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ISPs and long-distance calls

from TBTF for 1999-03-01

April 13, 1999

David Black thought I could have done a better job explaining the implications of the FCC ruling on phone calls to ISPs. Here are his comments, summarized from the Wall Street Journal Tech Center and the Dow Jones Newswire.

When a local phone customer initiates a phone call, one of three things happens:
  1. The local phone company completes it.
  2. The local phone company hands it off to a long distance company.
  3. The local phone company hands it off to another local phone company.
In case 1., the local phone company bills the customer and keeps the money. In case 2., the long distance company bills the customer and owes compensation to one or both of the local phone companies involved for use of their facilities (my memory's hazy, but I think both local phone companies get paid). In case 3. the local phone company bills the customer and then owes compensation to the other local phone company for using its facilities. So far, this all makes sense and worked reasonably well when local phone companies were geographic-based monopolies. Traffic would often more or less balance so that no large amounts of money changed hands. An ISP would go to its local phone company to get lines, and the local phone company would take responsibility for local phone service to the ISP, including charging.

The next thing that complicates this picture is the continuing attempts to introduce competition into local phone service. Part of the problem is that local phone service has some characteristics of a natural monopoly -- running duplicate phone wires can be cost-prohibitive. Among the things that was done to get around this was to require the baby Bells to lease their lines and facilities at a discount to competing local phone companies (that's right, a new local phone company can lease Bell Atlantic's lines and facilities to compete against Bell Atlantic). The goal was to get other companies into the local phone business, but it made a truly cute trick possible -- an ISP could declare itself to be one of these new local phone companies whose primary/only customer is the ISP. The result is that the baby Bell has to pay the ISP every time one of the ISP's customers calls the ISP, and there's no offsetting compensation coming the other way because ISPs tend not to make phone calls, and hence lots of money changes hands. What the FCC has done is put an end to that cute trick (and that trick sounds like a scam to me). So far, this seems reasonable, except ...

The bad news is that the FCC's regulatory regime currently can't cope with the notion that Internet connections are neither local nor interstate phone calls. They have to be classified as something other than local calls in order to put an end to the trick in the previous paragraph, and apparently the only label available is interstate. Interstate calls are currently category (2) above, and typically result in per-minute payments from the long distance company to the local phone company ... except that the FCC decision has said this won't apply to ISP calls. Needless to say, this is confusing -- see the quote from the Consumer's Union spokesman in the WSJ article on this impact of this notion of the call being long distance but not charged as such -- I tend to agree that this isn't over.

What I found potentially misleading in your TBTF story was the apparent acceptance of the assumption that this is a serious step in the direction of metered usage for calls to ISPs. Not only has the FCC said this won't happen, but if a baby Bell somehow put this into place, an ISP using the above trick would go back to buying its unlimited usage phone lines from the baby Bell, and hence there would be no meter. You're correct that this raises costs for ISPs that were taking advantage of the competitive local phone company loophole, but I think the leap to the notion of Internet access calls being metered was not justified.

[ TBTF for 1999-03-01 ]


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Created 1999-04-13