Forms of Arbitrage
Traditional network operators often charge different interconnection rates, depending on the type of call or type of service provider involved. Often this reflects differences in regulatory treatment between services or service providers. This creates opportunities for service providers to engage in arbitrage (either legally or illegally).
Not all regulatory arbitrage strategies violate laws and regulations even though they deviate from regulatory intent, or exploit loopholes. Also, when network operators create arbitrage opportunities in the absence of a regulatory obligation, or if they fail to close a loophole quickly once it is detected, this may indicate that they themselves expect to benefit.
A number of arbitrage strategies are sufficiently common that they warrant specific mention:
1. Grey market strategies,
2. Leaky PBXs,
3. Resale of private lines,
4. International call reorigination (or "call-back"),
5. Refiling, and
6. Routing calls over the Internet.
1 Grey Market Strategies
These are primarily “self-help” strategies by which consumers can reduce telecommunications charges, usually with the assistance of a business venture. Grey market strategies generally involve masking the true origination or destination of a call to qualify for a lower price.
2 Leaky PBXs
A business customer with an on-premises switchboard (Private Branch Exchange, or “PBX”) can “leak” traffic into the local exchange to avoid paying for long distance calls. For example, with a small satellite dish on the roofs of its offices in country A and B (or a leased line) a company can become a small-scale international carrier. It receives the calls on its PBX in country A, sends them over its link to country B, and then puts the calls out into the public telephone network of country B through its PBX there. The PBX in country B leaks the calls from country A into the network in country B, disguising them as local calls.
Figure 1: Example of Leaky PBX Strategy
3 Resale of private lines
This extends the “leaky PBX” concept. Instead of a private PBX, the customer calls a “free phone” access number to link to a service provider’s private line for low cost calling. Incumbents lease private lines for corporate business data but cannot police their resale.
In many countries this form of arbitrage has provided the first significant competitive pressure in the long distance calling market. However, often this competition is limited, as resellers are poorly capitalized and have little incentive or ability to invest in new network facilities.
This form of arbitrage, also known as “international call-back” takes advantage of the vast difference in international call charges across countries. Call-back service enables callers in a country facing high international charges to trigger a dial tone in a low-cost country to make an international call. For example, if country B has much lower settlement rates with country C than with country A, it might be cheaper for country A to send its traffic for country B via country C. One of the first larger arbitrage routes was for traffic between Australia and the US, which was cheaper if sent via New Zealand and Canada. Arbitrage is and was practiced even before the spread of de-regulation.
Figure 2: International Call-back
Re-origination is made possible by the SS7 signaling system, which allows a great deal of call information to be transmitted. In principle the receiving telecoms company can inspect the CLI to see where the call has come from and charge accordingly. In practice, switches are able to remove or change the CLI, thus disguising the origin of the call.
Some countries have sought to ban call-back services. However, in practice such a ban is difficult to enforce. Call-back has created downward pressure on international call prices, and has contributed to pressure to move away from the accounting rate system for international calling.
Refiling can involve cutting an international link into two or more shorter legs that collectively have a lower international accounting rate than the single link. For example, the United States and the United Kingdom have achieved a competitive marketplace and lower accounting rates than have existed in other European nations. Therefore, traffic from the United States to Portugal might be routed first between the United States and the United Kingdom and then retransmitted for the leg between the United Kingdom and Portugal
Figure 3: Refiling
In many countries regulators and network operators treat Internet traffic more favourably than traditional voice traffic. This creates incentives for network operators and service providers to route long distance telephone calls over the Internet, to qualify for lower charges. For example, Internet telephony may be exempt from certain regulatory fees, such as universal service contributions.
Certain features of VoIP traffic create additional arbitrage opportunities. VoIP traffic can readily enter the Internet without traversing the PSTN. Opportunities also exist for terminating VoIP traffic without traversing the PSTN, or through undetected transit of the PSTN. Even when a PSTN operator is able to detect VoIP traffic, it may not be able to differentiate between local, domestic, and international VoIP calls for billing purposes.