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October 13, 2006

Free International Calls! NOT Too Good to be True

Update:  As you will see if you go to the Future Phone website, Future Phone has been at least temporarily prevented from providing its service by the major carriers who are upset by the access charges they pay the local telco for these calls (which is what makes the “free” calling service possible). However, there is at least one free international calling service operating at this time: www.yak4ever.com. More about that service in this post.

NY Times technology blogger David Pogue posted about a company called Future Phone which offer free international calls to landlines in 54 countries around the world.  I think I understand the arbitrage play which makes this profitable for Future Phone.

You don’t use a computer to call, don’t need special equipment, don’t listen to ads, don’t even register with them.  You just call their number in Iowa (which may be a toll call for you), then dial the international number you want to reach. You can do this from your home or cellular phone (or from Skype or Vonage if you want).

David’s readers are skeptical saying this sounds too good to be true.  Many have tried it and most report that they did get through as advertised. None report being solicited for anything else.

Future Phone says it plans to make money by selling future services.  They say that they’ll be offering these free calls until 2010.  What they don’t say is why this service doesn’t bankrupt them in the meantime.  But I think I know.

The cost side is straightforward.  Calls to landlines in these companies are dirt cheap at the wholesale level because last mile service has been deregulated.  I suspect that VoIP is being used for lots of these calls but even traditional wholesalers of international calls have had to lower their rates for calling landlines in places like the UK to the penny/minute range. 

Because mobile phone operators have a monopoly on reaching their own subscribers and, outside of North America, charge the CALLING party for reaching one of their numbers, the cost to a carrier to reach a mobile phone is high.  That’s why Future Phone doesn’t offer calls to cell phones outside the US and Canada and why Vonage excludes calls to European mobile phones from its unlimited free calls to the US, UK and some other European countries option.

OK, losing even a penny/minute on something which will get widely used still isn’t a very good business.  How does Future Phone do it?

Here’s my guess; it’s how I would run this arbitrage business. When you make a domestic long distance call in the US, you indirectly pay a terminating “access charge” to the carrier who owns the last mile connection to whomever you are calling.  For the vast majority of the US, these terminating access charges are much less than a penny/minute (and still exorbitant at that price and very profitable for the local phone company).

However, some rural carriers have been allowed by the local regulators to charge much higher terminating access charges.  When I was last running ITXC in 2004, some areas still cost $.08/minute for termination.  The stated reason is that the rural carriers need this indirect subsidy.  The politics of this is that all politics are local and the extra cost is born by the callers, not the locals.  In fact, since almost all carriers offer a fixed or flat rate for calling the US, the cost of reaching these rural areas is spread over all callers even though the wholesale carrier does have to pay it per actual minute to the rural carrier who has the lucrative franchise.

The number given on the Future Phone website is in Superior, Iowa and belongs to something called the Superior Telephone Cooperative according to www.411.com. A footnote says that ownership of some of these numbers has been transferred due to local number portability.  It’s a very good guess (but I don’t know that it’s true) that Superior, IA is one of the places with very high termination rates.  I’d further guess that Future Phone either is the carrier receiving the calls or that it has a deal to get a good share of the terminating access charge revenue.

Net it out:  If Future Phone gets even four cents for each minute inbound to them and pays one or two cents for each outbound minute to the international destinations, they have a very good arbitrage business going indeed. In fact, they’ll get paid for the dial time and ring time on the outbound leg and’ll get paid for the inbound leg even when the outbound leg is busy, doesn’t answer, or is “call can’t be completed”.

What’s this mean to you?  I’d say use Future Phone if you want to save money calling these countries.  It’s NOT to good to be true.

What’s the global lesson?  Stupid, uneconomic structures like artificially high terminating access charges invite arbitrage.  Someone’ll always figure it out.

Previously posted more on access charges and who I think should collect them in the future.

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Listed below are links to weblogs that reference Free International Calls! NOT Too Good to be True:

» Intramural Disagreements from Aswath Weblog
Only recently both Tom Evslin and Alec Saunders wrote about the anomalies of Inter-carrier compensation scheme in US, when they talked about FuturePhone. Readers of these pages may remember that many “virtual number” offerings are based on the ICC regi... [Read More]

» Free International calls? from Dawnsblood
Tom Evslin explains how they do it. Hint: Government regulation plays a part.OK, losing even a penny/minute on something which will get widely used still isn’t a very good business. How does Future Phone do it? Here’s my guess; it’s how I...... [Read More]

» http://herot.typepad.com/cherot/2007/01/mike_arrington_.html from Christopher Herot's Weblog
Mike Arrington has pushed the otherwise obscure issue of Intercarrier Compensation into the mainstream with his inquiry into the business model of AllFreeCalls, a company that will let you call almost anywhere in the world for the cost of a [Read More]

» AT&T's 'Free Call' Bill: $2 Million from Digifonica
Guess who got stuck with a big bill for all those “free” international calls touted by outfits like FuturePhone? None other than ATT, which has filed a lawsuit in Iowa claiming that “deceitful and unlawful schemes” like FuturePhone’s ... [Read More]


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