How Does a Payphone Make Money for Its Owner?

Posted: 06/1998

How Does a Payphone Make Money for Its Owner?

By Bob Lane

When I decided to enter the payphone business a number of years ago, I didn't have a clue where to start. Like many other aspiring independent payphone providers (IPPs), I stumbled blindly into some of the less scrupulous payphone business offerings that lurk around the edges of the payphone industry. Fortunately, I managed to avoid becoming one of the many hapless victims of payphone scams.

I realized quickly that I needed to get my thinking straightened out about the right way to begin building a payphone route, concluding that the reliable, digestible, useful information I needed to help me become an IPP was hard to come by. After all, there weren't any payphone consultants listed in my local phone book.

The payphone industry may be rife with scams, but there is money to be made once you know some basic facts. Specifically, it's helpful to know how different types of calls are classified and the rates your local exchange carrier (LEC) and interexchange carrier (IXC) charge you, the payphone owner, for each call.

Payphone revenues consist of coin, operator service commissions and dial-around compensation. Examples of the different types of calls follow.

Coin Calls

The first--and largest--category of calls are coin-paid calls, also called sent-paid calls because the call is "sent" once it is paid for. The payphone collects the coin and the IPP receives local and long distance phone bills from the LEC and the IXC that has been chosen by the IPP. Subcategories of local coin-paid calls are:

Local calls: These are calls made to the area immediately surrounding the payphone. The pricing of these calls recently was deregulated and is now the decision of the IPP. These calls are carried by the LEC.

Local directory assistance calls: Also known as "information" calls. The pricing of these calls also has been deregulated recently and is now the decision of the IPP. These calls are carried by the LEC.

IntraLATA calls: These are calls placed to and from phone numbers within the same local access and transport area (LATA). They may be carried by the LEC or by an IXC depending upon state regulations and the preference of the IPP.

InterLATA calls: Calls from one LATA to another. These calls are carried by an IXC.

Interstate calls: Calls made from a phone in one state to a phone in another state. These calls are carried by an IXC.

Long distance directory assistance calls: The long distance version of "information" calls. These calls are carried by an IXC.

International calls: A call to another country. If the IPP allows these calls to be placed from the payphone, be aware that there is a significant potential for "clip-on" fraud and the IPP easily could be stuck with a phone bill amounting to thousands of dollars. Here's how it might happen: The perpetrator gains access to the phone wires (usually at the network interface box). Using a telephone lineman's "butt-set" (handset), the crook "clips" onto the wires and starts placing calls to far-away lands, possibly even selling calls to his friends and neighbors who want to call friends or relatives overseas. Ouch! The IPP has the option of asking the LEC and IXC to block these calls.

Operator Service Calls

Operator service calls are calls that do not require any exchange of money at the time the call is placed. They often are referred to as zero plus or zero minus calls. A zero plus call would be a call wherein the phone number is prefaced by the number "0." Zero minus refers to a call wherein only the "0" key is pressed by the customer at the payphone. The payphone does not collect coin and the IPP does not receive a local or long distance phone bill. Instead, the operator service provider (OSP) the IPP uses gets the customer's billing information such as credit card number, the phone number the call is billed to and the customer's name for a collect call; validates the billing information; completes the call for the payphone customer; bills and collects the charges; and pays a commission to the IPP.

The chances are good that an OSP will offer a number of different "billing groups." The higher the billing group, the more the customer is charged for the call and the higher the IPP's commission percentage is. Additionally, the OSP will add a premise-imposed fee (PIF) to the call if the IPP arranges for it. PIFs can range from zero to $3 or more per call. Typically, OSPs pay 100 percent of the PIF and a percentage of the remaining call charges to the IPP (after deducting a predetermined percentage for bad debt). In the past, IPPs and OSPs have come under fire for excessively high charges for these kinds of calls.

In the near future, the payphone customer will be able to determine the cost of the call. If it's too costly, the customer may choose to use a competitor's payphone. Recent regulation from the Federal Communications Commission (FCC) says the OSP must provide the payphone customer with the price of the call being placed (an oversimplification of a less-simple regulation, but you get the idea).

So how are calls priced? The following is a quick overview of what calls are regulated and what calls are priced by the IPP:

0+ local calls: The pricing of these calls may be regulated in some areas. Check with the OSP or the state's regulatory commission, such as the public service commission, public utility commission or state corporation commission.

0+ interLATA calls: The pricing of these calls may be regulated in some areas. Check with the OSP or the state's regulatory commission.

0+ intraLATA calls: The pricing of these calls may be regulated in some areas. Check with the OSP or the state's regulatory commission.

0+ interstate calls: These calls are not regulated.

0+ international calls: If the IPP arranges for the OSP to carry these calls, the IPP may have to agree to share the fraud liability with the OSP.

Other Types of Calls

While coin and 0+ or 0- are the most prevalent calls made from payphones, the IPP should be aware of the other calls that may be less typical but are no less important.

Dial-around compensation: These calls can best be summed up as toll-free or equal access calls. They include 800 numbers, 888 numbers, 10XXX, 10XXXXX and 950-XXXX (X can be any digit). The IPP must allow this special category of calls to be made by the customer without depositing a coin in the payphone. FCC rules mandate the IXCs that provide these numbers must compensate the IPP for these calls at the rate of 28.4 cents per call (to be paid quarterly). There are several organizations that will apply for dial-around information on the IPP's behalf and send along the proceeds (minus a modest fee for this service).

Toll-free "platform" calls: These calls normally arise from advertisement stickers placed on or around the payphone. The following is an example of a typical situation: A payphone customer notices a sticker on the payphone advertising long distance calls that could be placed by first calling a toll-free number. The payphone customer dials the toll-free number, which is answered by an operator service system. The operator service system gets the destination number and billing information from the customer and completes the call. The IPP that owns the payphone gets a commission from the carrier that completed the call because of a pre-existing agreement that says the IPP will receive commissions for these calls in exchange for actively promoting the carrier's services (hence the advertising sticker that the customer responded to in the first place).

211 (repair/refund) calls: These calls don't actually make money for the IPP, but they do help keep repair costs down. A payphone that is out of repair for a lengthy period can sustain a lot of damage from frustrated customers. If the IPP is responsive to repair/refund calls, the payphone customers are happier and so is the location owner who might otherwise be fending off customer complaints about lost coins at the payphone.

911 (emergency) calls: The IPP has a legal, moral and civic duty to permit these calls to be made at no cost to the payphone customer. Clear emergency-call dialing instructions should be posted on the payphone, as well.

Speed-dial advertising calls: Some payphones can be programmed to speed-dial a preset number or numbers. A typical speed-dial call might work as follows: A customer at the payphone sees an ad posted on the payphone equipment. The ad says, "Joe's Taxi Service - FREE CALL - Dial *21." The payphone customer, who just happens to need a cab, dials *21. The payphone is programmed to dial the phone number for Joe's Taxi Service. The cab company gets a fare that might otherwise have gone to a different cab company and, because of a prearranged deal between the IPP and Joe's Taxi Service, Joe pays the IPP a commission. This principle works well with tow truck companies, also.

Putting It Together

An important part of being a profitable IPP is the successful micromanagement of the many different streams detailed here. And although regulations have made the payphone business a sometimes confusing business, it can reap great rewards for the IPP.

Bob Lane is the owner of Payphones-USA ( http://www.payphones-usa.com   ) and Telefone. com (http://www.telefone.com ).  He also is the owner of Lane Communications Co., a payphone company operating in Virginia, Maryland and Washington, D.C., and is vice president of the Atlantic Payphone Association. Additionally, he is CEO of Payphone Consultants. He can be reached at (800) 213-6754.