What is a Telecom Arbitrage
Telecom arbitrage is a strategy where telecommunications companies provide long-distance access numbers, attracting customers looking for lower costs when dialing internationally. These companies gain profits through interconnect fees.
BREAKING DOWN Telecom Arbitrage
Telecom arbitrage is just one category of arbitrage. Arbitrage, in an economics and finance context, is the practice of capitalizing on price differences between two or more markets, with the end profit being the difference between the prices market to market. People who carry out arbitrage are called arbitrageurs.
Telecom arbitrage is used by telecommunications companies who provide access numbers that enable their mobile or cellular phone customers to make international calls without paying long-distance charges by dialing certain access numbers. The companies engaged in this arbitrage receive an interconnect fee from the mobile networks, and they use part or most of this fee to buy international calling routes at low prices.
Telecom arbitrage works because the cost of long-distance calls has plunged to such an extent in recent years that it may be comparable to, or even lower than, the cost of domestic mobile-phone calls. While the margins on this arbitrage activity are very slim, telecom companies benefit because their mobile customers use up their monthly calling minutes in making these so-called free long-distance calls. Even though such customers do not pay long-distance charges, they indirectly pay for them through their monthly calling-plan charges.
Reforming Telecom Arbitrage
Telecom arbitrage is rife with abuse. So much so that the Federal Communications Commission (FCC) appears ready to clean house. In June 2018, Telecom Reseller reported that the FCC is looking into quality assurance reforms in the system that oversees intercarrier payments for toll-free calling, which will include striking out any monetary incentive encouraging abusive calling practices such as "fraudulent or otherwise unnecessary robocalling to toll free numbers.”
Telecom arbitrage abusers take advantage of FCC rules on intercarrier payments for toll-free calling: by chasing after the originating access fees, providers engage in unsavory practices such as robocalling, artificial increases in minute-by-minute fees as well as unnecessary and inordinate numbers of fees to the toll-free provider. The FCC is now seeking comment on moving from the current compensation system to a "bill-and-keep" system. A bill-and-keep system would help carriers keep revenue from subscribers by ensuring it cannot be siphoned off by others.
The FCC offers further insight into practices that fall under a telecom arbitrage scheme on their website. There they outline the practice they call traffic pumping or access stimulation.