Long-distance gateways, RSL buys stake in voice-over-Internet company

With an eye toward getting into the voice-over-Internet market early and cutting voice transmission costs, international long-distance provider RSL Communications recently bought a 51% stake in Internet telephony company Delta Three.

RSL's planned Internet voice infrastructure includes installing gateway switches next to its Ericsson AXE 10 voice switches. Right now, the company is running only its prepaid calling card voice traffic through the Internet to countries where it doesn't have operating agreements, said RSL President and Chief Executive Officer Itzhak Fisher (see figure).

About 20% of RSL's revenue is from prepaid calling cards, with 50% coming from serving other carriers outside the U.S. and the remaining 30% from direct corporate customers.

For instance, when an RSL call is placed from the U.S. to the United Kingdom, the call is routed directly from RSL switch facilities in the U.S. to those in the U.K. But if a prepaid card call goes from the U.S. to Colombia, the U.S. voice switch would route the call to its collocated Internet gateway/server over the Internet to another gateway/server, where the encoded packets are regrouped at the destination point and converted back to regular voice over analog lines.

RSL acquires companies for one of three reasons - to buy into new markets, to enhance in-country facilities and operations, and to buy into products and technology, Fisher said. The Delta Three majority share purchase falls into the last category.

"We thought we'd test the product at first, but they proved to us they're here and running now," he said. "Now we're sending communications over the Internet - 1 million minutes a month to Latin America.

The Delta Three network has about half a dozen D3 Internet servers that it uses for some Internet voice but mostly for international business faxing, said Brian Van Dussen, director of research at The Yankee Group, Boston. RSL plans to expand its gateways to all its current and future switches, Fisher said.

"To our small to medium businesses and other big customers, I will not give voice over the Internet. Not yet. But that's why we're there. The technology will improve," Fisher said.

Van Dussen has just begun to track RSL, but he said the interesting angle to the Delta Three purchase is the attention to voice-over-Internet technology.

"Despite the fact that voice IP has yet to mature to a level that would substantiate large volume, the fact is that young upstarts are embracing and exploring the technology," he said. "That's the reason to watch RSL and others like them.

Van Dussen believes voice over the Internet will eventually become a threat to facilities-based voice traffic. He pointed out that when AT&T was fighting the Internet service provider access charge exemption several months ago, AT&T said 16% of its long-distance traffic would run over the Internet by 2000.

"It seems to be a play to help RSL establish a low-cost international infrastructure. The second thing is to leverage Delta Three's presence in some of these locations where RSL hasn't made a switch investment yet," Van Dussen said.

RSL was founded by Estee Lauder cosmetics heir Ronald Lauder, who is now RSL chairman of the board.

The 3-year-old, facilities-based international carrier has switches in 14 countries including three in the U.S., and it owns submarine and landline cable connecting those sites. RSL began by buying already-built telecom networks such as Cyberlink Communications, of which it now owns 95%.

In May, RSL bought Sprint's international facilities in France and Germany as part of Sprint's regulatory-mandated divestiture before joining France Telecom and Deutsche Telekom in the GlobalOne venture. It also owns switches in Japan, Australia, Venezuela, England, Finland, the Netherlands, Italy, Sweden and Denmark.

RSL plans to continue on its acquisition strategies path because it is faster and more economical to buy, Fisher said. RSL gets not only the equipment, but also managers, technology and experience.

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