Editor’s note: Russ McGuire is the online director of Business Reform Magazine. Each issue of Business Reform features practical advice on operating successfully in business while glorifying God.
AT&T has launched a legal attack against MCI, seeking to block its competitor from exiting from Chapter 11 bankruptcy. Ma Bell is claiming that the company formerly known as WorldCom has defrauded it for years by illegally routing calls through Canada, sticking AT&T with the bill for calls to expensive U.S. locations. Naturally, MCI disputes those claims. As I’ve dug into the mess, it appears more and more that AT&T is actually to blame for its own problems.
First, the background. On July 28, in response to requests from the U.S. Department of Justice, AT&T made public charges against MCI that that company had routed telephone calls from the U.S. to the U.S. through Canada in order to defraud AT&T. MCI immediately launched an internal investigation. The initial results of that investigation were distributed by the company on August 4. As would be expected, MCI believes that “its call termination practices comply with legal and regulatory requirements.” There have been further bitter exchanges, including AT&T’s claim that MCI’s actions represent a threat to national security, and MCI’s claims that this is all a ploy by AT&T to derail MCI’s bankruptcy proceedings.
However, the specific actions and claims represented here demand further analysis.
The following facts appear to be accepted by both parties:
- MCI, AT&T, and virtually every other company in the telecom industry all use software and information to perform what is called “least cost routing” of telephone calls.
- As part of this, MCI handed off some of their domestic telephone calls to a Minnesota-based company, Onvoy. Among other things, Onvoy offers wholesale long distance voice services to Canada and within the U.S.
- Onvoy then handed the calls to a Canadian carrier (apparently Bell Canada) who then handed them to AT&T to terminate in the U.S.
To understand how all of these handoffs and routing of calls through a foreign country could possibly be MCI’s “least cost” route, one has to understand the cost structure of a long distance call within the U.S.
You and I generally pay a flat rate for long distance calls. I pay 4.5 cents a minute for interstate calls within the U.S. (and quite a bit more for calls within my state – but that’s a different story). My long distance carrier has to cover at least three sets of costs with the 4.5 cents he takes from me. Of course, he has to cover his own costs – the cost of operating his network and running his business. Unless he’s also a local telephone company, he also has to pay two other companies – my local telephone company and the local telephone company of the person I’m calling. These charges are called access fees and generally they are pretty low – around a penny a minute on each end. That still leaves enough for the long distance carrier to cover their costs and make a little profit.
However, since access fees are regulated and set based on cost, there are some parts of the country that have extremely high access charges. Typically, these are either in places with very low population density (e.g. most of the northwestern quadrant of the U.S.) or in towns served by small independent telephone companies that cannot spread their administrative and overhead costs across millions of lines the way the regional Bell companies can. In these areas, access costs can be 5 cents a minute or more, on just one end of the call. My long distance company loses money every time I make a call to one of these locations. But since the vast majority of my calls are to more populous areas, the law of averages sets in and long distance companies generally come out ahead.
It appears that it is only the calls to these high-access-cost areas that MCI routed through Onvoy and therefore passed through Canada. Although it hasn’t come out clearly in the courts or the press, I’m guessing that AT&T has an agreement with Bell Canada, and Bell Canada has a separate agreement with Onvoy that sets a fixed price per minute for all calls terminated in the United States. As wholesale agreements with only one access charge (MCI pays the originating access charge directly to the local carrier), these are likely priced well below the 4.5 cents or so that you and I pay – probably in the one to two cent per minute range. Since AT&T wouldn’t have to provide consumer billing or customer support for these calls, the company would expect to still make money with this arrangement, assuming a typical mix of traffic to low-access-cost and high-access-cost areas.
However, such an arrangement represents a tremendous arbitrage opportunity, and that appears to be exactly what happened. By routing calls to high-access-cost destinations through Onvoy/Canada instead of terminating them directly to the local telephone company, MCI was able to pay a couple of cents a minute instead of five cents a minute or more. That, my friends, is least cost routing.
AT&T claims that is also fraud. Ma Bell’s argument is that MCI’s actions were specifically taken, not to reduce the overall costs, but to deceptively stick someone else with the costs. “We’re talking about the difference between shopping for bargains and shopping with somebody else’s credit card. The latter is clearly a crime that people can go to jail for,” said AT&T Chief Counsel James Cicconi.
I’m no MCI fan, but I’m afraid, in this case, I must side with the “shopper”. MCI went shopping for a bargain and found one. AT&T offered a service for sale at a given price and MCI (indirectly) bought it. The fact that AT&T’s costs are higher than their price is merely an indication that AT&T made some bad decisions which created the arbitrage opportunity.
More compelling is the fact that AT&T appears to have a history of profiting from the same types of opportunities as MCI. Although I couldn’t find the actual FCC proceedings, in their recent court filings, MCI claims that AT&T successfully lobbied the federal regulators to support AT&T’s practice of routing U.S. to U.S. telephone calls through Canada. Although I doubt AT&T performed this routing to avoid paying access fees, the company has grudgingly admitted that least cost routing is a common practice in the industry.
However, perhaps most interesting is the launch of the AT&T International Call Plan in 1996. This was AT&T’s entry into the international callback market. International callback emerged as a tremendously profitable arbitrage opportunity when calling rates from the United States to foreign countries fell dramatically faster than the calling rates from those countries to the U.S. or even between neighboring countries. AT&T’s offer was similar to others in that the foreign caller would signal AT&T that he wanted to place a call. AT&T’s network would automatically call the foreign caller back and provide him with the ability to then call anyone in the U.S. or anywhere in the world at a significantly lower price than they would pay by dialing direct. In effect, AT&T was using the foreign national telephone company’s network to provide the service, but was denying that carrier the international calling fees to which they were due. AT&T’s entry into this market legitimized the practice for the entire industry.
Similarly, AT&T has argued vigorously against having to pay access fees for its “voice over IP” service. This service allows placing a call from one phone to another, just like a normal telephone call. However, since the service is classified as an Internet service rather than a voice service, the normal access charges don’t apply. It appears that AT&T has launched this service specifically to be able to offer long distance voice services without having to pay the local access charges. Again, AT&T is not unique in offering this service, but has brought perceived legitimacy to the practice.
So, what’s the bottom line? Did MCI route high-cost calls through Canada in order to avoid paying high access costs? Almost definitely. Did MCI know that AT&T would get stuck paying those access costs? Probably. Is MCI unique in pursuing a mechanism like this to reduce costs and profitably offer a lower-cost service to its customers? Absolutely not. AT&T has been doing it for years!
Russ McGuire is Online Director for Business Reform. Prior to joining Business
Reform, Mr. McGuire spent over twenty years in technology industries, performing various roles from writing mission critical software for the nuclear power and defense industries to developing core business strategies in the telecom industry. Mr. McGuire is currently focused on helping businesspeople apply God’s eternal truths to their real-world business challenges through Business Reform’s online services. He can be reached at [email protected].