Tag Archives: transport

The End of Free Conference Calling

Like many of you reading this blog, I have been using the service Free ConferenceCall.com for many years. I got an email from them last week warning that their service will likely go dark, and they wanted users of the service to call Congress to help keep them in business.

Their issue stems back to an FCC order issued in September of last year that seeks to stop the practice of access arbitrage. This FCC summary of the order describes the situation well. Some small telcos have been making money by billing access on ‘free’ minutes generated by services like free conference calling. The process of making money from free calling services has been known in the industry as access arbitrage.

The FCC tried to stop access arbitrage in 2011. At that time, small rural telcos billed a rate of as much as a penny or two per minute to originate or terminate a long-distance call. Some telcos that were allowed to bill the high rates were making a lot of money by originating calls for free outgoing call center services or by terminating calls from 800 numbers, conference calling services, or free chat lines.

In the 2011 order, the FCC eliminated the access fees associated with terminating a call, migrating to what the FCC called ‘bill and keep’, and they hoped that eliminating the access revenues would kill the arbitrage practices. The FCC order was largely effective and chat lines and other free arbitrage services quickly disappeared.

However, the 2011 order didn’t kill all access charges, and over time the folks who make money with arbitrage found another way to make money with free calling. One of the few access charges left untouched in 2011 was transport, which compensates telcos for the use of fiber networks connecting telcos to the outside world. I’ve noticed that the caller ID for FreeConferenceCalling.com numbers is mostly from Iowa and South Dakota, and I have to assume those calls are being terminated at switches that are remote and that can still bill significant miles of transport.

The access fees billed to terminate calls are paid by the carrier that originates the call. This means that most remaining terminating access is paid today by long-distance carriers like AT&T, Sprint and CenturyLink, which together still sell the bulk of long-distance telephone services. The dollar magnitude of access arbitrage is much smaller than a decade ago. The FCC estimates arbitrage is currently a $40 – $60 million problem, whereas it was hundreds of millions before the FCC’s 2011 order. But those fees are being billed to the long-distance companies that get no benefit from the transaction (thus the term arbitrage – the companies are billing the fees because the rules allow a loophole to do so).

FreeConferenceCalling.com is not the only company doing this, and it’s likely that many conference calling services rely wholly or partially on the arbitrage. It’s worth noting that conference call services that use the Internet to place calls will not be affected by this change – because those calls don’t invoke access charges. The carriers billing for the access on the conference calling may or may not be sharing the revenues with companies like FreeConferenceCalling.com – in either case those carriers no longer have any financial reason to continue the practice.

Companies like FreeConferenceCalling.com don’t automatically have to go out of business, but the FCC order means a drastic change to the way they do business. For instance, the company could start charging a monthly fee for conference calling – likely forcing this particular company to change its name. They might sell advertisements for those sitting waiting for a conference call. They could charge for services like recording calls.

It’s more likely that companies like FreeConferenceCalling.com will quietly die or fade away. I tried using the service yesterday and it already seems to be broken. This latest FCC order probably puts the final nail into the coffin of access arbitrage – although I’ve learned to never say never. As long as there are any fees for calling based upon regulatory orders, there is a chance that somebody will find a way to generate lots of calls that fit the circumstance and get enriched by the arbitrage.

Shrinking Competition for Transport

Bloomberg reported that CenturyLink and Alphabet are interested in buying Zayo. It’s been anticipated that Zayo would be the next fiber acquisition target since the Level 3 merger with CenturyLink since they are the largest remaining independent owner of fiber.

As you might expect, the biggest owners of fiber are the big telcos and cable companies. Consider the miles of fiber owned by the ten biggest fiber owners – I note these miles of fiber are from the end of 2017 and a few of these companies like Verizon have been building a lot of fiber since then.

AT&T 1,100 K
Verizon 520 K
CenturyLink / Level 3 450 K
Charter 233 K
Windstream 147 K
Comcast 145 K
Frontier 140 K
Zayo 113 K
Cogent 57 K
Consolidated 36 K

You might wonder why this matters? First, Zayo is the largest company on the list who’s only business is to sell transport. All of Zayo’s fiber is revenue producing. While the companies above it on the list have a lot more fiber, a lot of that fiber is in the last mile in neighborhoods where there is not a lot of opportunity to sell access to others. The biggest independent fiber owner used to be Level 3, with 200,000 miles of revenue-producing fiber before they merged with CenturyLink.

The numbers on this chart don’t tell the whole story. Companies like Zayo also swap fiber with other networks. They may trade a pair of fibers on a route they own for a route elsewhere that they want to reach. These swapping arrangements mean the transport providers like Zayo, Cogent and Level 3 control a lot more fiber than is indicated by these numbers.

It matters because as soon as you get outside of the metropolitan areas there are not many options for fiber transport. A few years ago I helped a City look for fiber transport and the three options they found that were reasonably priced were CenturyLink, Level 3 and Zayo. If CenturyLink buys Zayo they will have purchased both competitors in this region and will effectively eliminated fiber transport competition for this community. Without that competition it’s inevitable that transport prices will rise.

I think back to the early days of competition after the Telecommunications Act of 1996. I remember working with clients in the 1990s looking for fiber transport, and there were many cases where there was only one provider willing to sell transport to a community. If the sole provider was the local telco or cable company it was likely that the cost of transport was four or five times more expensive than prices in nearby communities with more choices. When I worked with rural providers in the early 2000s, one of the first question I always asked was about the availability of  transport – because lack of transport sometimes killed business plans.

Since then there has been a lot of rural fiber built by companies like statewide fiber networks and others who saw a market for rural transport. Much of the rural construction was egged on by the need to get to cellular towers.

My fear is that we’ll slide back to the bad-old-days when rural fiber was a roadblock for providing broadband. I don’t so much fear for the most rural places because those fiber networks are owned by smaller companies and they aren’t going away. I fear more for places like county seats. I worked with a city in Pennsylvania a few years ago where there was a decent number of competitors for transport – Verizon, Zayo, Level 3 and XO. Since then Verizon bought XO and CenturyLink might own the other two. That city is not going to lose transport options, but the reduction from four providers to two giant ones almost surely means higher transport costs over time.

I am intrigued that Alphabet (the parent of Google Fiber) would look at buying an extensive fiber network like Zayo. Google is one of the biggest users of bandwidth in the country due to the web traffic to Google and YouTube. Their desire for fiber might be as simple as wanting to control the fiber supply chain they use. If so, that’s almost as disconcerting as CenturyLink buying Zayo if Google wouldn’t remain as a fierce transport competitor.

How Comcast Pays for Bandwidth

comcast-truck-cmcsa-cmcsk_largeToday’s blog is more about Comcast’s data caps. I recently saw a quote from Brian Roberts, the Comcast CEO during an interview by Business Insider. When asked about the data cap trials he said the following:

We don’t want anybody to ever not want to stay connected on our network, but just as with every other thing in your life, if you drive 100,000 miles or 1,000 miles, you buy more gasoline. If you turn on the air conditioning to 60 vs. 72, you consume more electricity. The same is true for usage, so I think the same for a wireless device. The more bits you use, the more you pay.

He is basically saying that it costs Comcast more to buy Internet bandwidth for customers who use more bandwidth. Certainly his first example means that – you certainly must buy more gas to drive a vehicle more miles. Is this a good analogy? For it to be true Comcast would have to be buying raw bandwidth each time a customer uses the Internet – this would mean when you download something at your house that Comcast is somehow buying more bandwidth from the big Internet spigot.

But that’s not how it works. While Comcast is really big, they are not one of the companies that owns the Internet, so they must buy bandwidth just like any other ISP. So how do ISPs buy Internet access? They buy it with two cost components – transport and raw bandwidth. Transport is the cost of getting the bandwidth from one of the major Internet POPs to a market. At Comcast’s size they either have a direct physical presence at each major Internet POP or they have an arrangement with some carrier who does. Due to their sheer size, I have to imagine that Comcast’s cost for transport on a per-megabit basis is lower than anybody else in the industry other than maybe AT&T, who is one of the owners of the Internet structure.

Transport can be a major cost for an ISP that operates a long distance from a major POP. I have small ISP clients that spend between $10,000 and $20,000 per month on transport, which is a lot if you only have a few thousand customers. But for Comcast this cost has to be miniscule on a per customer basis. And the cost is fixed. Once you buy transport to a market it doesn’t matter how much bandwidth you shove through the pipe. So this cost doesn’t increase due to customer usage.

The other cost is to buy the actual Internet connectivity — an expense that is sometimes referred to as an Internet port. This is an electronic connection directly into the main Internet routers. My small clients pay anywhere from $1 to $5 per raw dedicated megabit per month for Internet bandwidth. Generally the more you buy the cheaper it gets. Again, one has to imagine that Comcast pays a lot less than my clients due to their huge size.

And even that cost can be significantly reduced by large ISPs like Comcast through peering. Peering is where a carrier like Comcast makes a direct connection to companies with a lot of Internet usage like Netflix or Google. From an economic standpoint, peering is essentially the sam as transport and bypasses paying for the Internet port. Any traffic that goes through the peering connection does not increase with a customer’s use of the bandwidth.

An ISP’s total cost for an Internet port is based upon the average of the busiest times of the month. For instance, a small ISP might use 500 raw megabits of aggregate usage on most evenings, but if their customers have a few nights per month where they use 700 megabits, then the ISP pays for that larger amount for the whole month.

The interesting thing about this pricing structure is that the ISP pays the same every day of the month whether the customers are using the data or not. The cost to Comcast wouldn’t change if any one customer, or even all of the customers in a city, were to use more data, as long as that usage doesn’t create a new fastest day of the month. From a cost accounting basis, this means that the cost of Internet bandwidth can also be considered as a fixed cost. There is nothing that any one customer, or even a fairly large pile of customers, can do to change the cost of the bandwidth to Comcast. It does not cost them more when you watch an extra movie.

The idea that Comcast is paying more for somebody who downloads 500 gigabits per month than somebody who uses half of that is false. If that 500 gigabit customer was to instead use zero bandwidth in a given month then Comcast’s costs wouldn’t change by a penny.

To put this into a different perspective, many of my clients have done the math and in aggregate their bandwidth costs them between $2 and $5 per customer per month depending upon how small they are. This is the average of transport costs, any peering costs and the Internet port costs. I would be surprised if a large ISP like Comcast is spending much more than $1 to $2 per customer per month for bandwidth. For them to charge $35 for going over their data cap is outrageous and that charge is 100% profit to them.

Roberts did make one true analogy when he compared his data caps to wireless carriers like Verizon and AT&T. They buy bandwidth in the same way that Comcast does, and so it also doesn’t cost them extra when a customer uses an additional gigabit on their cellphone. US wireless data is very close to the most expensive bandwidth in the world and you have to go to places like Africa to see bandwidth being sold for as high pf a price. The cable companies like Comcast have eyed the Verizon and AT&T wireless profits with envy and the data caps are nothing more than an attempt to greatly bump up what they can bill for data. They will be billing customers for going above an arbitrary cap, while in reality using more bandwidth doesn’t cost Comcast anything extra.

A Solution for Net Neutrality?

Network_neutrality_poster_symbolToday Mozilla filed comments with the FCC with a clever solution that would fix the net neutrality fiasco. Attached is the Mozilla filing. I call the solution clever, because if the FCC wants to solve net neutrality Mozilla has shown them a path to do so.

Mozilla has asked to split Internet traffic into two parts. First is the traffic between ISPs and end-user customers. Mozilla is suggesting that this part of the business can remain under the current regulatory rules. The second portion is the traffic between ISPs like Comcast and AT&T and content providers like Facebook, NetFlix, etc. Mozilla recommends that the FCC reclassify this as transport under Title II of the Telecommunications Act of 1996.

The current dilemma we are facing with net neutrality is that FCC lacked the courage to classify the Internet network as common carrier business. Instead, in 2002, when broadband was growing explosively, the FCC classified all Internet traffic as an information service. And that decision is why we are even having the debate today about net neutrality. If the FCC had originally decided to regulate the Internet then it would have full authority to enforce the net neutrality rules it passed a few years ago.

But even in 2002 the FCC was a bit cowed by the political pressure put on them by lobbyists. The argument at the time was that the FCC needed to keep hands off the burgeoning Internet so as to not restrict its growth. It’s hard for me to see how classifying the Internet business as common carrier business would have changed the growth of the Internet and I believe it all boiled down to the fact that the cable companies did not want to be further regulated by the FCC.

The net neutrality rules written a few years ago by the FCC basically say that ISPs have an obligation to deliver all packets on the Internet without discrimination. Mozilla is suggesting that there is an additional legal obligation between ISPs and content providers to deliver their traffic without discrimination.

This argument might seem a bit obscure to somebody not in the industry, but it removes the dilemma of not being able to regulate the traffic between ISPs and content providers. The suggested change is to not classify data packets at the carrier level as information services, but to recognize it by its normal network function – that is the transporting of data from one place to another. Today transport is regulated in the sense that if a carrier sells a data pipe of a certain amount of bandwidth to another carrier they are obligated to deliver the bandwidth they have charged for. By putting the gigantic data pipes that extend between companies like NetFlix and Comcast under the transport regime it would treat Internet traffic like any other data pipe.

This change makes a lot of sense from a network perspective. After all, it’s hard to think of the transaction where NetFlix hands a huge data pipe to Comcast or AT&T as an information service. Comcast is doing no more than taking the data on that pipe and moving that data where it is supposed to go. That is the pure definition of transport. It only becomes an information service on the last mile of the network where the data traffic is handed off to end-user customers. There are already millions of other data circuits today that are regulated under the transport rules. It make logical sense to say that a 10 gigabit Internet circuit is basically the same, at the carrier level, as a 10 gigabit circuit carrying voice or corporate data. Data pipes are data pipes. We don’t peer into other data pipes to see what kind of traffic they are carrying. But by classifying the Internet as an information services that is exactly what we do with those circuits.

This idea gives the FCC an out if they really want net neutrality to work. I personally think that Chairman Wheeler is thrilled to death to see net neutrality being picked apart since he spent years lobbying against it before taking the job. So I am going to guess that the Mozilla suggestion will be ignored and ISPs will be allowed to discriminate among carriers, for pay. I hope he proves me wrong, but if he ignores this suggestion then we know he was only paying lip service to net neutrality.