY if it works in their favor. If it works against them, then..achemmm…they want to change the rules—but only in cases where it works against them.

  3. Wasn’t it AT&T that drove the long distance calling business to the all-included pricing standard that we now enjoy?

    So, should they really be surprised that folks have figured out how to solve a business problem and use AT&T’s own marketing gimic to compete with AT&T’s conferencing services?

    Given that this is a problem of AT&T’s own making, I would expect that their real goal is to get back to charging users something for LD on a per minute basis.

  4. Regarding the revenue side: on the retail side, maybe the LECs charge you guys $0.08/min, but at wholesale the cost of a terminating minute is only about $0.008 (yes, that’s 8 thousandths of a dollar). The difference goes into the retailer’s (LEC, calling card operator) pocket, not the LD carrier’s.

  5. Alex Cory

    You can’t just look up the rates of those companies in AT&T’s lawsuit, as they represent only a portion of those supporting conferencing businesses. FreeConference operates in 7 states and the suit only names companies in Iowa. But even if you did, the seven companies in the AT&T suit are described by AT&T as Superior at 12 cents and the rest between 4 and 7 cents, so clearly using 11 cents is way off the mark. And if conferencing is collectively doing 2.2 billion minutes, AT&T is only doing about 40% of that (it’s share of the long distance market). At 4 cents and 880 million minutes, I get $35 million. The FCC analysis shows average toll collections at about 6.3 cents and average payments at about 1.2 cents. If we just use the 6.3 cents (which I believe understates the impact of cellphone revenues per minute), that is $55 million in revenues. Even if you quibble with how AT&T has chosen to design rate plans, there is a big revenue number that they are ignoring. And conference calls are made for business purposes, which place them largely in the weekday and daytime, rather than being in the so-called “free” nights and weekends arena.

  6. Josh:

    I said, “I don’t know if 11 cpm is a reasonable number.” That’s just the number that came out when I divided AT&T’s $250M by Alex’s 10% of 22B minutes.

    I would caution, though, that averages can be deceiving on the access charge side as well. The only way to know the rates for sure is for someone to look up the switched access tariffs for Superior Telephone Coop., Farmer’s Telephone Co., All American Telco Co., and the other LECs involved.

  7. Josh Nelson

    DG
    The average NECA member company charge for interstate is 3.78 cents not 11 cents. Using a 4 cent average would be more appropriate for your figuring.
    Table 1.2 of the FCC report.

  8. AT&T and all the other carriers originally were making way more money per account oferring flat rate plans. Now that people have found ways to utilize there phones, they don’t like it. AT&T and all the other carriers created the opportunity themsleves.

  9. If I had to guess, I’d guess that AT&T measured the minutes terminating to the free conference calling services over a period of time (either a month or year-to-date), annualized it, and multiplied by the access charge per minute they’re paying to those terminating telcos. All that data’s available in their billing records; it’s not rocket science.

    If the free conference services have about a 10% market share of the 22B annual MOU as Alex says, an average access cost of 11 cents per minute would result in a cost to AT&T of $250M.

    I don’t know what LECs the free conferencing services are using, nor do I have access to an access charge database (though given the LEC names, an intrepid reporter could dig through tariff filings), so I don’t know if 11 cpm is a reasonable number.

    On the revenue side, ARPM for wireline interstate LD was 6.3 cents in 2004 and trending downward; I’d expect it to be around 5 cents now. ARPM for wireless was 7 cents in 2005 and trending downward; I’d expect it to be somewhere around 6 cents now. (Both numbers from FCC reports.) Average figures can be deceiving, though, as users savvy enough to use the free conferencing services are more likely to be those with large bundles of minutes who are careful not to exceed their limit, or with unlimited usage plans; ARPM for those users is much smaller.

  10. Josh Nelson

    Paul

    Alex is correct they always talk about cost, but don’t account for revenue. According to the FCC reports the average consumer uses around 170 minutes a month on the phone. Lets use that average for a minute. With AT&T 39.99 a month plan you get 450 minutes, not counting night and weekends. The 450 run you around 8.8 cents per minute. If you go over the 450 minutes the rate is 45 cents a minute. If the average consumer uses 170 minutes per month the rate is now 23.5 cents per minute. These are averages of course and some people use thousands of minutes while others use very few.

  11. There seems to be nothing illegal in what these companies are doing. They are getting their legal termination fee and they are more efficient then their competitors, so they can finance their entire business out of it. We could ofcourse just end the Calling Party Pays system. This way there are no terminating fees to be paid.

    Cut termination fees, move to a bill and keep system for all networks and voila, no debates anymore.

  12. Paul Kapustka

    Alex, no idea how they came to the number. Hoping that the FCC will post the letter so everyone can determine if there is more context. I have asked for interviews with AT&T execs as well as the FCC, so will ask those questions if I get the chance.

  13. Alex Cory

    Paul,

    Has anyone asked two simple questions:
    – how did AT&T calculate this absurd number?
    – how much revenue do they receive for these calls?

    By my calculations, they collect about twice what they pay, and I would expect they would collect about 30-40% (their market share) of the approximate $176 million in long distance revenues generated by the free conference calling businesses. I get this number by using a conservative 10% of the 22 billion minutes in conferencing done annually and multiplying that by the average of 8 cents per minute in revenues collected by long distance carriers. That makes AT&T’s share about $60 million in revenues collected for new long distance services. The portion they share with the rural telephone companies would be about half of this or roughly 30 million. Of course, given that AT&T did about $85 billion in 2006, I could see how they could get confused with numbers this small….

  14. Totally unrelated –

    Your WebEx banner ad on the top (regarding OM talking about broadband), opens up in the same window, when Clicked ( meaning – does not take the clicker anywhere). You might want to get a new window opened.