| tax subsidy scam? || Feb 3, 2007 |
Just read an interesting analysis of the futurephone phenomenon. I'll go ahead and post it here in case the blog post disappears someday.
What’s With the 712 Area Code?
Ever wonder why it is that FuturePhone, Radio Handi, FreeConferenceCall, and PartyLine Connect all have access numbers in the 712 area code? These services all provide “free” services to you. There’s “no catch”. You just have to make a long distance call to get them.
So how do these services get paid, and why are the access numbers all in Iowa?
The short answer is tax subsidies. The 712 model, as I refer to it, is really a variation on the 900 number model, but financed by taxpayers. Take a low cost call, terminate on a high cost carrier, and pocket the difference.
The first of these subsidies is the Universal Service Fund. Tiny Iowa, with just under 3 million residents last year, was the recipient of $86.5 million from the USF. The USF pays for maintenance and improvements to those local telephone plants, in addition to subsidizing user fees for local residents. The cost basis to provide service in those communities is dramatically lowered.
The second subsidy is the tarrif itself. Most Iowa telephone companies (and there are a lot!) participate in the NECA Access Fee Pool. The NECA publishes a tarrif, which each company participating agrees to use, and then they split the revenues. The termination charges for those tarrifs are a significant source of revenue for the local phone companies. And, because they’re rural, the charges are often steeply higher than to terminate in an urban setting. In the “NFL” cities, you might expect to pay 6 to 8 tenths of a cent per minute for termination. The NECA tarrif is closer to 3 whole cents. Arbitrage the subsidized rural rate against your costs and, presto, you’ve got a winner!
Let’s take FuturePhone as an example. Yesterday they announced free long distance calling to some 50 odd countries world wide. All you have to do is call 712 858 8883 (a number provided by the tiny Superior Telephone Coop in Estherville, Iowa), and then enter the international call you want to make using the standard 011 prefix. Easy peasy!
So how do they make money? Since we don’t know know what FuturePhone’s actual termination costs are, let’s make an estimate. We do know that Jajah provides services to the same 50 odd countries for a retail rate of 2.5 cents per minute. So, let’s assume a 50% cost, and say that FuturePhone’s cost to terminate the call is 1.25 cents. That leaves 1.75 cents per minute to split with the folks at Superior Telephone Coop. Give them half, which leaves you 0.875 cents per minute, and you’ve got a pretty attractive proposition! It’s certainly a lot more profitable than SipPhone, charging 1 cent per minute, and probably about as profitable as Skype at 2 cents per minute. It’ll definitely keep bread on the table.
Sounds great doesn’t it? Everybody wins! The good citizens of Iowa win (they’ve now got a fibre network joining up 150 of their independently owned telco’s), FuturePhone has a seemingly profitable business model, and you win by getting to make cheap overseas calls.
Or do you?
Well, you’re not really getting that call for free, are you… You’re still paying long distance charges, which are at minimum going to be the 1 or 2 cents per minute that Gizmo or Skype are charging. And, should you choose to make the call from a landline, you may be paying up to 10 cents per minute, depending on where you’re calling from, and what LD plan you have with your carrier. Or, you’re burning air time on your cellular phone. No matter how you cut it, it’s costing you.
Makes you wonder what FuturePhone’s real value is, doesn’t it? After all, if calls are free using Skype, or Jajah, and you don’t have to make a long distance call to do it, then why bother with FuturePhone?
The 712 model is a creative way to run a business, no doubt. FreeConference is a very successful example of a business using it. Today’s lesson, kids, is that even with a model as creative as the 712 model, you still have to provide real value to the customer. FuturePhone’s cheap long distance call may not be enough.
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