Interexchange carriers

What Are Interexchange Carriers?

Interexchange carriers (IXCs) are telecommunications companies that provide long-distance telephone services between different geographic areas, specifically across distinct local access and transport areas (LATAs). As a critical component of the telecommunications regulation landscape, IXCs facilitate communication that extends beyond local calling boundaries, handling the bulk of interstate and international long-distance calls. These carriers typically own or lease extensive network infrastructure, including high-capacity fiber-optic lines and switching equipment, to route voice and data traffic efficiently across the country.

History and Origin

The concept of interexchange carriers emerged prominently from the dismantling of the Bell System in the United States. Prior to the 1980s, American Telephone & Telegraph (AT&T) held a near-total monopoly over both local and long-distance telephone service, controlling the vast majority of the nation's infrastructure and customer base. This began to change with various antitrust challenges, culminating in a landmark antitrust suit filed by the U.S. Department of Justice in 1974. The subsequent settlement, known as the Modification of Final Judgment (MFJ), led to the breakup of AT&T in 1984.¹⁰

This historic event separated AT&T's local telephone operations into seven independent Regional Bell Operating Companies (RBOCs), often called "Baby Bells," which became Local Exchange Carriers (LECs). The "new" AT&T retained its long-distance business, effectively becoming the primary interexchange carrier. This divestiture immediately fostered competition in the long-distance market, allowing other companies like MCI and Sprint to emerge as significant IXCs.⁹ The Telecommunications Act of 1996 further promoted deregulation and competition by requiring LECs to provide non-discriminatory access to their local networks for IXCs and other new competitors.⁸,

Key Takeaways

• Interexchange carriers (IXCs) are telecommunications companies that specialize in providing long-distance communication services across different geographic areas.
• Their rise was largely a result of the 1984 breakup of AT&T's monopoly, which separated local and long-distance services.
• IXCs operate by routing traffic between Local Access and Transport Areas (LATAs), often utilizing extensive national or international networks.
• The business model for IXCs involves managing network capacity, interconnecting with local providers, and competing on pricing strategies for long-distance traffic.
• Regulatory changes, such as the Telecommunications Act of 1996, significantly impacted the competitive landscape and operational requirements for interexchange carriers.

Formula and Calculation

There is no single universal formula for "Interexchange Carriers" as it refers to a type of company and a service, not a specific financial metric or calculation. However, the financial operations of an IXC involve numerous calculations related to revenue, cost of goods sold (COGS), and profitability.

A key aspect of an IXC's financial model is Intercarrier Compensation (ICC), which are payments carriers make to each other for originating, transporting, and terminating telecommunications traffic. While the specific rates and methodologies have evolved due to Federal Communications Commission (FCC) reforms, conceptually, an IXC's revenue from a call might be calculated as:

$\text{Call Revenue} = \text{Per-Minute Rate} \times \text{Number of Minutes}$

And its cost for that call could involve access charges paid to LECs:

$\text{Call Cost (Access)} = (\text{Originating Access Charge} + \text{Terminating Access Charge}) \times \text{Number of Minutes}$

Where:

• Per-Minute Rate is the rate charged to the customer for long-distance service.
• Number of Minutes is the duration of the call.
• Originating Access Charge is the fee paid to the LEC at the call's origin.
• Terminating Access Charge is the fee paid to the LEC at the call's destination.

The profitability of a call for an IXC would then be:

$\text{Call Profit} = \text{Call Revenue} - \text{Call Cost (Access)} - \text{Other Operating Costs}$

Overhead and operating costs for maintaining their network and customer service would also be factored in.

Interpreting the Interexchange Carrier Landscape

Interpreting the role of interexchange carriers requires understanding the regulatory framework that shapes the telecommunications industry. Initially, IXCs were distinct entities providing services across Local Access and Transport Areas (LATAs), which are geographic boundaries defining local service regions. The primary function of an interexchange carrier was to connect calls that crossed these LATA boundaries, effectively handling all interstate and most intrastate toll calls.

The market for interexchange carriers has seen significant transformation over decades due to technological advancements and evolving regulatory policies. The distinction between local and long-distance carriers has blurred substantially with the rise of Voice over Internet Protocol (VoIP) and bundled service offerings. Today, many large telecommunications providers offer a full suite of services, including local, long-distance, internet, and mobile, blurring the once-clear lines between different types of carriers. Understanding an IXC, therefore, means recognizing its historical significance in fostering competition and its ongoing adaptation within a converged communications market.

Hypothetical Example

Imagine a customer, Sarah, living in San Francisco (Area Code 415), wants to call her sister, Emily, who lives in New York City (Area Code 212). When Sarah dials Emily's number, her local telephone service provider (a Local Exchange Carrier, or LEC) in San Francisco recognizes that the call is destined for a different LATA.

The San Francisco LEC hands off the call to Sarah's chosen interexchange carrier (IXC), let's say "GlobalLink." GlobalLink then routes the call across its extensive national network from San Francisco to New York. Upon reaching New York, GlobalLink hands the call off to Emily's local telephone service provider (another LEC) in New York, which then completes the connection to Emily's phone. GlobalLink, as the interexchange carrier, is responsible for the transmission of the call across the country and charges Sarah for the long-distance portion of the call, typically based on a tariff or service plan.

Practical Applications

Interexchange carriers have played a pivotal role in the evolution of global telecommunications, with their primary application being the facilitation of long-distance communication. Historically, they were essential for connecting calls between distinct geographic areas, especially those crossing state lines or international borders.

In today's integrated communications environment, the infrastructure and operational models pioneered by IXCs underpin much of modern data and voice transmission. They are crucial for:

• Wholesale Services: IXCs often lease their network capacity to other carriers, including smaller providers or mobile operators, enabling them to offer long-distance services without building their own expansive infrastructure. This facilitates broader market access and market share for various providers.
• Universal Service Contributions: In the U.S., interexchange carriers are among the types of telecommunications providers required to contribute to the Universal Service Fund (USF).⁷ This fund supports the availability of affordable communications services in rural, high-cost, and low-income areas, bridging the digital divide and ensuring widespread access.⁶,⁵
• International Connectivity: Beyond domestic long-distance, many IXCs operate vast international networks, connecting countries and continents, which is fundamental for global business operations and personal communication.

Limitations and Criticisms

While interexchange carriers were instrumental in driving competition and reducing long-distance calls pricing post-deregulation, the traditional IXC model has faced significant limitations and criticisms, primarily due to rapid technological shifts and evolving regulatory frameworks.

One major criticism has been the complexity and often contentious nature of intercarrier compensation (ICC). This refers to the system where carriers pay each other for terminating traffic on their networks. The legacy ICC regime, established in a circuit-switched world, led to varying rates based on call type and direction, creating opportunities for arbitrage and disputes, such as "access stimulation" and "phantom traffic."⁴ This complexity spurred significant regulatory reform efforts by the Federal Communications Commission (FCC) to transition towards a more unified "bill-and-keep" framework.³

Another limitation stems from the investment burden in maintaining extensive physical infrastructure. The shift from traditional circuit-switched networks to Internet Protocol (IP) based systems (like VoIP) has required substantial capital outlays and strategic adjustments. Furthermore, the blurring lines between telecommunications, internet, and mobile services mean that specialized interexchange carriers now face stiff competition from integrated providers that offer comprehensive service bundles, impacting their traditional customer base and profitability. The historical example of MCI WorldCom's bankruptcy in 2002, following a massive accounting scandal, highlights the financial risks and potential vulnerabilities within the long-distance carrier segment, especially during periods of intense market transition.,²,¹ The company's collapse, then the largest bankruptcy filing in U.S. history, underscored the challenges faced by major IXCs in a rapidly changing industry.

Interexchange Carriers vs. Local Exchange Carriers

The primary distinction between Interexchange Carriers (IXCs) and Local Exchange Carriers (LECs) lies in the geographic scope of the telephone services they provide and their historical regulatory roles.

While IXCs were responsible for the "interexchange" portion of a call, bridging the gap between local service areas, LECs managed the "local exchange" connections, handling calls within a single local calling zone. The clear lines between these two types of telecommunications providers have become increasingly blurred with technological convergence and market consolidation, as many companies now offer bundled services encompassing both local and long-distance capabilities.

FAQs

What does "interexchange" mean in telecommunications?

"Interexchange" refers to communication that takes place between different local telephone exchanges or, more formally in the U.S., between different Local Access and Transport Areas (LATAs). These are the geographic regions that define local calling areas. An interexchange call is essentially a long-distance call that crosses these boundaries.

How did the breakup of AT&T affect Interexchange Carriers?

The 1984 breakup of AT&T, mandated by an antitrust lawsuit, profoundly transformed the role of Interexchange Carriers. Prior to the breakup, AT&T held a near-total monopoly on both local and long-distance services. The divestiture separated AT&T's local operations into regional companies (Local Exchange Carriers or LECs) while AT&T retained its long-distance business. This created a competitive market for long-distance calls, allowing other IXCs like MCI and Sprint to thrive by connecting to the newly independent LEC networks.

Do Interexchange Carriers still exist in the same way today?

The traditional distinction of pure Interexchange Carriers has largely blurred due to technological convergence and market consolidation. While the underlying function of routing long-distance traffic remains, many major telecommunications companies today offer integrated services, including local, long-distance, wireless, and internet. However, the regulatory definitions and the operational need for inter-LATA communication persist, and the principles of intercarrier compensation still govern how networks connect and compensate each other.