Wednesday, February 24, 2010

The infrastructure chronicles -- Volume 3

Back to our occasional series on infrastructure. For this post, I will be digging back into the telecommunications portion of my career, to a period when tin cans and string dominated the industry.* Well, maybe not quite so far back, as that, but far enough that I came up empty when I did Google searches on some of the terms below. But let's get to the point.

Have you wondered how companies can offer you free teleconferencing service? Most of us are used to paying for this service, but there are a bunch of firms that offer it for no fee, and will even create customized numbers for you and offer other add-ons. How do they do it and make any money?

The answer goes back to the monopoly days of the Bell System, when AT&T and its subsidiaries dominated. But even then, there were a number of small local telephone companies, often serving rural areas. The policy at the time was to share the revenues of the Bell System with those companies to help subsidize local telephone service in otherwise isolated communities. The mechanism for doing this was called the Separations and Settlement Process.

Once a year (think "sweeps week" on television), the traffic coming into and out of these small companies was measured and provided the basis for the number of dollars that company would receive as a gift from the overall revenues of the Bell System. It worked for everybody. Ma Bell didn't care, as it was awash in revenue anyway; and it didn't want to incur the high per subscriber costs inherent in serving rural areas. The local telco's likewise welcomed the income, which enabled them to keep down the cost of basic telephone service while providing hefty profits for the owners of those companies.

The system was often manipulated. The subscribers in Smalltown were told by the local telco when the measurement period was occurring. They were urged to make as many calls as possible during that week, knowing that doing so would pay dividends for the rest of the year.

Fast forward now to the end of the AT&T monopoly, the introduction of long distance competitors like MCI and Sprint, cellular service, cable TV, and other technological advances. Consider the Telecommunications Act of 1996, which served to open up the very switches owned by the big regional telephone companies (like Verizon) and the little ones, too, to anybody who wanted access to those computer racks.

Through this all, Congress preserved the policy goal of subsidizing local exchange service, especially for rural areas. Over time, new versions of the Settlements process emerged. It still pays for those local telco's (now called local exchange companies, or LECs) to have traffic, in that they are paid extra money from the national pool of telecommunications revenues based on minutes of use emerging from and ending in their central offices.

Now, you are starting to get the idea. A teleconference company mounts its switch on the rack of a carefully chosen LEC, maybe somewhere in the middle of Iowa. The teleconference company's very existence provides extra traffic for that LEC, generating extra Settlements revenue, part of which is shared with the teleconference company. The company does not need to charge you a fee for a teleconference, because the entire United States is already paying for it.

What is the difference between the service and technology behind the free teleconferencing service and the one you pay for? Nada.

Why would you ever want to pay for this service? Beats me. You and everyone else already are, in your regular local and long distance telephone rates.

How long will this deal last? When was the last time Congress took away a subsidy?

Now you can understand why I love health care. Having been weaned off the world of telecommunications subsidies, I craved a field in which the subsidies are even more rampant and impossible to untangle.

* I worked as a telecommunications regulatory consultant for a while, and I was also Chairman of the MA Department of Public Utilities, which regulates common carriers in the state.


Bob said...

A wise man once told me that all allocations were political.
Cross-subsidies are in the eye of the beholder.

Anonymous said...

It seems we are ruled by the Law of Unintended Consequences and Gaming the System. But it probably has always been so.


Nick said...

MagicJack blocks calls to these numbers. It's easy to imagine burning through your entire $20 / year fee in a few hours at the Settlements rate. I'm not sure if MagicJack can do that, but I'm not sure they can't either. Who knows?

I suspect more phone companies will try and the FFCC will be under a lot of pressure to close this loophole.

Janet Karasz said...

No wonder I enjoy your blog so much - your common-sense approach and clean delivery. You catch the sorts of things that annoy me, too. I'm the daughter of a telecommunications man.