King of the callbacks
International callback companies may be a godsend for customers, but they're causing major headaches for PTTs around the globe. Typical callback companies route international voice and data traffic away from networks used by PTTs and onto less expensive systems, which are often based in the United States. The result is long-distance service at steep discounts, sometimes half the going price of government rates.
USA Global Link, which ranked among the top 100 international carriers in a recent Federal Communications Commission study, is perhaps the most insidious callback company of all. But that's just how founder and Chairman Chris Hartnett likes it.
From the pulpit of a worldwide press tour, Hartnett and his company have been declaring the death of government-run PTTs and the extinction of callbacks, the very industry in which the Fairfield, Iowa-based company has flourished. "PTTs are not only dead, they've turned into fossils, and callback is a dinosaur," Hartnett proclaims.
The PTTs are not taking such talk lying down. Chinese representatives threatened Hartnett's life. In Singapore, the government sought to punish Hartnett as well as its own residents. It published a notice stating that callback customers would be fined $10,000 and spend two years in jail if they continued to use the popular callback technology. A few days after that announcement, the telecommunications minister recanted the punitive measures, saying it was futile to take action against individuals.
Like walking into the lion's den, Hartnett accepted an invitation to visit Singapore representatives on their own turf and was welcomed with the threat of a jail sentence as the head of Global Link.
The 43-year-old, who 12 years earlier had made his fortune at the Chicago Mercantile Exchange, was used to a little heat in the kitchen. Hartnett simply responded that the U.S. State Department was aware of his visit and that he was a member of its telecommunications committee. The officials backed down and then offered to buy 51% of his company with the intent of shutting it down. Hartnett declined the offer.
"The PTTs are crumbling. China is the only one giving us any trouble, and they're the only ones that think they can stop us," Hartnett says. "All these barriers are only in people's minds. There are people on the other side of these PTTs.
A new age of callback With the introduction of Global Internetwork, a form of callback that uses the Internet as its backbone, USA Global Link hopes to make traditional callback systems obsolete. The new approach moves international traffic another step away from the grip of the PTT, according to Hartnett.
The routing path is referred to as hop-on/hop-off technology. When a call is made in Hong Kong, for instance, it goes from the local network to one of the Global Link nodes. That node hops it onto the Internet. The call terminates after it hops off the Internet and back onto the public network in the location that the customer called.
This entire process is invisible to the customer, who simply picks up a standard phone and dials an access code and the long-distance number.
The Internetwork, projected to cost $500 million, is expected to be launched within the next month in the United States, Australia, the Benelux countries, Brazil, Chile, England, France, Germany, Indonesia, Japan, Korea, South Africa and Hong Kong. But until Global Link deploys the 1008 nodes it estimates are needed to support service around the world, it will continue to operate callback conventionally. To dance this international two-step, a subscriber dials an assigned number and, after hearing one ring, hangs up. The callback switch then retrieves a less expensive dial tone - usually from the U.S. - and rings back the customer, who can then call anywhere in the world at a discounted rate.
Global Link also offers a smoother approach that uses an autodialer attached to the phone and processes the call while the customer stays on the line.
"Internet telephony coupled with the callback business is poised to have a very bright future," predicts Harley Kudler, Find/SVP's consultant in the technology information and communications practice group. "They constitute a threat to the PTTs, but the foreign nations are still holding onto their high accounting fees to set up a call.
"PTTs are going to be forced to lower their rates," Kudler adds. "The impetus was started by the callback providers, but as Internet telephony gets more sophisticated and becomes a viable alternative to going through a public switched network infrastructure, you're going to see countries drop their rates even more just to meet that challenge.
Callback takes many forms, all of which have outraged the domestic PTTs because the practice gouges their profits. But a comparison of PTT and callback company rates demonstrates the inflated prices that governments levy on their citizens.
Such was the scenario in Kenya. When Global Link came to that market in 1994, the PTT charged an incredible $6 per long-distance minute. And because calls were charged at a three-minute minimum, a one-minute call or even a one-page fax cost at least $18. The Kenya PTT responded to callback competition by lowering its prices to today's level of about $2.50 a minute. Still, Global Link is the better buy at 58› a minute.
The Japanese government charges $2.25 a minute, according to Global Link estimates. Callback companies carry the same traffic for 69› to $1.19 a minute, depending on where the call originates.
When Internetwork goes on-line, Hartnett expects to charge just 39› a minute.
But callback actually has come full circle in Japan, with American companies operating on both sides of the discount fence. In April 1994, the FCC ruled that callback is a form of reselling and went on to authorize three companies to participate in that business.
AT&T retorted with a petition for reconsideration. AT&T was one of the most vehement opponents of callback because it cut into the company's profits from interconnection agreements with PTTs. The company argued that callback was a form of fraud because of its ring-and-hang-up approach. AT&T also complained that callback was an abridgement of International Telecommunication Union regulations regarding calling agreements between nations.
The two charges were referred to the Justice Department and the State Department, respectively. In 1995, both departments sided with the FCC. In an interesting twist of fate, AT&T now offers callback in Japan, a venture that may strain the interconnection relationship with the resident PTT.
The callback craze Since these fundamental rulings, the callback momentum is unstoppable. Subsequent findings by the FCC continued to give the industry a green light, and it has been accelerating ever since. The number of callback companies has skyrocketed from just a handful 10 years ago to more than 200 today. The combined market share of Global Link and rival callback company Telegroup is about 50%.
"What we are doing is breaking down the monopolies of the world," Hartnett says. "There is an ITU regulation that each PTT has signed and agreed to sell their services at close to cost with a small profit. Instead, they've been artificially held up by accounting rates that one PTT pays to another PTT. This stagnates the economic growth of the world.
The FCC agrees, saying accounting rates are outdated and should more closely represent the actual cost of terminating calls. It estimates that figure is between 6› and 9› a minute. PTTs themselves are also waking up to the financial advantages of alternative routing.
"Everybody is looking for the cheapest route," Hartnett says. "If the cheapest way to go to China is through the United Kingdom, then PTTs are going through the United Kingdom to get to China. And China notices that some 60% of its traffic is coming from the United States and the United Kingdom. It's not that everybody is calling just from those two countries. It's that Kuwait and many other countries are refiling traffic through there because this is a back door in the accounting rate process. That's why we made the declaration at the ITU, and now the U.S. government and the president of the ITU have also declared the death of the accounting rate process.
The original process may be suffering, but the PTTs are not yet willing to give up. Few have taken kindly to the steep undercutting of their lucrative revenue stream. Still, in February, 69 countries signed a landmark World Trade Organization agreement in which they agreed to open their markets. But progress is slow.
"Everyone is deregulating [but] not very quickly," says Amanda McCarthy, analyst for The Yankee Group. "Don't forget, international calling rates tended to subsidize local telephone rates in many countries. So, a lot of the PTTs weren't fouling when they said during those World Trade Organization meetings that they're going to go broke if the FCC imposes unilaterally its settlement rates on them.
To date, any efforts to stem the callback tide have been unsuccessful. The number of callback companies proliferated with the lure of big money and profit margins that, in the early days, were nearly double that of conventional long-distance service.
"There's no way those growth rates will continue. They were exponential," McCarthy explains. "The [number of] countries in which you can play that arbitrage game [is] shrinking. So, callback companies are transforming themselves. The industry is not going to go away, but it's not going to be what it was. A lot of the major callback companies are moving into enhanced services. They're expanding and becoming more of an integrated service provider by offering more calling cards, billing management and just more perks."
With a bundle of products including global 800 numbers, calling cards and private lines, Hartnett and team spanned the globe to sign up agents that now number around 5000 in 120 countries. Although Global Link grew to serve some 200 countries and territories, PTT officials were never far behind, trying to shut down the entire operation.
Despite attempts to block calls or avert traffic, PTTs could not stop this segment of the $50 billion international calling industry. And as always, the cost saving options prevailed in the court of public opinion.
"We've been fighting a battle not only on the telecom level, but also on a regulatory and human level. And we've won on the human level," Hartnett explains. "The beautiful thing is that the people have now demanded low-priced telecommunications. When Singapore tried to outlaw callback after the people were used to paying 55› a minute from Global Link, there was no way they were going to start paying $2.75 to the PTT again. So they demanded the country liberalize.
Singapore did drop its prices to around $1 a minute, still well above the callback competition. Indonesian Satellite Corp. went one step further and actually invested $20 million through its subsidiary, PT Sisindosat Lintasbuana, for a 20% stake in Global Link. That nest egg, along with an initial public offering that Global Link expects to make later this year, will lay the fiscal groundwork for Indonesian Satellite to purchase its own worldwide fiber optic network.
If recent history is any indication, plenty of traffic will ride that backbone. Global Link's sales revenues jumped from $176 million in 1995 to an estimated $250 million in 1996. As the man who set records for the fewest number of losing days on the Chicago trading floor, Hartnett is not about to let past threats stand in the way of striking up ventures with PTTs.
"There's not a PTT on earth that I couldn't sit down with and figure out a way that we could both make money together," the entrepreneur proclaims. "And that's what we've been doing. On the surface, it may look like we're fighting them on a retail level. But on a wholesale level, we have alliances with almost every major PTT in the world.
"We're offering them calling card platforms and wholesale contracts to refile their traffic," he continues. "They may lose 2% to 3% of their business on callback, but we can save them 20% on refiling their traffic through our least-cost routing network." Deals like that are hard to pass up, even for a PTT.
Pat Blake is a freelance writer based in Cedar Rapids, Iowa. Her e-mail address is B814@aol.com
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