Will Free Calls be strong-armed out of business?

With the closure of FuturePhone as highlighted in an article on GigaOm this morning, it seems like the end is near for the “free” calling companies. AT&T is going to challenge them, or rather the Local Exchange Carriers enabling them, in court. Inevitably, this will take time, but likely will stop “free calling companies” as the payments are withheld until everyone has their day in court. That’s not to mention the (prohibitive) legal cost of defending against such lawsuites which the LECs and the free calling providers are not prepared to do.

This however is not a new situation. Back in the early 1990s AT&T were themselves enabling a similar type of business model. It was called International Settlement and was a means for AT&T to balance out the payments they paid to telcos (often monopolies) in countries like Italy against fees which Italy paid to them. There was a huge imbalance which meant that AT&T paid out much larger amounts to these foreign telcos on a monthly basis and these same foreign telcos had no incentive to renegotiate the rates which AT&T were pushing down at home.

What AT&T quietly did was to let some service providers have numbers in the US which they would on which they would share revenue. Starting to sound familiar? You would pay the equivalent of $1 in Italy to call the US number to listen to your horoscope, football scores, chat etc. etc. AT&T would get their portion of the revenue and share it with the service provider. Now the traffic from Italy started to flow back to the US in much larger numbers and it meant that AT&T was paying out less to the foreign telcos. Italy was just one example.

This practice happened in scores of countries. In some cases, the foreign telco would actually have to pay money to AT&T instead, in effect forcing them back to the negotiating table to talk about reducing rates. Once that happened, the rates were reduced to a point that the shared revenue model would no longer be attractive to the service providers and this flow of "other traffic" for entertainment would disappear.

It was a VERY smart move by AT&T and ultimately a great business. It drove down international calling costs, provided incentive to bring everyone to the table for bi-lateral rate negotiations and ultimately benefited AT&Ts subscribers. I wonder if the LECs in Iowa and Nevada have a similar plan to use this as a bargaining chip for something else they want? It will be interesting to watch it play out.

As I have said before, someone has to pay for phone calls. It’s not free to provide the service and it seems in this case AT&T was the one to pay.

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