The Federal Communications Commission has ruled against voice over Internet Protocol company magicJack in a case filed against it by AT&T. YMax-owned magicJack had been charging AT&T call-termination fees whenever its customers called AT&T customers or 1-800 numbers.
The FCC ruled on April 8 that YMax couldn’t charge call-termination fees, a key aspect of the company’s business model that had allowed it to charge customers only $19.95 a year for VoIP services. In its complaint, AT&T argued the charges the company received from YMax for long-distance calls terminating at an AT&T customer’s phone or toll-free number served by AT&T were undeserved, and the company sought relief from paying them.
The decision reversed nearly 15 years of FCC practice of avoiding the contentious issue of VoIP charges.
‘Gaming the System’
The FCC’s ruling was heralded by Jim Lakely, co-director of the Center on the Digital Economy at The Heartland Institute, which publishes Infotech & Telecom News.
“Happily, the FCC’s decision was narrow, meaning it really only applies to this specific, unique, and ingenious VoIP product—and not more-direct VoIP services such as Skype. The big regulatory battle in the FCC over Skype is for another day. But that battle, I should add, is best left to a consumer-driven market that is still deciding the matter,” he said.
Steven Titch, a telecom policy analyst for the Los Angeles, California-based Reason Foundation, also applauds the FCC’s ruling.
“Plain and simple, the FCC put the kibosh on magicJack’s attempt to profit from gaming the access charge system,” said Titch. “magicJack’s parent, YMAX, built its business plan on the regulatory requirement that [phone companies] must compensate each other for completion of calls.”
‘Relic of Monopoly Era’
Titch continued: “Over time, the rule, a relic of the monopoly era, has become ever-more complicated and more prone to abuse, especially with the proliferation of competition. “For example, it has long been a sore point among larger carriers that small telephone companies in rural states routinely partner with teleconferencing operations to terminate calls, ostensibly at servers, in their regions,” he said.
“This means they can increase revenue from access fees,” Titch said. “YMAX took it one step further by offering customers free calls through the magicJack device, a loss leader, with hopes of making money by maximizing access fees from AT&T and other carriers.”
Lakely agrees the FCC ruling is “bad news for Ymax because a key to its business model seems to have come to an end. It’s yet to be seen, though, whether this is also bad news for current users of magicJack.”
‘Keep Regulation Light’
Lakely says magicJack’s future customer base is dependent on the company’s moves following the FCC decision. “The company’s costs are now certainly going to rise, perhaps to a level that ends the promises we hear in the nearly ubiquitous TV commercials. And that’s a bit of a shame, because MagicJack has received good reviews from consumers and various technology publications.”
“Certainly, this ruling puts a crimp in magicJack’s TV pitch, which promises that customers can ‘fire their phone company,’ keep their phone number, and call virtually anyone, anywhere, for virtually nothing,” Lakely said.
“But let’s remember that MagicJack’s a niche product,” Lakely added. “Americans who are familiar with Skype, Vonage, and other VoIP technology have made their own decisions on the tradeoffs of abandoning traditional telephony and going in a new direction. And there are tradeoffs, which is the nature of emerging technologies in such a market. Regulation in this area should remain light enough to let the market sort things out,” Lakely said.
“We should really not read too much into this ruling by the FCC, which was blessedly narrow,” Lakely continued. “MagicJack is VoIP for those who don’t understand how the technology works—people who can’t imagine getting rid of their old land line phone, and who have a permanent desktop computer sitting on a desk from which it will never move.”
Lakely emphasizes that the market is moving beyond these technologies: “MagicJack is impractical for the laptops and wireless devices consumers are increasingly moving towards. Ymax’s business model was already on the way to being ground up in the creative destruction of the technology market,” he said.
Added Titch: “YMAX’s low rates did not derive from innovation or invention, but from advantage of regulatory loopholes. The FCC was right to call them on it.”
Tabassum Rahmani ([email protected]) writes from Dublin, California.
“Opinion and Order: AT&T v. YMax,” Federal Communications Commission, April 8, 2011: http://heartland.org/infotech-news.org/article/29904/FCC_Opinion_and_Order_ATT_v_YMax.html