Prison phone giant GTL gets bigger, again.

GTL has purchased competitor Telmate, meaning higher prices for families and facilities. We examine GTL and Securus domination of the industry.

by Peter Wagner, August 28, 2017

The largest phone provider in prisons and jails, which incarcerated people use to call home, has just gotten bigger. GTL (formerly Global Tel*Link) has purchased its competitor Telmate.

In the broken market that is the prison and jail telephone business, families pay high costs because the companies compete not on the basis of low prices or high quality, but on which company will share the most revenue with the facility that awarded the company the monopoly contract. That’s how, in an era of unlimited long distance and free Skype calls, costs to receive a call from an incarcerated loved one have surpassed $1/minute.

By purchasing Telmate, GTL has eliminated a small but very quickly growing competitor. Telmate had contracts with two state prison systems (Montana and Oregon) and contracts with almost a hundred local jails. The company was one of the more innovative companies in the space, although their biggest contribution to the market might have been various kinds of creative accounting tricks that transferred money from customers’ pockets to Telmate without federal and state tax collectors or correctional facilities catching on.

Now that the number of major national companies competing for contracts has declined to just two (GTL and Securus), it will be that much harder for facilities that want to lower prices to do so. How bad is GTL and Securus’ domination of the industry? Our research associate Alex Clark determined each company’s market share as of July 2017 and prepared this chart:

Fewer companies will mean less choice for facilities

Because the primary differentiation between vendors is cost, having fewer companies compete for contracts will mean less choice for the facility that awards the contracts and less of an incentive for the companies to offer good deals.

Much of the time, facilities consider “bad deals” to be ones that give a lot of customer money to the companies, and “good deals” to be ones that give the lion’s share of customers’ funds to the facility. In that context, where families are being charged unconscionable sums under either scenario, one can see why advocates might be tempted to entirely ignore fights about the distribution of these ill-gotten gains.

But commission fights are just a piece of puzzle and the details of these industry contracts are important. First, on a technical level, the biggest source of revenue for the companies appears to be the hidden fees that the companies charge the families but then hide from the facilities and the commission system. The facilities are starting to find some self-interest in policing the companies’ nasty practice of fee harvesting in order to leave the families more money to spend on commissionable phone calls or other fee-based services that split profits with the facility. After years of criticism for their greed some jail facilities, and an increasing number of state prison systems, are finally restraining their insatiable demand for commissions and insisting on lower rates.

Many state prison systems want better deals for the families

Through a combination of legislation, state regulations, and more ethical contracting, more states (and very large jails) are saying no to commissions outright:

• New York – “When determining the best value of [telephone contracts for incarcerated people] the lowest possible cost to the telephone user shall be emphasized.”
• New Mexico – “A contract to provide inmates with access to telecommunications services in a correctional facility or jail shall be negotiated and awarded to an entity that . . . provides the lowest cost of service to inmates or any person who pays for inmate telecommunication services.”
• Rhode Island – “No telephone service provider shall charge a customer rate for calls made from a prison in excess of rates charged for comparable calls made in non-prison settings. All rates shall reflect the lowest reasonable cost to inmates and call recipients.”
• Illinois – “Department of Central Management Services shall contract with the qualified vendor who proposes the lowest per minute rate and who does not bill to any party any tax, service charge or additional fee exceeding the per minute rate.”
• South Carolina – “The State shall forego any commissions or revenues for the provision of pay telephones in institutions of the Department of Corrections and the Department of Juvenile Justice for use by inmates. The State Budget and Control Board shall ensure that the telephone rates charged by vendors for use of those telephones must be reduced to reflect this foregone state revenue.”
• Nebraska – “Vendor contract [for inmate telephone services] should also be based on rates and surcharges that are commensurate with those charged to the general public for like service. Any form of deviation from ordinary consumer rates will reflect the actual cost associated with the provision of services in a correctional setting.”
• Michigan – “Any contract for prisoner telephone services … shall include a condition that fee schedules for prisoner telephone calls, including rates and any surcharges … be the same as fee schedules for calls placed from outside correctional facilities.”
• Cook County, Illinois – The “County does not seek and will not accept proposals for a cash site commission, administrative cost reimbursement, minimum annual guarantee, or any other analogous reimbursement mechanism.” The “County seeks to achieve the … lowest possible cost to Consumers and inmate/detainees.”

Other states aren’t going quite so far as to refuse commissions, but they are starting to prioritize the cost to families over their commission income:

• In connection with a 2010 contract that was awarded to Telmate, the Montana Department of Corrections indicated that “[t]he RFP was written with the requirement that the commissions only generate enough to maintain the inmate welfare fund. This allowed vendors responding to the RFP to focus on the rate of the call and not how much money could be generated by commissions.”
• In connection with a 2008 contract, the Kansas Secretary of Correction stated, “We have recognized for many years that the cost of phone calls inmates make from our correctional facilities has created a financial hardship for their families, and I am pleased that the new contract will help reduce those costs.”
• When Arkansas contracted with GTL in 2007, it considered two proposals, one with a 50.75% commission that had a 25% decrease in the per-minute call rates, and the other with a 45% commission that included a 50% decrease in per-minute rates. The state selected the latter, noting that “while our annual revenues may decrease, we believe this would be a good faith effort to reduce the financial burden on inmate families.”
• When South Dakota renewed its contract in March 2008, the Corrections Secretary remarked, “the reduced rates we were able to negotiate will have a positive impact on inmates’ ability to maintain contact with their loved ones while they are in prison.”
• In the Missouri Request for Proposal for offender telephone services issued in August 2016, 30% of the competitive evaluation criteria was cost to end-users.

The phone companies aren’t just buying competitors, they’re buying unrelated businesses so they can control the entire prison service market

For the families of incarcerated people — and for ethical correctional facility administrators — the fact that only two companies control most of the market is just the first chapter in a very bad story. The anti-competitive impact of companies buying their competitors is obvious, but the dominant companies are also actively developing a separate monopoly strategy that is both more subtle and more harmful: they are buying non-telephone companies so they can offer the correctional facilities packages of unrelated services in one huge bundled contract.

For example, the phone companies are including other correctional products like video calling, tablets, electronic messaging, money transfers and other correctional banking services, and commissary into their phone contracts.

Some of the most notable recent acquisitions are Securus buying the payment company JPay; GTL buying payment company TouchPay and video calling company Renovo, not to mention the fact that prison commissary giant Trinity/Keefe also owns the phone company ICSolutions. That list is potentially just the tip of the iceberg because these companies are privately held and make it close to impossible to get information about whether two companies are temporary business partners or one actually owns the other.

These corporate acquisitions are fueled in large part by the windfall profits earned from charging up to $1/minute for phone calls that cost almost nothing to transmit, and in part because the two largest companies are owned by private equity firms with very deep pockets. GTL is owned by American Securities, and Securus is owned by Abry Partners, although it’s trying to sell itself to Platinum Equity, whose Chairman/CEO is Tom Gores, owner of the Detroit Pistons.

Gobbling up related businesses is what anti-trust lawyers call “vertical integration”. It is a strategy designed to make it impossible for smaller companies to compete for contracts because no matter how good Small Company A is at providing telephone service, they can’t compete for a contract that requires them to provide both phone service and a list of unrelated services. To be sure, bundled contracts sound appealing to the facilities as they only have to handle one contract and one vendor. But in practice, facilities learn the hard lesson that big bundled contracts lock them in to one company permanently.

When the biggest player in an evil industry gets bigger and more powerful, that’s never a good thing. Families, ethical correctional administrators, and government regulators are going to need to be that much more vigilant as we all go forward. The facilities may have fewer companies to choose from than they did just a few months ago, but the good news is that the evidence says that the public and facilities are growing savvier each day.