Their issue stems back to an FCC order issued in September of last year that seeks to stop the practice of access arbitrage. This FCC summary of the order describes the situation well. Some small telcos have been making money by billing access on ‘free’ minutes generated by services like free conference calling. The process of making money from free calling services has been known in the industry as access arbitrage.
The FCC tried to stop access arbitrage in 2011. At that time, small rural telcos billed a rate of as much as a penny or two per minute to originate or terminate a long-distance call. Some telcos that were allowed to bill the high rates were making a lot of money by originating calls for free outgoing call center services or by terminating calls from 800 numbers, conference calling services, or free chat lines.
In the 2011 order, the FCC eliminated the access fees associated with terminating a call, migrating to what the FCC called ‘bill and keep’, and they hoped that eliminating the access revenues would kill the arbitrage practices. The FCC order was largely effective and chat lines and other free arbitrage services quickly disappeared.
However, the 2011 order didn’t kill all access charges, and over time the folks who make money with arbitrage found another way to make money with free calling. One of the few access charges left untouched in 2011 was transport, which compensates telcos for the use of fiber networks connecting telcos to the outside world. I’ve noticed that the caller ID for FreeConferenceCalling.com numbers is mostly from Iowa and South Dakota, and I have to assume those calls are being terminated at switches that are remote and that can still bill significant miles of transport.
The access fees billed to terminate calls are paid by the carrier that originates the call. This means that most remaining terminating access is paid today by long-distance carriers like AT&T, Sprint and CenturyLink, which together still sell the bulk of long-distance telephone services. The dollar magnitude of access arbitrage is much smaller than a decade ago. The FCC estimates arbitrage is currently a $40 – $60 million problem, whereas it was hundreds of millions before the FCC’s 2011 order. But those fees are being billed to the long-distance companies that get no benefit from the transaction (thus the term arbitrage – the companies are billing the fees because the rules allow a loophole to do so).
FreeConferenceCalling.com is not the only company doing this, and it’s likely that many conference calling services rely wholly or partially on the arbitrage. It’s worth noting that conference call services that use the Internet to place calls will not be affected by this change – because those calls don’t invoke access charges. The carriers billing for the access on the conference calling may or may not be sharing the revenues with companies like FreeConferenceCalling.com – in either case those carriers no longer have any financial reason to continue the practice.
Companies like FreeConferenceCalling.com don’t automatically have to go out of business, but the FCC order means a drastic change to the way they do business. For instance, the company could start charging a monthly fee for conference calling – likely forcing this particular company to change its name. They might sell advertisements for those sitting waiting for a conference call. They could charge for services like recording calls.
It’s more likely that companies like FreeConferenceCalling.com will quietly die or fade away. I tried using the service yesterday and it already seems to be broken. This latest FCC order probably puts the final nail into the coffin of access arbitrage – although I’ve learned to never say never. As long as there are any fees for calling based upon regulatory orders, there is a chance that somebody will find a way to generate lots of calls that fit the circumstance and get enriched by the arbitrage.