Texting with Toll-Free NumbersOld-School Market Failure Plagues a New-Age Marketa QSI Consulting Exploratory PaperToll-Free telephone numbers have allowedbusinesses to pay the long-distance fees oftheir customers for more than half acentury. 1 This simple reversal-of-chargesconcept established Toll-Free numbers as aprimary means by which businessescommunicate with their customers.Initially, the 800 area code hosted all TollFree numbers and was synonymous in thepublic lexicon with a Toll-Free call. However,as the popularity of Toll-Free callingaccelerated over time, new area codes wererequired and 888, 866, 877, 855, and otherswere added to the mix. Today nearly 48million Toll-Free numbers are available to themarket with more than 41 million of thosenumbers in use. 2As technology advances, businesses are usingToll-Free numbers for more than voiceconversations. For example, recentadvancements have paved the way for textmessaging to Toll-Free numbers. Recognizingconsumers’ strong preference for the easeand convenience of text messaging, thecommunications industry has been keen toadvance text messaging acrosstechnologies—text messaging is not just forBrief History of Toll-Free Numbers, available iefhistory-of-Toll-Free-numbers.html (04/21/2007).12mobile phones anymore. With Toll-Freenumbers already positioned to facilitatecommercial relationships, texting with TollFree numbers is the next logical step intexting’s cross-technology transition.While texting across multiple technologies isan accelerating trend, the vast majority oftext messages still originate from orterminate to mobile devices. As such, mobiledevices continue to drive the text-messagingmarketplace, and the nation’s four largestmobile phone companies (who serve nearly100 percent of mobile subscribers) are the defacto gatekeepers.AT&T, Verizon, Sprint, T-Mobile, and othermobile carriers use third-party aggregatorsto manage traditional text messagesexchanged between mobile devices on theirwireless networks. A text from an AT&Tmobile customer to a Verizon mobilecustomer is generally forwarded toSyniverse 3 or SAP,4 who then routes the textmessage to the intended network forcompletion. Aggregators provide an efficientand flexible system, bypassing the need forevery mobile wireless carrier to be directlyconnected to every other carrier for oduct/technologyplatform/sms.html34SOMOS (formerly SMS/800, Inc.).Page 1

completion. There are multiple aggregatorsfacilitating mobile-to-mobile text messages,and the market structure (e.g., rates, terms,and conditions for exchanging texts) isrelatively mature.Even for texts to or from regular, traditionalwireline telephone numbers (a relatively newbut increasingly popular market), the systemworks generally the same way. Textmessages to or from wireline phone numbersenjoy the benefit of multiple aggregators andrelatively stable and reasonable rates, terms,and conditions for exchanging text messages.The same is not true for the Text to Toll-Free(TTF) marketplace.TTF is unique in that the nation’s largestmobile carriers use a single aggregator,Zipwhip, Inc., to manage practically 100percent of the TTF traffic to and from theirsubscribers. In other words, anytime a mobilesubscriber in the United States sends a textmessage to a Toll-Free number or a businessuses its Toll-Free number to send a textmessage to a mobile subscriber, those textmessages are routed solely through Zipwhipmore than 99 percent of the time.Importantly, Zipwhip also competes withother TTF providers in the retail market.This unique decision on the part of themobile carriers appears to have caused majorproblems in the emerging TTF marketplace,including blocked text messages, substantialprice increases, and slowed innovation.CTIA – Everything Wireless , SMS InteroperabilityGuidelines, Version 3.2.2, effective January 1, 2015.6Id., Section 4.4.7Throughout this whitepaper the term “Toll-Free textprovider” is used to describe the non-Commercial5Further, industry guidelines applicable toToll-Free texts5 are being ignored, and theToll-Free industry’s neutral-third partyregistry, specifically designed to ensuresecurity and interoperability, is beingbypassed.6 Not surprisingly, Zipwhip’s uniquerole as exclusive TTF aggregator as well asretail Toll-Free text provider also leads toanti-competitive behavior. 7The market failures described above aresimilar to the state of the landline market inthe mid-1990s before Congress and the FCCintervened. And the root of the problem isexactly the same—market power. When thefive largest mobile wireless carriers, whocontrol more than 99 percent of the mobilesubscriber marketplace, choose unanimously(and almost simultaneously) to use a singleaggregator for all TTF traffic, they bestowtheir cumulative market power on that singleaggregator (in this case, Zipwhip). History hasshown us time and again market power ofthat magnitude will be abused.Toll-Free Texting HoldsGreat PromiseToll-Free numbers serve as a vital linkbetween businesses and consumers. Not onlydo most consumers associate Toll-Freenumbers with business rather than personaluse, but businesses also often spendsubstantial monies incorporating their TollMobile Radio Service (“CMRS” – the technicaldescription for mobile carriers) providers of Toll-Freetext messages, sometimes referred to as over-the-top(“OTT”) text providers.Page 2

Free numbers directly into their marketingcampaigns.a text to a Toll-Free number and textinganother mobile subscriber.Many people know by heart the catchy jinglefor Empire Carpet: “800-588-2300, Em-pire!”And most of us who travel regularly pick upthe phone and dial Southwest Airlines frommemory: 1-800-I FLY SWA.Text messaging, regardless of the telephonenumber being used, is one of the mostprolific forms of electronic communication inthe world today. In 2015, more than twotrillion text messages (SMS/MMS) wereexchanged in the U.S. alone. 9A recent survey shows that 33 percent ofsmall businesses, 78 percent of medium-sizedbusinesses, and 90 percent of largebusinesses utilize one or more Toll-Freenumbers. 8 Today, those numbers are notused for just voice conversations. Toll-Freenumbers are now regularly used to both sendand receive text messages.There is no doubt that the convenience ofcommunicating via text message is a majordriver in text messaging popularity:Texting with Toll-Free numbers is relativelyeasy. Indeed, for the mobile subscriber, nodiscernible difference exists between sending-The average person responds to a textin 90 seconds (compared to 90minutes for an email).-90 percent of all text messages areread within three minutes of theirdelivery.-Text messages are read on average inless than five seconds.10-Overall, 80 percent of US mobilecustomers prefer texting as a primarymeans of communication. 11-Nearly 92 percent of US adults havemobile phones capable of sendingand receiving text messages.How Toll-Free Texting WorksCustomer sends textmessage to a toll-freenumber (1-8XX) like atypical text to amobile phoneBusiness receives textmessage via integratedsoftware, or anynumber of otherdevices includingmobile phoneBusiness replies tocustomer fromcomputer or device;customer receivesmessage as a typicaltext messageConnecting with text: The shift to landline and TollFree business texting, AT&T Market Survey (January2016) (hereafter, “AT&T 2016 Market Survey”).Available g volumes taken from CTIA’s Annual SurveyReport for Year-End 2015. “SMS” stands for Short9Message Service and “MMS” stands for MultimediaMessaging Service.45 Texting Statistics That Prove Businesses Need toTake SMS Seriously. Available iously/(09/10/2015) (hereafter “OneReach 2015 Toll-FreeText Statistics”).1011AT&T 2016 Market Survey.Page 3

-98 percent of US smartphone usersutilize text messages on a regularbasis. 12As text messaging evolves from apredominately personal communicationsmedium to an effective commercial tool,businesses are gearing up to send andreceive. This includes text-enabling the sameToll-Free numbers on which they have reliedto communicate with customers for decades.The benefits of text-enabled Toll-Freenumbers for consumers and businesses arevirtually endless. For example, every airtraveler is familiar with the frustrationinvolved in a cancelled flight. You call yourairline, wait on hold, and eventually speakwith a customer service representative—oftentimes while in a crowded and noisyairport. Hold times are infamous forfrustrating consumers and harming abusiness’s reputation. 13 Text-enabled TollFree numbers can make this process notablysimpler (and less stressful): simply respond toa text message sent from your airline via itstrusted 800 number and reschedule via areturn text.Another example involves quick resolutionsto time-sensitive activity. Did you justremember that today is your significantother’s birthday? Send a text message withall necessary information to 1-800-Flowers to12AT&T 2016 Market Survey.See, e.g., Fortune, “American Airlines left passengeron hold for 6 hours,” March 4, 2015. Available hold/1314have a bouquet of flowers delivered withminimal time and effort.It was recently reported that 97 percent ofbusinesses using text-enabled Toll-Freenumbers found that communicating withcustomers was more efficient using textmessaging. 14 Yet, only 14 percent ofcompanies regularly communicate withcustomers via text, 15 and as of mid-2015,roughly 98 percent of Toll-Free numbers inuse in the US were not text-enabled. 16 Thesimple conclusion is as follows: There issubstantial room for growth in the TTFmarketplace.Disruption in the TTFMarketplaceThe telecommunications industry involvesliterally thousands of carriers, cooperating toensure telephone calls get from one caller toanother. These include mobile carriers,traditional wireline carriers, Voice overInternet Protocol (“VoIP”) providers, andhundreds of unique and interesting hybridparticipants that foster astoundinginnovation. While each participant pursuesits own unique business and technologicalinterests, the market is governed bytransparent and enforceable rules andguidelines that ensure reliability in consumercommunication.15AT&T 2016 Market Survey.Chatterjee, Koeli. Get more out of your Toll-Freeand landline numbers Use it for Texting Too!Available at: s-for-texting/ (06/06/2016).16AT&T 2016 Market Survey.Page 4

The voice market also depends on noncarrier vendors and third-partyadministrators for signaling, telephonenumber access, number portability, routing,and numerous other functions critical toproviding voice service.If a wireline carrier refuses to follow theindustry’s telephone number assignmentguidelines when assigning telephonenumbers or ignores the Local ExchangeRouting Guide (LERG), calls are not likely tobe properly routed. Further, NumberPortability Administration Center (NPAC)guidelines and the SMS/800 registry ensurecalls are securely delivered to the party towhom they are intended. And FCC rulesdictating interconnection and trafficexchange guidelines ensure that callsbetween carriers can be reliably exchanged atreasonable rates. If carriers ignore theseguidelines, calls fail and consumers suffer.Though less mature than the voice market,the mobile-to-mobile text message market(i.e., texts between mobile carriers) appearsto function well outside federal or stateregulation. For example, mobile-to-mobileSMS TextWhen a mobile customer sends a textmessage to another mobile customer using adifferent provider, the text is routed throughone of a number of neutral, third-partyaggregators17 (e.g., SAP and Syniverse).These aggregators provide the mobilecarriers with neutral points ofinterconnection for purposes of exchangingtext messages. The system works well, inpart, because (a) market participants canchoose their trusted exchange partner fromamong multiple aggregators, and (b) theeconomics of the market are wellestablished, typically requiring the sendingparty to pay a small fee to the aggregator. Asa result, consumers enjoy the benefits ofNeutral 3rd PartyExchange GatewaysThe term aggregator in this white paper refers to acompany that interconnects with one or more mobile17text messages flow rather seamlessly, evenwhen the sender and receiver are served bytwo different mobile providers. Yet, theseexchanges are fostered by well-establishedinter-carrier vendors, inter-carriercompensation arrangements betweenparticipants of relatively equal bargainingpower, and commonly accepted industryestablished interoperability guidelines andstandards.SMS Textcompanies and is a middleman between Toll-Free textmessage providers and mobile companies.Page 5

inexpensive texting—even with customers ofdifferent mobile carriers (generally atunlimited volumes).The same cannot be said for the Text-to-TollFree market. From 2014 to 2015, the fivelargest U.S. mobile companies, whocollectively serve virtually 100 percent of thewireless market, contracted with a singlecompany—Zipwhip, Inc.—for handling textmessages involving Toll-Free numbers. 18Under this arrangement, the mobilecompanies have agreed to send all textmessages destined for Toll-Free numbers(i.e., mobile-originated texts) throughZipwhip and have also agreed to accept textmessages from Toll-Free numbers (i.e., TollFree–originated texts) from only Zipwhip.The arrangements between the mobileproviders and Zipwhip created a de factomonopoly provider for Toll-Free texts to andfrom roughly 100 percent of the nation’smobile subscribers. Not surprisingly, whatfollowed was textbook monopoly behavior—i.e., higher prices, less innovation, andTOLL-FREEText ProvidersTOLL-FREETextZipwhipSee, e.g., SOMOS Notice of Ex Parte, WT Docket No.08-7 (04/26/2016) (“struck deals with the five largestwireless carriers that requires all texting to Toll-Freenumbers to be routed through Zipwhip ”) Zipwhipstates that it is directly connected with 17 total mobile18TOLL-FREESubscribersZipwhipoperators in the United States. See, Zipwhippresentation to the FCC, WT Docket No. 08-7(04/21/2016).Page 6

anticompetitive business practices aimed atleveraging the combined market power of thefive largest mobile carriers to the benefit ofthe mobile companies themselves andZipwhip.Importantly, the TTF market appears to havefunctioned well in its relative infancy prior tothe introduction of Zipwhip. However, onApril 3, 2014, a problem was encountered inwhich text messages between Toll-Free textproviders and Verizon simply stopped.Reports indicate no prior warning and noerror (or “non-deliverable”) messages. TheToll-Free text messages between Verizon andthe Toll-Free text providers simplydisappeared into a virtual black hole. 19According to Gene Lew, Chief TechnologyOfficer of Toll-Free text provider Heywire,someone simply “turned the switch off.” 20Apparently, even Verizon’s networkengineers were unaware of Verizon’s shift inToll-Free texting procedures, initiallyreaching out to Heywire and others, inquiringabout the text message blackout.21 Afterscrambling to discover the root cause of theproblem, Toll-Free text providers wereMcMillan, Robert. Wired Online. A New NetNeutrality Battle Brews Over Text Messages.(12/03/2014). Available ywire Letter to FCC, WT Docket No. 08-7(12/21/2015).21See, e.g., Twilio, Inc. Petition, WT Docket No. 08-7(08/28/15), p. 8.22See Twilio, Inc. Notice of Ex Parte, WT Docket No.08-7 (05/02/2016), indicating that Verizon, AT&T, TMobile, and US Cellular blocked Toll-Free numberranges and re-routed SMS texts to a single Toll-Free23ultimately notified by Verizon that all texts toToll-Free numbers would now be routed viaan alternative messaging aggregator—Zipwhip (a company with whom none of theToll-Free text providers had connectivity orany prior business dealings and with whomthey soon discovered was competing withthem in the retail TTF market). 22Ultimately, all major mobile providers shiftedto this strategy and blocked Toll-Free numberranges such that all texts to Toll-Freenumbers had to be rerouted throughZipwhip.23Signs of Market FailureToll-Free text providers initially approachedthe mobile carriers directly, asking tointerconnect without the need to aggregatethrough Zipwhip or to establishinterconnection similar to that afforded toZipwhip. The mobile carriers denied thoserequests. 24 As a result, Toll-Free textproviders were forced into commercialagreements with Zipwhip in order to receiveor send Toll-Free text messages. 25 Accordingaggregator thereby forcing Toll-Free text providersinto commercial agreements with Zipwhip.SOMOS Notice of Ex Parte, WT Docket No. 08-7(04/26/16).24Twilio, Inc. Reply Comments, WT Docket No. 08-7(12/21/2015), pp. 10-11 (“In other words, Verizonunilaterally and without notice re-routed traffic to itskick-back vendor, knowing Twilio and others wouldhave to connect with this entity if Twilio wanted torestore traffic flows, after it figured out what washappening Once the ransom was paid, Verizon got itsshare, and the traffic flowed once more.”) Industrystakeholders report that actual contracted terms are25Page 7

to the text providers, no other optionexisted; Zipwhip had been established by themobile companies as the gatekeeper forvirtually all Toll-Free texts. They had to makea deal with Zipwhip to survive.Market power is generally defined as aparticipant’s ability to sustain prices abovecompetitive levels. 26 However, anotherequally damaging aspect of market power isthe ability to increase the costs ofcompetitors, thereby limiting their ability toexert competitive pressure on prices moregenerally. 27 Where market power existsunilaterally, markets do not operateeffectively, and consumers suffer. Highlyconcentrated markets (i.e., markets wherefew participants control substantial marketshare) lend themselves to the exercise ofmarket power. 28Acting in unison, the five largest mobilecarriers in the US require that all textmessages either to or from a Toll-Freenumber be exchanged through Zipwhip. As aresult, Zipwhip controls more than 99percent of the TTF market. With thisinformation in mind, it is not surprising thatcompeting market participants can identifynumerous and systematic failures within themarket.confidential and protected, at Zipwhip’s request, bynon-disclosure agreements.See Krattenmarker, Lande and Salop. The UnitedStates Department of Justice, “Monopoly Power andMarket Power in Antitrust Law.” (1987).25See Krattenmarker, Lande and Salop. The UnitedStates Department of Justice, “Monopoly Power andMarket Power in Antitrust Law.” (1987).27Id., Section III, Toward a More Precise Definition.26Prices for Exchanging Texts withMobile Carriers Have SubstantiallyIncreased via ZipwhipFor mobile-to-mobile texts between carriers,the carrier whose customer sends a text isgenerally obligated to pay the carrierdelivering the text a small fee. The samearrangement existed for texts to Toll-Freenumbers before 2014.With the introduction of Zipwhip, not onlydid per-message fees increase by more thanthree times, but also Toll-Free text providers(who are not mobile carriers) were, for thefirst time, required to pay to both send andreceive Toll-Free text messages. 29While inter-carrier compensation ratesgenerally vary based on volume, some TollFree text providers report price increasesbetween six- and fifteen-fold.Inter-carrier compensation rates in the nonToll-Free text message marketplace typicallyregister between 0.0015 and 0.002 pertext (or as low as 0.0005 per text forsignificant volume). Toll-Free text messagingcompanies report that rates for Toll-Freetexts can be as much as 0.006