Traffic Pumping – Free Conference and Porn Services Exploit FCC Provision

A little-known scheme called “traffic pumping” has been found siphoning money from service providers like AT&T and Verizon with the purpose of funding free conference services, free international calling schemes, and even pornographic chats.

According to an Oct. 13 study by TEOCO, a cost management resource group, traffic pumping bled $2.3 billion from the big telecos–mainly Verizon, AT&T, and QWest–over the past 5 years. The study said this money went to the purposes of funding free conferencing services, free pornographic chat, free international calling, free pre-recorded calling, and free international radio.

Traffic pumping was enabled by a provision in the FCC’s Intercarrier Compensation system which was intended to subsidize the operational costs of rural carriers. For example, carriers in rural Iowa maintain the important service of providing  telephone connectivity to people living in the countryside. Since there are few people living in these areas, it was difficult for the small companies to subsist; there were few people paying phone bills. As such, the FCC’s provision made it so when the bigger interexchange carriers (IXCs), like Verizon, connect callers to the rural area providers, the IXCs pay a tithe, usually 5.5 cents a minute, to the rural providers for the call. It’s called a termination fee and works as a subsidy.  This way, the rural carriers still do the work of building a network out to the “last mile,” but they get a little extra money for their trouble. All well and good.

However, in mid-2006, the rural companies, known as Local Exchange Carriers (LECs), who had heretofore fielded small volumes of telephone traffic, suddenly experienced an explosion in traffic, sometimes by over 40,000 percent, according to TEOCO’s study. Subsequent investigations of the anomalous growth revealed that Free Calling Service Companies (FCSCs)  had gone into business with the rural Local Exchange Carriers (LECs) to offer free services such as free conferencing and free pornographic chat to customers by exploiting the tithe paid by big telecos. The FCSCs offering the free services set up shop in the rural areas, drove traffic to the bridges, and were, in return, splitting the money garnered from the boom in traffic–the money originally intended to subsidize phone calling to and from rural callers.

Of course, AT&T and Verizon both cried foul, pointing out that the LECs have begun enticing the FCSCs with free or low-cost services while upping the cost of termination fees. In some cases, the telecos have fought back by refusing to pay the termination fees altogether. They defend their right to do this because of a tentative conclusion reached by the FCC in 2007 in which it would make the practice of splitting the tithe with third parties illegal. However, the FCC has not acted on the tentative agreement, so it exists in a state of limbo–not a law, just a suggestion.

According to the TEOCO study, “Those involved in Traffic Pumping take advantage of the (FCC) delays, pumping more and more traffic.”

On the other hand, FCSCs argue that they are providing a valuable service whilst pumping more money into the rural LECs that need it.

Also, a recent study by Alan Pierce, former chief economist for the FCC, asserted that the large IXCs are profiting from the practice as well. It says that the existence of free conferencing services encourages more people to purchase long distance service.

“The report further concludes, therefore, that rather than having a legitimate basis for concerns about access costs associated with free calling services, IXCs are, in fact, seeking to eliminate competition for their own conference calling services, many of which have been forced to reduce prices in order to remain competitive with the relatively new, and innovative services offered by emerging competitors,” according to the report.
At the end of the day, traffic pumping is a deceptive business practice, one that results in taking money from some consumers and appropriating it to subsidize free, and in the case with pornographic chats, prurient services for others. While it may be difficult to know why the IXPs are complaining–whether it actually cuts into their business or they are trying to knock out conferencing competition–it still results in consumer “A” footing the bill for consumer “B.” Why? Because the big telecos offset their own charges incurred from traffic pumping by charging consumer A more money on their phone bill. The services that exploit this loophole in the FCC’s mandates aren’t truly free. They simply realign the charges to suit their own needs.

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