Telecommunication
References Networking Case
June 21, 1994
Now, like a growing number of business people abroad, Mr. McMaster has escaped high international phone bills by contracting a telephone callback service. It works like this: Mr. McMaster dials a special U.S. number provided by the callback service and hangs up the phone. That call triggers a switch in the U.S. that, in seconds, calls Mr. McMaster back. When he lifts the receiver, Mr. McMaster hears a U.S. dial tone, the signal to make the international call. The callback service tracks how many calls Mr. McMaster makes and sends him a bill - but at U.S. rates, which are the lowest in the world.
"Callback has been a godsend," says Mr. McMaster, whose phone bills have fallen by two-thirds.
Callback services are proliferating wildly as consumers find they can reduce their international phone bills by 50% to 70%. TeleChoice, a Vernona, N.J.-based consulting firm, says the number of companies offering callback has grown fivefold to 100 during the past year. TeleChoice projects that the callback industry's 1994 billings will reach $200 million, two-thirds of which will come from Latin America. The market is dominated by a dozen or so savvy U.S. entrepreneurs, exploiting a lucrative niche where there is next to no overhead. They pay wholesale prices for huge blocks of time from international long-distance carriers such as Sprint, MCI and AT&T and then sell it abroad. Fred Gratzon started Telegroup Inc., the largest callback service, a few years ago in a spare bedroom of his Fairfield, lowa, home after losing control of his ice-cream business.
Joel Eisenberg formed Seattle, Wash. based Kallback last year after staying at a London hotel where his phone charges exceeded his room charges. Billings at both companies are now growing from 10% to 20% a month.
What started out as a guerrilla industry got a major stamp of legitimacy in April when the Federal Communications Commission rejected a complaint against several callback companies brought by Basking Ridge, N.J.-based AT&T Co. The phone giant had accused the callbacks of stealing its service. specifically, AT&T objected to the use of its network for the initial uncompleted call, which usually triggers the callback.
In their defense, callback companies argued that AT&T had applied the very principle it was objecting to in a number of its own products. For instance, many AT&T answering machines have a toll saver device that makes it possible to check for messages without paying charges if no messages have been recorded. The FCC ruled in favor of the callback services, saying the services would eventually pressure foreign phone carriers to lower international rates. AT&T says it will petition the FCC to reconsider the ruling.
If the callback services so far have outmaneuvered the dominant American phone company, they still face impediments abroad from both foreign carriers and regulators. Since many foreign phone companies use high international charges to subsidize cheap local rates, callback threatens the entire rate structure in some countries.
So some foreign carTiers and governments are trying to pull the plug on callback. The Kenyan government took out newspaper advertisements warning callback users that they could be prosecuted. Japanese phone companies are pressing regulators for a callback ban. Nearly everywhere, there are whispering campaigns against callback. "Somebody always starts these rumors that the government is going to take our service away," says Rodolfo Endara, a callback user in Panama City.
In few places have callbacks caused a bigger flap than in Argentina. Last summer, communications regulators, acting at the behest of the country's two telephone carriers, ruled that callback was illegal and that users could have their phone service rescinded. The outcry from consumers was bitter. "Why has the government surrendered to the telephone oligarchies?" asked one Argentinian in a letter to a newspaper. Last December, the regulators reversed themselves and ruled that callback was legal.
Refusing to yield, the Argentine phone companies recently persuaded a federal judge to uphold the original ban,. There are some calculations that callback has 10% to 15% of the international market here, and we do not think we should lose that," says a spokesman for Telefonica de Argentina, one of the two Argentine carriers. The matter is still being thrashed out between the carriers and government officials.
Indeed, many countries are discovering that trying to ban callback can be an exercise in futility. Uruguayan telephone authorities got so frustrated with Viatel, a telecommunications company that has its callback switch in Nebraska, that they severed all calls made to any Nebraskan exchange. Undeterred, Viatel found a way to reroute calls originating from Uruguay through Washington, D.C. "They couldn't deny access to Washington," says Daniel Petit, a Viatel vice president. "Uruguay has an embassy there."
Better technology is not only making callback harder to eradicate but also much more convenient. Some companies now offer callback without the user having to wait for the return ring. A San Anselmo, Calif.-based Transworld Telecommunications Inc. can install a device that allows the overseas caller to tap directly into the U.S. network. "It takes inconvenience out of the deal," says Andy Corwin, Transworld's president. Many other callback companies have developed or are working on similar systems.
Analysts say that as callbacks become more common and sophisticated, foreign phone companies will have little choice but to lower international rates. That's good news for long-distance customers, but bad news for callback entrepreneurs. "We're definitely operating with a limited window of opportunity for callback," says Telegroup's Mr. Gratzon. "But we think we can use callback to take our company to the next level of sophistication." The company is working on a project to build its own international network.