The face of traffic pumping

I met an interesting fellow last week at the IT-Expo in Miami. He’s a traffic pumper and operates a successful business exploiting the price arbitrages created by policies of the Federal Communications Commission (FCC).

I some respects, I admire this fellow’s simple, direct business style. So what is the arbitrage?

In order to spur competition for Incumbent Local Exchange Carriers (ILECs), the FCC allows rural Competitive Local Exchange Carriers (CLECs) and Incumbent Local Exchange Carriers (ILECs) to charge high terminating access charges for completing calls they accept from Inter-Exchange Carriers (IXCs). The FCC’s policy reason to allow high terminating access is to encourage the expansion of rural telephone and broadband data networks.

Rural CLECs and ILECs often charge terminating access fees of $0.05 to $0.15 per minute. From a public policy perspective, this subsidy to rural networks from urban networks made sense when telephone traffic to rural areas was low and high terminating fees were based on a reasonable average cost. But times have changed, and this policy now creates a ridiculous arbitrage opportunity.

Today, most telephone subscribers have unlimited long distance calling in the USA. For these subscribers, calls to a rural telephone number have zero additional cost, even though the terminating CLEC may be charging their long distance carrier $0.10 per minute.

Under normal circumstances, calls to high cost rural areas would be rare and the total impact of high terminating fees would be low. However, this arbitrage is exploited when a CLEC partners with a third party to stimulate traffic to its high cost rural network.

FreeConferenceCall.com was the pioneer of this arbitrage, but many other have followed with different ways to stimulate traffic to high cost CLECs.

This fellow specializes in offering free international radio station broadcasts, over the phone, to immigrant communities. He hosts computer servers that pickup international radio stations over the Internet and then rebroadcasts the radio station to callers who dial into a telephone number provided by the high cost rural CLEC. The anecdotal user for this service is the Jamaican taxi driver in New York who uses his cell phone to call a rural Iowa telephone number so he can listen to his favorite Kingston radio station all day.

The money flow goes like this: The taxi driver pays zero additional fee to his wireless service provider, because his call plan includes unlimited long distance. The wireless service provider, or long distance carrier, transports the call to the rural CLEC and pays the high terminating access charge. The CLEC then shares part of the terminating access revenue to the “traffic pumper”—the firm that artificially stimulated the telephone traffic to the rural CLEC.

So how big is this arbitrage opportunity? Suppose the average phone call for a cabbie of small shop owner listening to the radio all day is eight hours. Next, suppose you have just 1,000 of these dedicated listeners and the terminating access fee is $0.05 per minute. The total arbitrage revenue generated is $24,000 a day or $720,000 a month. If the rural CLEC shares 40% of this revenue, the traffic pumper collects a nice $288,000 per month for himself. Not bad for a guy with a handmade marketing sign around his neck.

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