AT&T vs. Google Voice: Sex, money, the feds, and your phone bill

Despite what a handful of lawmakers may say, the dispute between Google (GOOG) and AT&T (T) over the search giant's Google Voice application is not so much about fairness or rural access as it is about steamy phone sex and piles of money. These lawmakers, including Steve Buyer, an Indiana Republican and John Shimkus, an Illinois Republican -- who have received a combined $200,000 from AT&T and Verizon over their careers, according to Opensecrets.org -- have written to the FCC complaining that Google's refusal to connect expensive rural calls is "ill conceived and unfair to our rural constituents."

The FCC is set to open an investigation to determine if that's true, according to Dow Jones, and will formally notify Google of the inquest later Friday. But why all the interest in Google Voice from AT&T, Congress and now the FCC? After all, Google Voice is available by invite only, and only a relative handful of people are using it. So why is everyone in such a lather about it? And why is AT&T expending so much energy to create roadblocks to its tiny new rival?

Technically, the dispute is over FCC regulations governing how long-distance and local phone companies pay each other for traffic that passes from national to local networks. Since Congress deregulated the telecommunications industry in 1996, much of this traffic comprises extremely lucrative sex chat lines, which the national carriers wind up paying for. AT&T has never been happy about that, and it's now livid that Google Voice can avoid having to connect such calls -- thus dodging this twisted fee scheme.

On Thursday, after much sniping between AT&T and Google, the dispute reached Congress: A group of 20 House Republicans and Democrats wrote to the FCC urging it to investigate Google's right to block calls to rural telephone exchanges. AT&T, which has the exclusive right to market Apple's iPhone in the U.S., which Google Voice will compete against, has argued that Google Voice should also have to connect expensive rural calls. This is something AT&T has tried to avoid, but was required to do by the FCC in 2007. In response, the search giant has said, "Unlike traditional carriers, Google Voice is a free, Web-based software application, and so not subject to common carrier laws."

But those 20 lawmakers have challenged that notion. "We are formally requesting an investigation by the FCC into the nature and function of Google Inc.'s voice service," the lawmakers wrote in their Oct. 7 letter to FCC Chairman Julius Genachowski. "A company should not be able to evade compliance with important principles of access and competition set forth by the FCC by simply self-declaring it is not subject to them without further investigation."

Set aside for the moment the fact that most of these lawmakers have received over their careers hundreds of thousands of dollars from AT&T and Verizon (VZ) in campaign and PAC donations. Set aside the fact that the local exchanges, many of which are in their districts, benefit most from this gaming of the intercarrier payment system. And set aside the fact that these lawmakers' constituents are among the biggest beneficiaries of a system that provides them with the same phone service that more densely populated areas are accustomed to.

Instead, to understand what's going on here, consider this background. After Congress and President Bill Clinton deregulated the phone industry with Telecommunications Act of 1996, rural areas came to receive their service primarily from two types of local carriers: an ILEC, for "incumbent local exchange carrier," the local phone companies that predated the Ma Bell breakup; or a CLEC, for "competitive local phone exchange," companies that emerged after the industry was deregulated.

What these newlocal phone exchanges quickly discovered is that they could make a gobs of money by partnering with phone sex and adult chat companies to route the numbers through rural exchanges -- a practice known as "traffic pumping." The local exchanges then turn around and charge AT&Tand other national carriers like Verizon a fee -- sometimes as high as 10 or 20 cents per minute -- to connect long-distance traffic coming from all over the country to these supposedly rural numbers, many of which are actually forwarded to sex call centers in Los Angeles and elsewhere.

And for the coup de grace, the local exchanges then split AT&T's fees -- which amount to millions of dollars every month -- with the phone sex companies, which then turn around and use that money to advertise their services, completing the self-perpetuating cycle. In 2008, AT&T warned that traffic pumping could force higher rates for phone consumers across the country to offset some $250 million in extra costs due to these fees the previous year.

Thanks to FCC rules, AT&T is obligated pay these fees to the local phone exchanges to connect the calls, primarily to local numbers in Iowa and South Dakota, but in other rural states as well. In recent years, volume to these local numbers has increased dramatically, with phone numbers being used by free conference-call companies as well as sex chat lines with names like "Butt Monkey." Ron Laudner, CEO of Farmers Telephone, a local exchange in Riceville, Iowa, last year toldUSA Today the arrangement was routing some 40 million minutes of calls each month to his exchange, generating $2.2 million per month.

Since most consumers now have phone service with unlimited long distance or large monthly chunks of minutes, the calls are supercheap -- or effectively free -- for the user, while AT&T and the other long-distance carriers have to shoulder the charges imposed by the local exchanges.

All in all, a very tidy scheme.

Thus, while lawmakers, AT&T, and The Wall Street Journaleditorial page might pontificate about how this is all about rural phone customers, or fairness, in reality this is about sex and money -- and everyone knows it, including AT&T, which has long griped about the situation. In a 2007 letter to the FCC complaining about the practice, AT&T wrote: "Many of the calling service providers use 'free' pornographic chat lines to generate traffic.... All of which have a single purpose: to artificially stimulate massive increases in traffic." In other words, AT&T knows this dispute isn't about getting Google Voice to provide service to rural America -- it's about porn.

Naturally, AT&T does not want to pay these exorbitant fees, and yet it's urging the FCC to require Google Voice to connect such calls and pay the fees. An AT&T spokesperson told Reuters that policymakers would determine if Google is enjoying a "double-standard."

Some of the local exchanges have accused AT&T of simply not paying its bills. In fact, just last week, two local South Dakota carriers, Northern Valley Communications and Sancom, sent a letter to the FCC accusing AT&T of hypocrisy by complaining about Google's ability to block such calls. In the letter to the FCC, an attorney for the rural carriers, Ross Buntrock, wrote to complain that AT&T is refusing to pay the required fees to rural carriers, despite being required by law to do so.

"AT&T is engaging in very similar conduct to 'reduce its access expenses' by simply refusing to pay its bills," Buntrock wrote. "Indeed, if one were to replace 'Google' with 'AT&T,' and call blocking' with 'no pay' in AT&T's [letter to the FCC], Northern Valley and Sancom would have little to add to describe AT&T's unlawful campaign."

"Without a hint of irony, AT&T concludes that 'the Commission cannot, through inaction or otherwise, give Google a special privilege to play by its own rules,'" Buntrock added. AT&T and the other major carriers "are in desperate need of reminder of their obligations under the law."

"For AT&T to invoke rural America to seek common carriage regulation of online applications, while rural carriers say AT&T isn't even paying its bills, is the height of cynicism," said Mistique Cano, a Google spokesperson. "The fact is, we agree that the FCC needs to fix the current rules for compensating phone carriers."

A spokesperson for the FCC declined to comment, and AT&T did not immediately return calls requesting comment. In the end, though, it would seem that AT&T could wage its battle against the sex chat lines that are exploiting FCC regulations in a more direct manner than trying to drag Google Voice into also paying these fees. And one could ask: Why isn't it?

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