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ICB Toll Free (800/888) News by: Judith Oppenheimer, Publisher, ICB Toll Free (800/888) News
Monday October 13 1997 at 10:14:58 PM EDT

THE EMPEROR HAS NO CLOTHES

For many companies the use of vanity numbers goes far beyond advertising or even marketing - the toll free number itself becomes a brand or product name (e.g., 1-800-FLOWERS, 1-800-COLLECT, etc.) This is good for business and economic growth. As such, the private commercial transfer of numbers from one user to another serves legitimate business purposes and is an integral part of the toll free marketing industry.

New York, NY US - Once upon a time, there was an entrepreneur who conceived of a new retail product. His market studies and focus groups convinced him that "widgets" could be successfully marketed at the consumer level on a Kingdomwide basis. He contacted the Royal Long Distance carrier to inquire about having 1-800-943-4387, the 1-800 number that corresponds with 1-800-WIDGETS, assigned to his new company. Obtaining this number was a very important part the marketing plan. But, alas, the entrepreneur was informed that the number was not available. It had already been assigned to another subject, Ye Olde MailMart, a small mail order company in the Midwest region of the Kingdom. He inquired of MailMart about the possibility of acquiring rights to the number. The owner was, at first, reluctant, because his customers have been using the number for many years. In addition, MailMart would incur a significant expense in notifying its customers, reprinting its catalogs, stationery, etc.

Because the number was crucial to the entrepreneur's business plan, however, he pursued the matter, and finally reached an agreement with MailMart whereby: (a) MailMart would release the number to the entrepreneur, (b) for a period of 18 months the entrepreneur would re-route all calls intended for MailMart, (c) the entrepreneur would absorb all direct costs incurred by MailMart because of the number change, and (d) the entrepreneur would pay MailMart an additional fee over and above direct costs. This deal having been struck, both firms lived profitably ever after, and the entrepreneur developed 1-800-WIDGETS into a retail success that stimulated economic growth and created a host of new jobs throughout the Kingdom.

It sounds like a text book example of the free market system at work. Two business firms negotiate and arrive at a mutually beneficial accommodation that also happens to benefit the public at large. It sounds as wholesome and American as motherhood and apple pie. But there is a problem-a big problem-under regulations recently adopted by the FCC, the "accommodation" between 1-800-WIDGETS and Ye Olde MailMart would be illegal! A new Federal Communications Commission ("FCC" or "Commission") policy makes it unlawful to transfer a toll free telephone number from one user to another in exchange for a monetary payment. The problem is that most people do not see the FCC regulation in the rather innocent context described by our "make believe" story. Rather, they think of the particular situations about which they've heard about or experienced in which an opportunist, due to his own cleverness and/or the negligence of a long distance carrier, manages to obtain the rights to vanity number associated with a well known brand or trademark, and then proceeds to extort a large payment to release the number. An FCC policy aimed at preventing such "greenmail" activities seems reasonable to most people. But the devil, as they say, is in the details. The FCC's anti-brokering regulations were so strictly written that they prevent any purchase or sale of toll free numbers, even when both the buyer and the seller are perfectly satisfied with the terms of the transaction. This article critically examines the new FCC policy and its potentially devastating impact on the toll free marketing industry.

The relationship of FCC actions to economic theory is an interesting, albeit inconsistent, moving picture. Over the past three decades or so the FCC's telecommunications policy has moved from a model of regulated monopoly to one of competition and open entry (at least in theory). Having reluctantly embarked on the road toward competition, motivated by the sometimes not so gentle prodding of a series of court decisions during the 1960's, the FCC quickly adopted as its own the regulatory theory that free competition is often a more effective protector of the public interest than governmental coercion.

Just as religious converts sometimes exhibit greater zeal than those born of a particular faith, the FCC became a champion of free market competition both in its own actions and in its recommendations to Congress. And yet, the Commission often appears to be a backslider, adopting policies that are diametrically opposed to marketplace forces. Whether such straying from the path is born of heresy (i.e., a return to the belief that perhaps governmental coercion is better) or moral weakness (i.e., an irresistible temptation to wield regulatory power), the result in the real world marketplace is the same: businesses are asked to oppose natural and strong economic forces in favor of governmental wishes. More often than not, this tension creates two types of business persons: (1) those who comply with the regulatory edicts to their fiscal peril, and (2) those who obey economic reality, placing themselves in legal jeopardy. The FCC's newly adopted prohibition on the commercial transfer of toll free numbers is a perfect example of this. The Commission has disregarded the economic forces of the marketplace and the business judgments of the industry, instead imposing its own faulty regulatory judgment. In this case, however, the potential consequences are far more ominous than the mere increased cost of regulation-the new FCC policy could, if not altered, abruptly halt the future growth of the toll free marketing and branding industry.

On 11 April 1997 the Commission released the Second Report and Order and Further Notice of Proposed Rulemaking in CC Docket No. 95-155. Up to that time, the FCC's activities with respect to toll free number allocation had been limited. Apart from policies requiring service provider number portability, the Commission theretofore had left the mechanics of the actual allocation of toll free numbers up to the industry. In the Second Report and Order, however, the Commission flexed its regulatory muscle and adopted a policy that may, if it stands, have a devastating effect on the use of toll free numbers as a marketing and branding mechanism. Arguing from the premise that "toll free numbers are a public resource [that must be] allocated efficiently and fairly," and that users therefore do not "own" their numbers, the FCC ruling prohibits "brokering" of toll free numbers, which the Commission defines as "the selling of numbers by private entities for a fee." The practical effect of this ruling is to make it unlawful for two private companies to enter voluntarily into a mutually beneficial agreement providing for the transfer of rights to a toll free number in exchange for a monetary payment.

The official explanation for this policy makes little sense. The Commission does not say that the sale of numbers is a bad thing in itself, but rather that it "provides motivation for hoarding." The Commission fears this "would lead to the premature depletion of the supply of toll free numbers." Concerned that merely "prohibiting ... hoarding will not fully eliminate [its] effects," the Commission concludes that "removing the ability to sell a toll free number eliminates the incentive to hoard." Thus, the entire regulatory prohibition is grounded in the assumption that allowing the private commercial transfer of toll free numbers between users will somehow significantly deplete the supply of available toll free numbers. (I say "assumption," because the Commission pointed to no evidence whatsoever to support the theory that the purchase and sale of vanity numbers has any significant impact on the supply of toll free numbers.)

Two crucial items are totally absent from the FCC's consideration of this issue: (1) not a shred of evidence was presented to or cited by the Commission that would support the theory that the sale of numbers will lead to a depletion of the number supply; (2) the Commission has not given any indication that it has even a rudimentary understanding of functions of toll free advertising, marketing, and branding, nor has it considered the impact of its decision on the industry. Common sense should be enough to defeat the claim that the ability to sell one's number will deplete the supply. Looking back at our make-believe example of the negotiated transaction between 1-800-WIDGETS and MailMart, it is difficult to see how there as been any net effect on the supply of toll free numbers. The widget business will likely be launched, with or without the desired vanity number. We thus have two businesses, each of which will be using at least one toll free number. Which company has which number is of no consequence to the supply of numbers.

The FCC does not see things in such simple terms. Rather than seeing and accepting the realistic business circumstances dictating the purchase and sale of vanity numbers, the Commission merely speculates that the ability to sell numbers provides an "incentive to hoard" or that "a subscriber could acquire a group of numbers it expected to sell at a later date" and "could then nominally place the numbers in service through 'dummy' affiliates." The Commission thus seems perfectly happy to proscribe legitimate activities that are beneficial to the public users of toll free service based solely on speculative assumptions what "could" happen. This is a far, far cry from relying on competition and market forces rather than imposing government regulation. If the Commission were to prohibit each and every activity that "might" be exploited in some untoward way, virtually all legitimate activities would be prohibited.

The Commission is not entirely to blame for this misjudgment. The Commission is taking its information and its lead from the industry, but thus far the "industry" the Commission has heard has been, for all intents and purposes, the long distance carriers. Firms that actually use of toll free numbers for marketing and advertising have been underrepresented. In 1995 the long distance industry told the FCC there was a shortage of toll free numbers and that the supply was in danger of imminent depletion. On the basis of that representation, the Commission adopted interim "conservation" measures and began the rulemaking proceeding that eventually led to the adoption of the anti-brokering policy. But the Commission may very well have been misled in 1995 as to both the immediacy of any number shortage as well as the source of rapid number depletion.

A 1995 industry survey found that out of approximately 7.7 million potential 800 numbers, RespOrgs were serving only approximately 4.5 million working numbers. Where were the other 3.2 million numbers? They were not being hoarded or brokered by subscribers, because they were not being served by RespOrgs. But, if the information the industry was feeding the Commission Is accurate, neither were they in the pool of available numbers, which, according to the FCC, had only 600,000 as of June 1995. It would appear, then, that over 40% of the toll free number supply was being warehoused by the same RespOrg/Carriers who were, at the same time, telling the Commission that the alleged shortage was being caused by brokering numbers.

In the relatively short time since adoption of the Second Report and Order, there have already been two rulings on the matter in enforcement proceedings. The first was a 13 June 1997 letter of admonishment from the John B. Muleta, Chief of the Enforcement Division of the FCC's Common Carrier Bureau to Mr. Joseph J. Weiss of TWC Communications ("TWC"). The controversy began when TWC obtained a 1-888 number that AT&T inadvertently failed to reserve for the holder of the corresponding 1-800 number. It appears there were some negotiations between TWC and AT&T and its customer, but when the parties could not come to terms, AT&T complained to the FCC. In response to the complaint the Commission concluded that "attempting to negotiate the transfer of toll free number[s] for profit [is] contrary to longstanding Commission policy prohibiting the establishment of ownership interests in toll free numbers," as well as a direct violation of the rules and policies adopted in the Second Report and Order. Having said that, the Commission stopped short of imposing any serious sanctions, such as directing release of the number back to AT&T or imposing a fine. Instead, the Bureau "strongly admonished" TWC for having violated Commission policy, and stated its expectation that TWC would take corrective steps.

The Commission may have been unsure of its ability to deal more harshly with TWC because the conduct complained of took place prior to adoption of the Second Report and Order. The Commission pays lip service to "longstanding" policy, but the fact is that prior to the Second Report and Order the only clear prohibition against buying and selling of numbers was contained in voluntary industry guidelines. (SNAC maintains the Industry Guidelines for Toll Free Number Administration.) It would probably be difficult for the Commission to defend in court a serious sanction for number brokering that took place before the policy were clearly established. But the TWC letter nonetheless sends a loud and clear signal to the industry that the Commission does intend to enforce the anti-brokering regulations.

On 28 August 1997 the Commission released a Memorandum Opinion and Order addressing a formal alleging that a carrier had improperly withheld assignment of a toll free number. Patients Plus, Inc. alleged that Long Distance Telecommunications Service, Inc. had reneged on a commitment to reserve the number 1-800-JUSTICE for Patients Plus, and instead directed the number to an affiliated marketing company who used it for a legal referral service of the type Patients Plus had developed. It was alleged that the affiliate had been set up for the express purpose of circumventing the Commission's portability rules. Patients Plus also alleged that the carrier had attempted to "sell" the number to it for $200,000, which it argued was discriminatory treatment vis--vis the carrier's own affiliate. The Commission denied the complaint, finding that the number had been assigned to the affiliate prior to the formal reservation request by Patients Plus, and on the grounds that PPI otherwise failed to offer adequate proof of its allegations. But in so doing provided some further insight into its thinking on toll free number brokering.

The Patients Plus ruling implies that Communications Act Sections 201(a), 201(b), and 202(a), which require communications common carriers to provide service to the public upon reasonable request on terms that are just and reasonable and nondiscriminatory vis--vis similar services and customers, can be implicated (and hence violated) in vanity number cases, independent of any "policies" regarding toll free number brokering and/or portability. This theory, if followed and upheld, could give the Commission the ability to deal with conduct occurring before the adoption of anti-brokering regulations. In fact, the Commission clearly stated in the ruling its belief that the anti-brokering policies adopted in the Second Report and Order can be applied retroactively. What is even more troubling is the Commission's apparent lack of concern regarding the alleged use of an affiliated company to evade portability and anti-brokering regulations. One can only hope the Commission is not setting up a double standard whereby the regulations will only be enforced against end users, but not the carriers.

The new toll free number regulations reflect the Commission's failure even to understand, much less appreciate, the legitimate and necessary role the purchase and sale of toll free numbers plays in marketplace. Through the use of so-called "vanity" numbers, an entire facet of marketing has developed. For many companies it goes far beyond advertising or even marketing-the toll free number itself becomes a brand or product name (e.g., 1-800-FLOWERS, 1-800-COLLECT, etc.). This is good for business and economic growth. It should be encouraged to continue, but the Commission's anti-brokering policy may stop it dead in its tracks. Under the new regulations, an entrepreneur who conceives of a new product or service that is based on or will make use of a particular toll free number is probably out of luck, because the odds are overwhelming that the number has already been assigned to another user. The law now prohibits the entrepreneur and the user from negotiating a transfer of the number for monetary consideration.

I am convinced this is simply a case of the Commission not being properly educated by the users of toll free numbers-and being misinformed and misled by other parts of the industry. When a Commission staff member thinks of selling a number, he or she apparently conjures up a mental image of a seedy broker who is standing in an alley opening with a host of hoarded vanity numbers hidden under a trench coat. This misconception must be replaced with the true picture: two small business entities (seller and buyer) engaging in a legitimate and mutually beneficial agreement that will facilitate the creation of a new business enterprise and/or the launching of a new product or service.

The Commission will not come to see the error of its ways on its own. The industry must help. Telemarketers, call centers, shared use vendors, and other firms that have the frequent need to acquire specific numbers should come forward and explain the facts of life to the Commissioners so they will begin to see and understand the proper and useful role of buying and selling numbers. Telecommunications carriers must rethink their historic opposition to number brokering and recognize that the FCC regulations also prevent them from assisting their subscribers in obtaining specific numbers. Legal arguments and policy analysis are fine and good, but if there is any hope of changing these restrictions, the Commissioners and the key members of the FCC staff must come to understand that the private commercial transfer of numbers from one user to another serves legitimate business purposes and is an integral part of the toll free marketing industry. The industry participants must impart that understanding.

Author/Correspondent's Profile: Judith Oppenheimer, Publisher, ICB Toll Free (800/888) News



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