Long Distance Fraud Again – Really?

I’ve been helping clients get into and stay in the long distance business since the 80’s when long distance was a new line of business for many telcos. I remember when the industry was new that it was a challenge. If you were a rural LEC you had to convince the RBOC who owned the regional tandem switch to help you set up a trunk group to get to a long distance company. And they were reluctant and slow to respond. So a company had to fight to get into the long distance business.

But over time it got easier and fairly routine and most rural telephone companies added long distance as a product line. It worked pretty well until the time in the early 90’s when calling cards became the rage and customers all wanted them. With a calling card a customer could make a long distance call from any other phone and bill it to their own home phone number.

So companies in the long distance business started giving out calling cards, and eventually they gave a calling card to every customer. This generated a lot of new traffic, and since this was back in the day when it still was not unusual to pay 10¢ to 15¢ per minute for long distance it also drove a lot of new revenue. But within a few years after calling cards were introduced calling card fraud followed. Calling card fraud was pretty straight forward. There were people who would try to find a valid calling card number that they would then send to places like the Middle East where street vendors would hawk cheap minutes. And dozens or even hundreds of people would use the calling card until somebody figured out that fraud was going on and cut off the card.

When the fraud first started the losses got huge because nobody was looking for it. But over time the carriers that sold the long distance began monitoring for unusual usage and policies were established such as making the cards only good for domestic calling, and over time the big calling card fraud got under control, but never quite stopped.

Over the years since then I have run across cases of fraud, but it has been a random thing here and there and not widespread like the calling card fraud had once been. The companies that sold wholesale long distance got more sophisticated and monitored usage closely and for the most part the industry stopped worrying about fraud.

But recently I have seen cases of significant fraud happening again to my clients. Within recent months I have had two clients hit for over $25,000 in fraud in a single month, which in both cases was as much as they had been paying for wholesale long distance for most of a year. So for these companies this was a really big deal and it effectively doubled their cost of buying long distance for the year.

And both of these companies were buying long distance from ‘big name’ carriers and not from some small VoIP provider. I must tell you that I was surprised. Not surprised that fraud could still happen, but surprised that the big company selling the long distance did not have a fraud monitoring process in place to stop it. It’s not that hard to monitor for fraud at the large carrier level. If they process the long distance in real-time it is not hard to set some flags to look for unusual usage. When my clients decided to buy wholesale long distance from these vendors they were assured that those carriers had fraud monitoring. It turns out to not to be true.

The fraud in both of these cases was allowed due to faulty connections between my clients and their customer. In one case if was my client’s own connection that was not secure. They had installed an IAD (Integrated Access Device) at a business customer in order to supply voice and data from their fiber connection. The IAD was not properly configured and had very weak passwords and was not configured to only accept commands from my client.

The second case was similar in that another client had a connection to a customer PBX. And of course, being a full service provider, they made the connection for the customer to his PBX. As it turns out there was a backdoor connection available into the PBX into the internet, which means that the PBX could have a connection from somewhere other than my client.

Neither of those problems automatically leads to fraud, but there is a new set of bad guys in the world. They use computer worms to test against millions of phone numbers looking for phone numbers connected to PBXs or IADs. Once they find such a device they use normal hacking techniques like cracking easy passwords to gain access to the device. They then sell calling in the same way as was done in the old days of calling card fraud. In one of these cases the calling went to the Middle East and in the other went to INTELSAT calling to satellite phones – both very expensive calling. My suspicion is that these bad guys are not selling these minutes on the street like in the past, but instead hawking cheap minutes to International VoIP minute sellers who have no idea where these minutes come from.

Certainly my clients had some liability in their loss since they contributed to the customer connection being made in an insecure manner. But they also ought to be able to rely on their underlying long distance provider to protect them against a flurry of suspicious calls. The biggest worry about this new kind of fraud is that it pumps a large volume of calling to expensive places in a short period of time. So it can cost a telco a large amount of money in a hurry.

So my caution to companies that sell long distance is to beware. It has been a while since fraud was of this level of concern, but it’s back again. There are two steps you can take to protect yourself. First, make absolutely certain that the company you are buying long distance from has good fraud detection and policies. You want a carrier who will not only find the fraud but who will cut off the calling before they even contact you. But second, the responsibility rests with you to use good network practices to make sure it is hard for somebody to hack the connections to your customers. If you want to know more about how to protect yourself contact Derrel Duplechin of CCG at (337) 654-7490.

One Month Anniversary

I’ve been writing this blog for a month now and so far I have learned the following:

It takes a certain discipline. On many of the topics I am covering I could easily write a white paper, or at least a long dialogue. However, blogging forces you to keep things short. I have found that I will have to break some topics into a series of blogs if I want to cover them fully.

And the trick is in making something short is to not over-simplify it. I have already caught myself doing that. Some telecom topics are complex and can’t be covered adequately in three paragraphs.

So bear with me as I learn this new medium. It has been interesting to write this way and I hope the resulting blog posts are of value to my readers.

There are a lot of topics. When I got the idea of writing the blog my first fear was that I would quickly run out of topics. On the first day I sat and thought hard and made a list of forty topics. It struck me that day that if I wrote those forty blogs that I would be done with this blog after two months.

Luckily, it seems that every time I write something or read something on the Internet that I think of five more related topics. I also now seeing a blog post every time I read a telecom news story.  CCG Consulting as a firm is involved in a huge array of telecom services. This gives me a really wide spectrum of relevant ideas to write about. I don’t know that I can crank out meaningful posts forever, but I think I can do it for years. We shall see.

Some topics are boring as hell. So far I have not found any good way to spice up a blog post about an FCC ruling or about the current nature of access disputes. But sometimes these are the topics that small LECS and CLECs most need to know about. So please just take my most boring blog posts like medicine and just remember they are good for you!

Current Access Disputes

We are seeing more access charge disputes today than we have ever seen. For those who don’t know about access charges they are the fees that an Interexchange Carrier (IXC, or long distance carrier) pays for accessing a local network. Most of the fees are quite miniscule at fractions of a penny per minute, but since there are still a lot of long distance minutes they add up to substantial payments from long distance carriers to LECs and CLECs.

It seems that a number of IXCs have recently adopted a policy of disputing access charges in the hopes of getting out of paying what they should pay. They know that some local telcos won’t dispute their claims even if the dispute is wrong. They also know that the dispute process can be painful and they hope to wear telcos down into making compromises just to get paid something. In my view some IXCs are being bad citizens in that they know they can strong-arm smaller telcos into accepting less than they should be paid.

Over the last year, the following are the sorts of disputes we have been seeing:

  • IXC’s are demanding a fully verifiable access bill. By that I mean that they expect every fact on the access bill to be correct. In the telephone industry there are several industry databases and the IXCs want every fact on the bill to match the information in these databases. This includes a lot of different facts from the names of switching offices (CLLI codes), mileages, billing percent splits between various carriers, the company that should be billing (OCNs), etc. There is nothing wrong with expecting the bills to be verifiable. But over time small errors creep into these databases as companies make changes to their networks. In the past the IXCs would see these kinds of issues as clerical issues and not substantive issues and they would often point them out and ask the carrier to fix them. But today the more aggressive carriers are refusing to pay bills until such problems are fixed.
  • NECA LATA issue. The NECA tariff which most small telephone companies still use for their Interstate tariff has a prohibition in it that says that a telco cannot carry their traffic to a tandem in a different LATA. This prohibition comes from 1984 when the RBOCs were all part of NECA for a few years. Judge Greene, in the order that divested the RBOCs from AT&T prohibited the RBOCs from carrying voice traffic to another part of the country, and this was left to the IXCs, being mostly AT&T then. However, when the RBOCs all left NECA nobody changed the language in the NECA tariff and so the prohibition is still there. There is no external law or rule that prohibits smaller telcos from carrying traffic to another LATA. Unfortunately, the language in a tariff overrides any industry rules, so if you use the NECA tariff and your tandem is in a different LATA your access bill can be successfully disputed. The only real fix for this is for NECA to fix their tariff or for you to use a different tariff.
  • Traffic and mileage pumping. Last year the FCC banned traffic and mileage pumping. Traffic pumping is when a carrier generates bogus traffic simply for the purposes of generating access charges. Mileage pumping is when a carrier rearranges their network to bill extra miles of transport for the purposes of billing more access. Since that ruling I have seen a number of disputes that accused telcos of one of these types of pumping, but in each case the accusation was not true. Since traffic pumping is now a bad word, I believe the IXCs are trying to scare telcos into settling rather than taking a claim of traffic pumping to a regulatory body. If you are accused of this please talk to us, because the chances are high that you are not in violation of this prohibition.

All of these issues can be a problem for a telco since the IXCs are in the driver’s seat. They can withhold payments for access which gives them the upper hand in a dispute. They know it is a costly process for telcos to appeal an access dispute to the next level, which is normally done by filing a complaint at the state Commission. I don’t mean to sound cynical, but I think there are ruthless people in the access departments of some IXCs that are getting bonuses for reducing access payments by any means they can find. Even scarier, there is now a whole industry of access consultants who get paid a percentage of any savings they can find in access bills. Such consultants are highly motivated to use any tactic in the book to get a payday.

And so my warning to LECs and CLECs is to get your access bills into the best shape they can be. Do a careful review between your access bills, your actual network and the industry databases (the LERG and Tariff 4). Eliminate any easy reason for the IXCs to single you out, because fighting your way out of access disputes can be costly and time-consuming. CCG has done hundreds of access charge reviews, so don’t hesitate to call us if you want to do this and need help.

Two Fiber Networks?

Image of Austin, Texas

Image of Austin, Texas (Photo credit: Wikipedia)

The conventional wisdom in the industry is that two companies would never invest in side-by-side fiber networks to serve residential customers. I have had this conversation many times with clients who were planning to build a fiber network and who were worried about the response of the incumbent providers. Everyone has always believed that the first fiber builder wins because there is not enough margin in the residential market to support two fiber networks. AT&T has shown that conventional wisdom to be wrong by announcing that they will build a second fiber network in Austin as a counter to Google’s announcement to do the same.

This is not without precedent, although on a much smaller scale. The City of Monticello, Minnesota built a fiber network to pass every home and business in the City. The municipal fiber build was prompted by the fact that the City had some of the highest telecom rates in the country. Soon after the City built their network, TDS Telecom, the incumbent telephone company built a competing fiber network.

And as expected, both fiber providers are not faring well. After building fiber TDS decided to win back customers with an aggressive price war. Charter, the incumbent cable company also got into the price war fray. And so customers in Monticello are benefitting from a price war while all of the companies are underperforming.

It is fairly easy to understand TDS’s motivation for building the fiber network and for the price war. The company serves numerous other towns like Monticello and I see their response there as a clear warning to anybody else who is planning on overbuilding their serving territory. It is also clear that they are hoping that the City will give up and leave the fiber business.

And now we are going to see this scenario play out in the much bigger market of Austin. Google already overbuilt one AT&T market in Kansas City and one can easily envision Google overbuilding many other large cities. AT&T’s response in Austin is the same as TDS’s response in Monticello. AT&T has made it clear to Google and others that they are not going to side idly by and watch their major markets go to somebody else.

So it will be interesting to see the impact of AT&T’s announcement. It’s possible that the announcement will cause Google to pause and not build in Austin. Certainly they will not do as well as expected if there are two fiber networks. It’s also possible that both companies will build fiber and we will see side-by-side competition with two fiber networks and the cable company – the kind of competition we have never seen in a major city in the US.

But the real impact of AT&T’s announcement is going to be felt everywhere else. One has to wonder what kind of impact AT&T’s announcement will have on any company, Google included, who is contemplating building a fiber network in a large city. Google has very deep pockets and might proceed anyway, but almost any other company would not be able to afford the much lower returns that come with hard competition.

While this announcement might result in real competition for the citizens of Austin, it also might have the effect of stifling anybody else from trying to build fiber in a large City. This announcement could result in killing anybody from building fiber in large cities due to the fear of a similar reaction. While hearing about two companies wanting to provide gigabit fiber sounds like a good thing, the long-term consequence of this might mean less overbuilding, less fiber and less competition.

And I don’t know that AT&T had any choice. Their only other option was to watch their large markets go to an aggressive competitor. Nobody knows what Google plans to do, but some have speculated that they might build in most of the major cities. Now we’ll just have to watch this one play out, so pull up a chair. This should be interesting.

Do You Know the Margins for Your Product Lines?

That sounds like a straightforward question and most businesses in the country can say yes to that question. But I find that a large percentage of telecom companies don’t know the margins on their products.

There are a number of reasons why it is important to know your margins.

  • You need to know if you are selling any product at a loss. It’s okay to consciously have a loss-leader product if selling it always also sells more profitable products. But it makes no sense to sell a product that loses money as a single product. If you have products that lose money you need to consider raising the price or stop selling the product.
  • You should be trying to sell what makes you the most bottom line. All too often I see telecom companies push products that get them a lot of revenue but not much margin.
  • Without knowing your margins you can’t understand where you need to cut costs. While raising rates is one way to increase margin, cutting costs can have the same effect.

Regulated telcos are very used to having separations studies performed that define their access costs. But these studies have no practical value to management and tell you nothing about your profit margins by product line. And many CLECs and cable companies have never done any kind of cost study.

There all kinds of studies that can be done to look at your margins. The most common are:

Fully allocated fully distributed costs. In these studies every cost in the company is distributed to products. Done properly these studies will define your gross margin (revenues minus direct costs of producing a product), your net margin (the margin after also allocating joint and common costs), and net income by product which will look at depreciation or a surrogate cost of the network layered onto your other costs.

Incremental costs. The large phone companies have historically produced TELRIC or other forms of incremental cost studies for state commissions. These studies do not calculate margins in the same way as a fully distributed cost study. Rather, they look at the incremental cost of producing one unit of the product. The main purpose of these studies is to prove that you aren’t selling products below cost, but otherwise they have very little practical value for management.

Luckily it is a very straightforward process to understand your margins. A fully allocated fully distributed cost study can be as simple as a spreadsheet that allocates every cost in your ledger to products using some logical allocator. The whole key to getting believable results is to develop the best allocators that you can find for the way your company operates.

CCG has done these kind of margin studies many times and we don’t see them being offered by a lot of other consultants. There are a ton of companies that do separations studies or TELRIC studies, but not nearly so many who do straightforward cost accounting studies that management can use. Once you have a good margin study on hand then management can begin to understand how costs affect your profits. As an example, you can quickly see what will happen to your margins if you hire a new employee or if the cost of your Internet backbone goes down. That kind of basic information is vital if you want to maximize the bottom line. Knowing your margins lets you concentrate on those things that will have the best impact to the bottom line.

Cat in the Box!

CCG is not just a company, but also a group of great people. We will be posting a blog entries from time to time to help you get to know us better. This video is of my crazy cat Baxter (the female voice you hear is my wife, Julie). He is getting close to a year old and has a lot of energy. He loves boxes and every morning he sits in a box waiting for me to move him around the floor. It is the highlight of his morning. I laugh every time when he stops and grooms himself while being kicked all around the floor.   –Doug Dawson