A company offering free cellphone service says it’s now profitable, with millions of users, thanks to an unconventional business model and fewer taxes than standard carriers.
About 55 percent of FreedomPop users pay nothing, said CEO Stephen Stokols. The rest have monthly bills that average $14.40, covering extra data and optional apps. After six years, he said the company tipped into profitability this quarter.
A regulatory loophole is crucial to success. FreedomPop buys data from Sprint and AT&T and treats calls as data packages using Voice Over IP (VoIP), arguably exempting it from local and federal taxes applied to traditional voice calls.
Free accounts cost the company less than $2 a month. On traditional cellphone plans, local taxes for 911 services alone can add $4, Stokols said.
“There are probably six of seven different taxes associated with phone coverage that probably adds up to $5 or $6 per month on a normal carrier,” he said. “By using VoIP you avoid a lot of these regulatory taxes that are associated with voice calls. That’s the biggest financial benefit of using VoIP.”
VoIP trailblazers charted a similar path, only for the Federal Communications Commission to regulate them into paying taxes. Jonathan Marashlian, a telecom attorney, said it’s likely the status quo will prevail for a while, though history suggests a gradual broadening of FCC rules.
“It is doubtful to happen under a Republican-led FCC,” Marashlian said, but “much more likely if the Democrats take the White House in 2020.”
Marashlian said the FCC had two major waves of VoIP rules. Beginning in 2005, in response to Vonage’s popular landline alternative, the FCC created an “interconnected VoIP service” or I-VoIP category, ultimately requiring payment of federal phone taxes and local 911 fees. After Congress passed the 21st Century Communications & Video Accessibility Act in 2010, the FCC created a “non-I-VoIP” category encompassing Skype.
The non-I-VoIP category requires payment of Telecommunications Relay Service Fund taxes, which benefit people with disabilities, but not the Universal Service Fund tax to expand coverage — a nearly 20 percent levy on revenue from interstate and international calls.
“Many, many companies … have conformed their business models and service offerings with the two regulatory definitions in mind,” Marashlian said. “After all, why subject your service and your customers to regulations and the nearly 20 percent Universal Service contribution fees that can be avoided through careful and smart structuring?”
Boston College law professor Daniel Lyons said “the law draws lines in funny places because it’s based on a statute from 1996.” But Lyons said the FCC under Republican Chairman Ajit Pai may be inclined to tighten regulations, noting that Pai has prioritized expanding rural broadband, funded in part by the USF.
Stokols said FreedomPop does pay some federal taxes, including TRS taxes since launching, and recently started paying “negligible” USF fees to limit legal risk.
FreedomPop has benefited from $100 million in investment, while rivals with similar models failed, including RingPlus last year. Stokols claims the company has “millions” of customers, adding about 500,000 a year. In 2015, he claimed to have almost 1 million users, suggesting there may be nearly 3 million.
“If you’re in a home on WiFi most of the time, there is absolutely no reason you should be paying 50 or 60 bucks a month, you should be paying zero, or 5,” Stokols said.
Customer reviews vary. Some are satisfied, others complain about cost confusion or poor service.
FreedomPop has thrust itself into some major policy debates, taking people not poor enough for federal Lifeline service — some recipients called devices “Obamaphones” — and launching a “Snowden phone” in 2014 with anti-surveillance features.
About 30 percent of customers buy a security app that includes a virtual private network. Another app enables multiple numbers, for example, allowing family in Mexico to place local calls to the U.S.
A new app allows traditional voice calls in areas with poor data coverage, prompting FreedomPop to work to identify applicable local taxes.
Stokols acknowledges regulations may eventually force the company to pay more taxes. In the meantime, he said, “We take a lot of pride in the fact that half of our base doesn’t pay us a penny.”
