The Wall Street Journal details what it calls a “battle between AT&T Inc. and Google Inc. over the future of the Internet.” One of the accusations is that Google is “blocking calls with its Google Voice service…”  To catch you up: AT&T had claimed “press reports indicate that Google is systematically blocking telephone calls from consumers that use Google Voice to call telephone numbers in certain rural communities” in order to “reduce its access expenses”, despite other providers being “banned from call blocking…”  Google responded (via their blog, so +1 for Google), noting that they “agree with AT&T that the current carrier compensation system is badly flawed, and that the single best answer is for the FCC to take the necessary steps to fix it”, but that “Google Voice is a free, Web-based software application, and so not subject to common carrier laws.”

Frankly, I wasn’t sure what to make of that dispute when I first saw it, and I am still skeptical.  However, a recent conversation I had with an expert who has been watching this situation suggests there may be more interesting aspects to the AT&T/Google Voice story.  I was given permission to publish this experts comments anonymously.

The intercarrier compensation story is much more interesting than the furor over call-blocking, but it is related. Ultimately, how can Google afford to offer unlimited inbound and outbound calling for free? Even Skype charges for calls with a leg on the PSTN.

Conventional wisdom is that Google will find a way to cover the telco expense (i.e. access and reciprocal compensation) through behavioral advertising. But when you start to add up the numbers, it doesn’t seem to work. Inbound calls should cost Google about half a cent a minute. Outbound about a cent. So each Google Voice user could cost Google $5 to $15 a month, depending on their usage level.

One way they control expense is the blocking they’re taking so much heat for.  But another, and much more important, is by assessing access charges to balance against the expense. By doing so they could totally eliminate their expense by creating revenues out of thin air.

Google’s CLEC (Bandwidth.com) may be assessing originating and/or terminating access on calls that it merely redirects. These calls ultimately originate and terminate on the networks of other carriers. Basically, Google may have configured its service so that other carriers are subsidizing the cost of its pipes. This, by the way, would be a blatant violation of the FCC’s rules.

It seems to me that Google is right about this showing the problem with the intercarrier compensation rules, and the importance of fixing them.  Yet, if this expert is correct that Google is essentially arbitraging the regulatory system and operating Google Voice based on that CLEC revenue, that seems like an awfully unGoogley thing to do and it could alter the calculus about where Google Voice straddles the line between carrier and application.

UPDATE: USTA has filed a statement with the FCC asking additional questions.  It seems to me that Google is correct that the way to resolve this situation is to fix the intercarrier compensation issue.

If Google wishes to respond, I will be happy to publish their comments here.

Note: I do work for a coalition that includes AT&T among other companies, but I quite like Google, as well, and I take no position on this dispute.