Ever wonder why it is that FuturePhone (now defunct), Radio Handi, FreeConferenceCall, and PartyLine Connect all have access numbers in the 712 area code? These services all claim to provide free services to you without a catch.

After a little research, I found out that you just have to make a long distance call to get them, so lunch isn’t entirely free. But I still wondered how these services get paid, and why are the access numbers all in Iowa?

According to Michael Arrington of TechCrunch, “the founder created his own telephone company in Iowa. Iowa is apparently the only state taking advantage of an FCC kickback scheme that gives telco’s a portion of the fees generated from every inbound call to an Iowa number. So when you call (one of those Iowa telco’s access) phone number, a portion of any long distance fees you are paying go to the company. The kickback is apparently authorized via the Universal Service Fund. These kickbacks are enough on average to more than cover the international outbound calling fees (which are mostly carried via VOIP schemes).”

Alex Saunders goes into a little more detail how these services get paid. “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!”

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