AT&T vs. the Farm Team

Making money has never been easy for small-town phone companies, most of which rely on federal subsidies to survive. But two years ago, Ronald Laudner, chief executive of Farmers' Telephone, in rural Iowa, hit on a lucrative new source of profit, thanks to a convoluted federal mandate that requires long-distance carriers to pay rural phone companies. By the end of 2006 his call volume was up twelvefold and annual net revenues had doubled, to $2 million.

That's when AT&T's (T) lawyers came calling. Now Farmers', which serves about 1,600 local customers near Riceville, Iowa, is among a handful of rural telcos under assault from big telecommunications companies. The giants complain that the little guys have latched onto a lively industry of free conference-call, chat-room, and sex-line services that make economic sense only because of federal regulation.