Economics for One

Making Money By Sticking It to the Man—

Over salads in Palo Alto, a friend and I started talking about online business models. As two serial entrepreneurs (he founded LinkedIn, among others), this is a favorite topic.

I’ve used for years. They provide a great service–scheduling and hosting conference calls.  It’s easy to use, and 100% free. But recently I’ve been asking myself: How exactly do they make money?

I’ve become so accustomed to free services through the internet, that I tend not to think about them much. Most are either advertising-supported, or they try to upsell you on premium services. But I noticed that has very little advertising, and never seems to be trying to sell me additional services. So that left me wondering: how exactly do they make money?

Fortunately, my friend had led a company in a related space. So he was happy to explain.

Enter the Government

When the US Government broke up the old Ma Bell, they needed to ensure that various networks would be compatible. Nobody wanted a bunch of private networks that couldn’t talk to each other. So they instituted a set of connection tariffs.

It works like this: if you are an AT&T long-distance customer, and you call someone who uses Sprint for their local service, AT&T must pay Sprint a “termination fee” for carrying part of the call. Likewise, when a Sprint long-distance customer calls a local AT&T customer, Sprint pays a fee to AT&T.  These termination fees typically range from $0.01 per minute to more than $0.10 per minute. For customers in rural areas, where the cost of serving the customer is high, the payments can easily be in the $0.03 to $0.04 per minute range.

So what does this have to do with Free Conferencing? realized that if they could devise a business that accepted incoming calls to rural areas, but had no outgoing calls, then they would receive the termination fees from all of these incoming calls.

So they set up conference call servers in rural areas and started giving out those numbers to people who wanted to set up a free conference call.  They also registered as a local telephone company (an “independent local exchange carrier,” or ILEC), or cut deals with the local telephone company to split the termination fees.

So now when customers call in for a conference call, makes money from each caller’s termination fees.

Simple, huh?

Only one problem: the big long-distance companies like AT&T don’t like it. You see, they wanted to sell the same service, and charge something like $1 per minute, per line. So having a competitor who was effectively free really bugged them.

So they started by blocking calls to the numbers. Then they tried charging their customers extra for calling those numbers. But the FCC ruled clearly that AT&T and others cannot block calls to valid phone numbers, and cannot charge a differential rate to a US-based phone number.

So they sued (and a bunch of other companies with similar business models) to try to recover the fees. And they tried to claim it was a misuse of the original idea of termination fees.

Well, perhaps it was. Then again, AT&T isn’t required to charge me for their business taxes, but they do so anyway (check your bill!).

Meanwhile, I love the ability to easily schedule and use free, business-class conference calling. And I plan to continue using it.

Posted in Article | No comments

No comments yet. Be the first.

Leave a reply