Far-flung and flourishing

The callback industry was born six years ago to offer savings to international customers on their telecommunications costs by bypassing the local PTT when placing calls outside their own country. With callback, the call is actually placed from a different country - often the U.S. - where charges between the two markets are lower.

From the beginning, the callback market has been fluctuating. Initially, the only requirements were a few PCs and starting capital of about $100,000. Now U.S.-based companies are beginning to report more than $10 million a month in callback revenues, and - in the near-term, at least - that market should continue to grow.

In 1996, the callback market generated $1.3 billion, M.J. Scheele & Associates estimates. In 1997, the market is expected to grow 25%.

As callback providers continue to advance their technology, deploy offshore switching equipment and seek ever-cheaper call setup methods, their distribution channels remain relatively constant. The choices are few: maintain an in-house sales staff, distribute via service bureaus or retain independent sales representatives in each country served.

In M.J. Scheele & Associates' 1997 International Callback Market Analysis, 60% of callback providers surveyed maintain a network of agents. Total sales resulting from agents averaged 53%. If this number seems low, it is only because 11 of those same 21 companies reported using service bureaus.

The percentage of total sales via service bureaus ranged from zero to 100%, averaging 19%. In M.J. Scheele's experience, the majority of service bureaus use agents to sell services. Therefore, 72% of total callback sales are coming from independent agents, who are becoming very important players. If independent sales representatives are generating 72% of a $1.6 billion industry, how experienced are they in the marketplace?

The 1996 Fall Callback Agent Survey was conducted through the Internet. Agents who accessed the firm's Web site (located at www.callbackinfo.com) for information about the callback industry were invited to complete a registration form. Surveys were then e-mailed to agents who registered, about 25% of whom responded to the survey.

Reports were received from nearly 60 different countries. The largest body of respondents was U.S.-based, which means those agents were targeting a variety of overseas markets.

Agent profile Based on this data, a general profile emerged. The majority of agents surveyed have been selling callback for a year or less, marketing the services of only one company, differentiating themselves based on customer service and maintaining flexibility in price setting (Figure 1).

The agents surveyed own their customer base and are the primary contact for all service-related issues. Although the agents are independent contractors for the callback companies and do not work directly for the carrier, they are often the carriers' only in-country representation. This makes it necessary for the agents to troubleshoot line quality issues and billing problems and answer general "how to" questions that arise. Often, agents also are required to install and maintain autodialers for their customers (see sidebar).

Carriers might do well to provide better support with regard to autodialers. One autodialer manufacturer, Hy-Tek Controls, recently phased out its single-line dialer because of the exorbitant cost of technical support, which agents were not receiving from their providers. Many agents opt not to market to customers who use autodialers. This indicates that either this market segment is too small to be significant, or providers are overlooking a potentially lucrative opportunity.

The majority of agents also said they are authorized to switch their customers' callback provider. Providers need to be aware of this. If they do not ensure high-quality service and support, they risk losing the end user to a competitor at the agent's suggestion. Many providers have required exclusive marketing agreements with their agents in the past; however, this exclusivity has been difficult to enforce, and many carriers are no longer requiring it.

As competition in the callback market increases, carriers are giving more pricing flexibility to the agents. Half of the agents surveyed had pricing options tied to their commission structures. The agent could offer a lower price to the customer and receive a lower commission for that sale. This drives the responsibility for the final pricing decision to the agent, within company-set limits, and eliminates the need for excessive dialogue between the carrier and agent.

This flexibility is especially important in the more price-sensitive markets and allows the agents to respond more quickly to competitive influences and customer needs. This structure also benefits the carrier because the more responsive the agent is, the more successful the carrier will be.

Although agents own their customer base, the carrier handles the customer billing in most cases. Only 23% of all agents surveyed were producing their own bills, while 70% said the carrier maintained all billing, and 7% provided no information.

About 60% of agents responded that their average number of customers had stayed the same, while 22% actually reported a decrease in their customer base. This statistic might indicate a decrease in the overall callback market; however, combined with reported growth rates in commissioned dollars, it indicates that the usage per customer is increasing even as the number of customers has decreased. Only 1% of respondents indicated a decrease in commission dollars.

Agents' businesses are experiencing some degree of churn. Of the population surveyed, 32% reported 250 or more new customers during the past year, while only 28% reported having that number still actively using the service.

More than half of the agents participating in the survey market services and products other than callback, such as operator services, paging, cellular and debit cards. About 40% of the agents reported that callback services only accounted for a quarter of their total revenue. Only 25% said they derived their entire revenue from the sale of callback services.

Providers seem to recognize this need. Companies such as USA Global Link of Iowa are now offering Internet-related services, prepaid calling and data services.

Of agents surveyed, 85% are paid a percentage of sales, less bad debt, as commission. The commission is most often based on traffic volume, with 14% of the agents being paid based on profit margin. The commission percentages paid to the agents ranged, on average, from 10% to 15%.

Bad debt in the callback industry has been a recurring problem. The majority of agents said they were paid a percentage of sales less bad debt, but only 32% said they were fully responsible for it. In M.J. Scheele's experience, the majority of carriers take full responsibility for bad debt. A few require their agents to split the bad debt equally, but only in cases in which the carrier has had its agents involved in attempted fraud or in cases of gross agent negligence.

Customer service Most often, the agents in the survey were handling the majority of customer service issues for their customers, with 85% of the agents in the study spending up to one half hour a month with each customer. Although customers may receive their billing from the carriers, they use the agents as their main points of contact with the carriers.

Agents handle customer service issues ranging from quality problems and billing questions to teaching first-time end users how to use the service. The agent also takes responsibility for installation and training for customers who use autodialers.

Clearly, carriers must provide customer service agents with adequate support. As the provider representative, the agent must appear competent or risk making the provider look bad. Conversely, the carrier must provide adequate support for the agent or risk losing the agent - as well as the agent's entire customer base - to another provider.

One of the survey's most significant findings was that agents are more concerned about the quality of the service they are offering than the rate or commission. The average callback customer is no longer willing to compromise on service and quality to save a continually decreasing amount of money. As the savings decrease and the sophistication of the end users increases, the customer's demand for high quality will be more persistent.

Agents have multiple access methods available for their callback services. Although direct inward dial signaling remains the most widely used, alternative methods are increasing in prevalence. Some access methods including X.25 are faster, and some including Internet signaling are cheaper. Traditionally, X.25 signaling has been the primary alternative access method. However, newer methods are emerging.

Telegroup of Iowa, the largest of the callback carriers with more than $200 million in revenue for 1996, is focusing on call-through in the majority of its markets. This call setup method takes the onus off the end user because it is performed transparently at the switch level. Callers simply stay on the line while their calls are completed.

This reflects the trend of offering more PTT-like services because companies can no longer compete on price alone. Their services must be as convenient to use as the incumbent providers' services.

Callback has long been used as a means for U.S.-based providers to get a foothold in foreign markets. With the inception of call-through, they can now compete on equal footing with the incumbent PTT.

Legal issues Agents marketing callback in countries where callback is illegal are still able to sell the service. They do so without benefit of advertising to their customers through normal channels. Most agents rely heavily on word of mouth, unless they publish an advertisement on the Internet or in international trade publications.

The majority of respondents (53%) faced no penalties for marketing illegal callback services. Many governments heavily discourage the sale and use of callback but do not necessarily enforce any penalties. The only reported case of penalties being enforced was in Indonesia. The agent did not elaborate on the details.

Survey results indicated, however, that if governments decided to become more aggressive, fines and penalties could be severe. One agent said that marketing callback in South Africa was punishable by imprisonment. In the Bahamas, the seller is subject to a $10,000 fine for the first offense; additional offenses incur penalties of $20,000 and three years in jail. In the Netherlands Antilles, the fine is $14,000 and six months in prison.

An agent in Thailand stated that, technically, one needs a license to market telecom services, but the government has yet to crack down on agents, and agents are unsure of what will happen in the future. An agent in New Zealand reported that while the PTTs and governments don't like callback, no one in the agent's multilevel marketing group has had any major problems, although some have come close.

In the survey, agents were also asked what they believed would be happening in the callback industry over the next three to five years. Responses ranged from predictions that callback companies will consolidate, forcing smaller companies out of business, to the belief that a significant amount of growth still exists in the market. Most carriers are forecasting growth in their callback segments.

New agents are still joining the industry, which also indicates that there may still be growth and viability left in the marketplace. A full 61% of the respondent population had entered the market only within the last year. And many agents felt AT&T's entry into the market lent a legitimacy to the business that it previously lacked.

Although the callback market is changing, the channels of distribution remain the same. A provider with a widespread network of resourceful agents has the best chance at long-term success. Agents allow carriers to penetrate difficult markets. Using agents defrays responsibility and risk of legal action in more than 50 countries where callback is illegal. Agents reported heavy fines and imprisonment in such markets for both the buyer and seller, but no agent indicated risk for the carrier.

New call completion methods create competition, even in markets dominated by a government-sanctioned monopoly, and international telephony as a whole is slowly beginning to consolidate into one large market with a global accounting rate. Agents will be a key ingredient in this vision of international telephony, and carriers would be wise to keep a close eye on them and their satisfaction.

Robin Warren is Associate of Marketing and Cathleen Woodall is Director of Marketing for M.J. Scheele & Associates in San Francisco. Warren's e-mail address is rwarren@callbackinfo.com and Woodall's e-mail address is woodall@callbackinfo.com.

One of the major drawbacks to callback is the nature of the basic service. The end user must dial an access number, wait for it to ring once, hang up, wait for the callback, and then dial a final destination number. For a customer using simple callback, this is cumbersome and time-consuming. It complicates faxing. In a PBX environment, it is impossible. But a number of solutions to this complicated scenario exist or are being developed.

The first solution, which has existed in one form or another for some time, is the autodialer, which has multiple applications in the general telecommunications industry. Autodialers are available with a variety of features and range from simple to complicated with regard to programming and flexibility.

The international callback autodialer automates the process of callback for the end user, rendering the call setup transparent. The autodialer is located on the user's premises, directly between the user's phone, fax machine or PBX and the public telephone network.

A secondary purpose of the autodialer is to increase the speed of call setup. Dialing manually can take anywhere from ten seconds to one minute, depending on the countries called, the callback switch, the carriers and their call supervision, and the person dialing the call. The autodialer has the ability to significantly decrease call setup time. In addition, the autodialer ensures callback is used when it is the low-cost solution.

Autodialers are especially attractive for faxing. Estimates of callback from many parts of the world show that up to 40% of the international calls are faxes. Callback used with a fax machine can be inconvenient and time-consuming, but the autodialer relieves this difficulty and ensures that all users of the fax machine obtain maximum savings.

The second solution that renders callback transparent to the end user is local node callback. This is a quasi-call-through service. The end user dials a local number that rings at an in-country facility. The facility answers, requests a personal identification number (PIN), provides dial tone and then accepts the user's dialed destination number. The facility then signals the callback switch via direct inward dialing, X.25 or the Internet. The switch calls back the local facility, accepts the dialed digits and places the outbound call.

The third solution is call-through. This method removes the burden of call setup from the end user altogether, taking it to a switch level. This type of service is the most similar to PTT services and, as such, is the greatest threat to an incumbent PTT. The end user dials a local number that rings at an in-country facility. The facility answers, prompts for a PIN and provides dial tone. Customers dial their destination number and are connected with the appropriate central switch over a private network. The switch then terminates the call over a private or public network. In countries with ISDN or U.S.-like carrier identification codes, no PIN is necessary.