Cingular Wireless is selectively blocking calls placed to numbers in Iowa run by local phone companies currently involved in multiple suits with its parent company AT&T Inc. The dispute is over "termination fees" -- rates long distance carriers pay the local phone company at a call's destination -- relating to third-party conference and international call services who are increasing traffic to states where these fees are relatively high.
But the FCC has made clear that long distance carriers may not block traffic to local companies as a "bargaining tool" based solely on the carrier's perception that fees are "excessive," in previous rulings that explicitly cite AT&T's use of the tactic.
Despite this, the nation's largest wireless provider is justifying its actions by claiming it may block certain "categories of number," if, in Cingular's sole discretion, the company is "experiencing excessive billing," referring to a clause in their customer service agreement that uses 900 and 976 numbers as examples.
Cingular began blocking the local exchanges in Iowa during the weekend of March 9.
AT&T Inc., the sole owner of Cingular Wireless, says it is losing millions of dollars because local telephone companies are partnering with businesses that offer services like free teleconferencing, and using the arrangement to exploit a "loophole" in the way network connect fees are set by the FCC.
Long distance companies like AT&T, Sprint and Qwest are called "interexchange carriers" (IXC) because they relay traffic between "local exchange carriers" (LEC) in different states. LECs are local phone company networks on which customers place and receive calls.
IXCs pay "origination" and "termination" fees -- more accurately rates -- to the LECs on either end of the call for the right to use their networks. These interstate rates are overseen by the Federal Communications Commission and vary from about a penny to a dime per minute.
Certain LECs are allowed to charge IXCs like AT&T higher access rates due to a differential rate structure heatedly debated, litigated and consecrated by the FCC before being adopted industry-wide. Generally, rates are higher in sparsely populated areas, and where environmental factors drive up costs.
The logic is fairly straightforward: if a phone company can't make a profit in Iowa, no one in Iowa will have a phone. Also, part of the FCC's mandate is to ensure that reliable telecommunications are available to everyone, even in "rural, insular, and high-cost areas."
But when some of Iowa's rural LECs figured out a way to substantially boost their traffic -- and revenues by collecting more access fees from IXCs -- they attracted AT&T's considerable ire in addition to more incoming calls.
By offering, in essence, a percentage of their network access rate -- a penny or two per minute -- paid as a commission on new traffic, entrepreneurs soon discovered an untapped market: consumers who needed but couldn't afford typically pricey conference call services.
So companies like California-based Global Communications Partners connected some hardware to rural LECs in Iowa, and then began to advertise free and low-priced conference calling on web sites like GCP's FreeConference.com.
Boatloads of people started dialing cornfields in Iowa to attend board meetings, organize grassroots campaigns, and participate in support groups. "If you build it ..."
And big IXCs profit margins slipped just a tiny bit, like the San Andreas Fault.
AT&T's current protests that it is "losing" money are disingenuous. It is more precisely making less, because customers buy blocks of "anytime minutes" and "nights and weekends" at a fixed price. But still, anyway you slice it AT&T is charging customers for each and every call.
New technology has fundamentally altered the telephone business equation such that "distance" no longer has any value. Now, consumers buy a "rate plan;" they agree to a price for a specified amount of time on the national telecom network. The details of how a call gets from one person to another are settled in turf wars between telecom carriers.
IXCs are gambling that customers won't use all their minutes, or in other words that they unwittingly agreed to a slightly higher rate than advertised. But because carriers aren't allowed to cut off a customer when the minutes run out, they hedge their bet by charging extreme rates for "additional minutes." Unless a caller uses exactly the number of minutes they purchased, the IXC gets a higher rate.
IXCs also gamble that sparsely-populated states with higher termination fees won't originate and terminate a disproportionately large number of calls. So when customers start calling rural telcos ten at a time, that increases an IXC's total network costs and lowers profits.
So, AT&T's gripe isn't really about conference calling per se -- although it is a competitor with GCP in that market -- but more so about the increasing number of people calling Iowa to convene conference calls.
Late last year, AT&T decided to take aim at LECs supporting companies like GCP -- it stopped paying termination fees to seven rural phone companies: four in the state of Iowa. Then early this year as the two sides were seeking to resolve the disagreement, AT&T ended negotiations by filing two suits against the rural telcos: one in U.S. District Court, Southern District of Iowa and another with the Iowa Utilities Board.
In February, all seven LECs initiated collections actions against AT&T to recover more than $15M in fees for "services that [AT&T] undisputedly received." The actions were filed in U.S. District Court, Southern District of New York.
AT&T's legal strategy conspicuously bypasses the FCC which is directly responsible for setting -- and regulating -- interstate charge rates. Their case before the IUB is downright curious, because states oversee intrastate fees.
But whatever the eventual outcome of any civil remedies, the re-emergent telecom leviathan is clearly taking punitive action against its competitors, seemingly by shutting down revenues and driving up costs with litigation, to stress smaller companies into cash-flow binds.
Alex Cory, GCP's CEO feels that AT&T's decision to start blocking calls is "inappropriate," adding that if the company has concerns about access rates, "there are well-established mechanisms for raising them with the FCC."
Attorney Jonathan E. Canis offers a more blunt assessment: "the law in this area is 100% clear. Carriers cannot block traffic as a way to settle disputes." Canis is a partner and telecommunications expert with Kelley, Drye & Warren LLP in Washington, DC, the firm representing the Iowa LECs.
In the event companies like AT&T decide to take matters into their own hands, Canis -- who spent three years with the FCC -- describes it as "self-help," further emphasizing that "self-help is just not allowed."
Recent orders from the FCC seem to support Canis' stance, and may also explain AT&T's apathy about presenting its case to the Commission. For example, in 2004 the FCC clarified its intent with regard to IXC "interconnection obligations." Although the ruling specifically addresses a LEC classification different from those in rural Iowa, it nonetheless establishes the broader context in which the decision was rendered:
[Allowing] IXCs unilaterally and without restriction to refuse to terminate calls or indiscriminately to pick and choose which traffic they will deliver would result in substantial confusion for consumers, would fundamentally disrupt the workings of the public switched telephone network, and would harm universal service.
Nevertheless, Cingular Wireless began refusing to connect its customers to several of Global Conference Partners' Iowa access numbers during the weekend of Mar. 9. The practice first came to ePluribus Media's attention when about half its directors were blocked from attending a board meeting on Sunday, March 11. Web-based corporations like ePMedia rely heavily on teleconferencing because their members are widely dispersed throughout the country.
When customers, including ePMedia members, called Cingular to complain, representatives referred them to their service agreement, and a clause that states:
[Cingular] may block access to certain categories of numbers (e.g. 976, 900 and certain international destinations) or certain web sites if, in our sole discretion, we are experiencing excessive billing, collection, fraud problems or other misuse of our network.
Similarly, in an online Cingular customer forum, a moderator posted the following:
After careful research it does look as though we have put limitations on the calling of certain numbers, some of which appear on the FreeConference website. This particular block went into effect on or around March 9th and as [forum member "wilcre"] has stated before [sic], Cingular may choose not to provide service to certain classes of numbers. Examples include 976 and 900 numbers, and certain chat services.
"wilcre" -- the user referenced by the forum moderator -- had simply copied and pasted the now familiar clause from Cingular's service agreement into an earlier post. Of note, "wilcre" has posted to Cingular forums 27,874 times since June 1, 2004, averaging roughly 27 posts per day.
Ironically, AT&T could have a legitimate complaint. If LECs in Iowa have enough overhead to "buy" an exponential increase in network traffic by "spending" a small percentage of their termination fee, the system would seem to be out of balance, especially because IXCs are paying for virtually all of that profit.
So, are businesses like GCP scamming AT&T or exploiting a "loophole" in the system? GCP is no different than any entrepreneur: they recognized a financial opportunity in the marketplace and worked it to their advantage.
In business, "fair" is that which is "legal," until it isn't anymore. And at this time, no one -- not even AT&T -- is accusing GCP of doing anything illegal. And AT&T is hardly in a position to accuse others of foul play, given its storied history of setting antitrust legal precedent.
But with what appears to be the return of that old swagger, AT&T is making it difficult for anyone to feel sympathetic, especially if the company has simply been outsmarted. And it isn't exactly winning over the hometown crowd by trying with a straight face to convince customers locked into two-year contracts that free conference calling and "dial-a-porn" are one and the same.
Canis, with a hard-boiled knack for agitative sound bites, suggests "if a big carrier uses self-help to settle these disputes instead of the legal avenues, we can assume it's because they feel the law is not on their side."
Cory, on the other hand, while undeniably playing in traffic, is still to some degree getting side-swiped by perhaps the nation's longest running feud over the balance between free-enterprise and "public interest."
"There's no reason why [AT&T] can't come to a solution that works for everybody, rather than unilaterally forcing companies to offer less and consumers to pay more," he says. No reason, indeed.
But reason is a decidedly unreliable vane by which to gauge the future of enterprise, and especially so in markets defined not only by commodities, but by the networks that deliver them.
It is unlikely that AT&T will embrace lower profits for the good of all, or that it will gracefully accept any compromise not rigidly and vigilantly enforced, as it grows almost unchecked back to its former status. What is most probable is that any begrudgingly relinquished gains will be equalized on the customers' monthly statements, right below the line where "end-users" has been changed to read "end-losers."
For further reading .... The Cingular (AT&T) Blocks: Networks and Their Content
About the Author: Todd Johnston is currently finishing his Ph.D. in glaciology, focusing on rapidly melting Alaskan glaciers and more broadly on Earth systems related to global climate change. Johnston received a B.Sc. with High Distinction in meteorology and Honors in Geosciences, and a minor degree in mathematics from the Pennsylvania State University. Prior to that, he enjoyed a 15-year career as a musician.
Other ePluribus Contributors and Fact Checkers: Aaron Barlow, cho, wanderindiana, avahome, standingup, BeverlyinNH, roxy
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