On Neutral Networks, settlements and freeconference

[David Farber <dave () farber net>]

Begin forwarded message:

From: Brad Templeton <btm () templetons com>
Date: March 19, 2007 5:51:32 PM EDT
To: David Farber <dave () farber net>
Cc: ip () v2 listbox com
Subject: On Neutral Networks, settlements and freeconference


I have been surprised to see comparisons of the issues surrounding
freeconference.com and network neutrality.   In fact, I feel one key
issue makes the issues at deep odds.

Freeconference exists by taking advantage of artificially high
termination fees that exist at rural phone companies (such as those
in Iowa.)   A termination fee is a fee paid by the long distance
provider to the local phone company where the called number is in
order to complete the call to that phone.

Normally, the termination fees for most phones are well under a
penny per minute.   However, rural LECs can charge a great deal
more, up to 7 cents/minute.   In theory, this is because it costs
them more to send a call to a farm in rural Iowa.

However, freeconference and some other companies turned this into
a situation similar to a 900 number.  A 900 number is a number where
the caller pays more than the actual cost of telecom, and some of
that money is paid out to the recipient of the call.   You also
see this with small-nation PTTs which charge exorbitant fees to
terminate international calls and give the money to the called
party, and some providers of non-US mobile numbers, where some of
the extremely high cost of calling a mobile number is paid out
to the mobile user as a kickback or to a company operating ordinary
numbers within the mobile-number exchanges.   The use of rural
phone companies provided a way to do a (comparatively cheap) 900
number that looked like a regular number.

This took advantage of the fact that most customers want simple
pricing, so the cell carriers in particular offer unlimited long
distance or flat rate long distance.  They might be charging the
customer 3 cents/minute for all calls, and lose money if you
call a farm in Iowa that costs 6 cents to terminate.

These companies located their numbers in places like Iowa for
no other reason I can imagine but to take advantage of this price.

You probably knew that, because there is no free lunch.
I knew it because my phone company charges me the real price.
I pay half a cent/minute to call your cell phone, and 7 cents to
call freeconference.   I see the real price and know it's not
free.

On the other hand, it is disconcerting to see big telcos block
numbers.   I am not bothered by the IXCs (long distance companies)
as there is a very competitive market there.   Let them offer
whatever services and prices they want.   Many already have differential
charging.  The cell carriers are competitive but they are
fewer in number and there are barriers to entry for new ones.
It is the idea of a cell company blocking a number, in theory
to stop competition, which has reminded people of the network
neutrality question.

In fact, this is an artifact of the extreme non-neutrality of the
PSTN.   The PSTN uses a sender-pays model, and has a complex and
regulated system of settlement payments to compensate the other
end of a call.   However, the party paying the money does not get
to negotiate the price, which is always a recipe for disaster and
market failure.

The internet works a different way.  On the internet, I pay for
my connection to the middle, and you pay for yours.   Packets
don't cost differently based on where they are going.  That's one
of the more important things that keeps the network neutral.

Can you imagine the internet if a packet to Iowa cost 10 times more
than a packet to New York?   Or if one to a small country cost 1000
times as much?    And you couldn't negotiate the price?  That's what
the PSTN is like.    And the internet would be rife with regulatory
arbitrage to keep the price of packets high and funnel that money
to the people receiving the packets.


The real answer is simple, but hard in our overregulated world.
The PSTN should become like the internet.   When you get a local
phone line from a local phone company, you should pay for the cost
of the connection to the switch -- for both incoming and outgoing
calls.     Just like the internet.   The other person should pay
for their own half too, for both incoming and outgoing.    They
actually give us that illusion for local calls, though there are
settlement payments there too, but they are vastly smaller,
and they have been abused, too, back when they were larger.

Truth is, most people would never see a difference.  All the
phone companies would just offer flat rates to cover incoming
and outgoing.

Now in this model, it does cost more to get a phone line to a farm
in Iowa.  The congress has decided it wants to subsidize that, though
I think they do that in a pretty stupid way.   However, if we want
to subsidze the rural phone, let us do so directly.   (Frankly, I
think all we have to do is open up some more spectrum and you would
quickly see rural phone service cost vastly less than urban service cost
in the days these regulations were put in place.)

I can't support freeconference.com because it would be supporting
the use of a loophole in stupid regulations that should be opposed
from all directions.   A netural PSTN, with internet-style pricing,
would finally allow the tremendous surge of innovation we're seeing
in (surprise, surprise) internet telephony.    Then we can strike
down the backwards caller-pays-for-airtime model of European and
other cell phones and put in the internet cost contract that has
brought us the wonders of a neutral network with understandable
flat-rate pricing.


More thoughts on this area can be found in my blog post on the
subject:
    http://ideas.4brad.com/whoops-freeconference-coms-pants-fall


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