Alec Saunders SquawkBox

Ever wonder why it is that FuturePhone, Radio Handi, FreeConferenceCall, and PartyLine Connect all have access numbers in the 712 area code?   These services all provide “free” services to you.  There’s “no catch”. You just have to make a long distance call to get them. 

So how do these services get paid, and why are the access numbers all in Iowa?

The short answer is tax subsidies. The 712 model, as I refer to it, is really a variation on the 900 number model, but financed by taxpayers. Take a low cost call, terminate on a high cost carrier, and pocket the difference.

The first of these subsidies is the Universal Service Fund.  Tiny Iowa, with just under 3 million residents last year, was the recipient of $86.5 million from the USF.  The USF pays for maintenance and improvements to those local telephone plants, in addition to subsidizing user fees for local residents.  The cost basis to provide service in those communities is dramatically lowered.

The second subsidy is the tarrif itself.  Most Iowa telephone companies (and there are a lot!) participate in the NECA Access Fee Pool.  The NECA publishes a tarrif, which each company participating agrees to use, and then they split the revenues.  The termination charges for those tarrifs are a significant source of revenue for the local phone companies.  And, because they’re rural, the charges are often steeply higher than to terminate in an urban setting.  In the “NFL” cities, you might expect to pay 6 to 8 tenths of a cent per minute for termination.  The NECA tarrif is closer to 3 whole cents.  Arbitrage the subsidized rural rate against your costs and, presto, you’ve got a winner!

Let’s take FuturePhone as an example.  Yesterday they announced free long distance calling to some 50 odd countries world wide.  All you have to do is call 712 858 8883 (a number provided by the tiny Superior Telephone Coop in Estherville, Iowa), and then enter the international call you want to make using the standard 011 prefix.  Easy peasy! 

So how do they make money?  Since we don’t know know what FuturePhone’s actual termination costs are, let’s make an estimate. We do know that Jajah provides services to the same 50 odd countries for a retail rate of 2.5 cents per minute.  So, let’s assume a 50% cost, and say that FuturePhone’s cost to terminate the call is 1.25 cents. That leaves 1.75 cents per minute to split with the folks at Superior Telephone Coop.  Give them half, which leaves you 0.875 cents per minute, and you’ve got a pretty attractive proposition!  It’s certainly a lot more profitable than SipPhone, charging 1 cent per minute, and probably about as profitable as Skype at 2 cents per minute.  It’ll definitely keep bread on the table.

Sounds great doesn’t it?  Everybody wins!  The good citizens of Iowa win (they’ve now got a fibre network joining up 150 of their independently owned telco’s), FuturePhone has a seemingly profitable business model, and you win by getting to make cheap overseas calls.

Or do you?

Well, you’re not really getting that call for free, are you…  You’re still paying long distance charges, which are at minimum going to be the 1 or 2 cents per minute that Gizmo or Skype are charging.  And, should you choose to make the call from a landline, you may be paying up to 10 cents per minute, depending on where you’re calling from, and what LD plan you have with your carrier. Or, you’re burning air time on your cellular phone.  No matter how you cut it, it’s costing you.

Makes you wonder what FuturePhone’s real value is, doesn’t it?  After all, if calls are free using Skype, or Jajah, and you don’t have to make a long distance call to do it, then why bother with FuturePhone?

The 712 model is a creative way to run a business, no doubt.  FreeConference is a very successful example of a business using it.  Today’s lesson, kids, is that even with a model as creative as the 712 model, you still have to provide real value to the customer.  FuturePhone’s cheap long distance call may not be enough.

Sightspeed is the technology behind AMD Live! Communicator Live.  Good on you, folks!

The ten second summary of the deal is:

1. Sightspeed technologies are the foundation of the AMD Live! Communicator.  AMD has taken the existing Sightspeed technology, and customized it to their experience, delivering 30 frame per second video telephony to their customers.
2. By itself, this a great feature for AMD customers.  If you want more, you can pop over to the Sightspeed website, and get yourself the Sightspeed Premium package which includes more voice mail, video conferencing, a personal web page and much much more!

From a customer’s point of view, this is the best way to experience Sightspeed.  AMD Live! is for the living room PC.  Now, with AMD Live! Communicator, you can relax on the sofa, and have a family video chat with Grandma on your big screen TV.

It also speaks volumes about Sightspeed’s technology and business practices.  AMD could have partnered with Yahoo, Skype, or Microsoft, all of whom have similar products in market.  I think they chose Sightspeed for two reasons: 

1. The product. The company consistently wins the top awards in the industry for their product, with particular focus on video quality.
2. The company.  A twenty person company, out of necessity, is a partnering organization.  AMD is going to rebrand Sightspeed’s technology with a new look and feel.  I’d be willing to bet that none of Yahoo, Skype, or Microsoft would have gone that far — too much brand dilution for the big guys.  For Sightspeed, it’s an opportunity to get into the market with a great partner, and upsell the customer later.

Kudos to the Sightspeed team.  They’ve got a great product, and they are clearly ready to do business.

BusinessWeek’s Olga Kharif has written a short article on Jeff Pulver’s latest effort: Network2.tv.  She leads off with the provocative question of whether this will be the “Vonage” of TV, and then makes this statement:

Pulver believes that, in 2007, we’ll see the rise of a new TV network that will eventually compete with the likes of NBC, ABC and CNN. He believes that this new TV network will be Web-based. And he hopes it will be Network2.tv.

Is the Vonage of TV the right analogy?  Maybe and maybe not.  Like Vonage, Network2.tv is a broadband parasite — it rides on someone else’s network.  But unlike Vonage, Network2.tv isn’t actually a substitute for your television.  It’s not about saving money, as Vonage was.  Rather, it’s about getting the content you want.  Network2.tv is a long tail play for micro-shows, rather than just a new distribution mechanism.  In that respect, it’s more like Tivo, than Vonage, except web based.

What’s also fascinating is that because Network2.tv guide isn’t time based, but rather content based, it may be able to neatly sidestep all of the ugly program guide patents owned by Gemstar International.

Go go Jeff!

From the good folks at ThinkGeek comes this monster: an 85 tool Swiss Army Knife, for just $799.  Created by Wenger, the makers of the Genuine Swiss Army Knife, to celebrate 100 years of innovation, this behemoth weighs a whopping 2lbs 11oz, and is 8 3/4 inches wide.

Don’t leave in your hand luggage.