Global Telephony / April 1996
By Larry Luxner
Callback services -- the bane of government-owned phone monopolies from Uruguay to Uganda -- now constitute one of telecom's fastest-growing industries, as new technology make it possible for customers to thumb their noses at outrageous long-distance rates by circumventing their own countries' phone systems.
Precise numbers are difficult to come by, but in 1994, callback was estimated to be a $200 million business. Last year, revenues had doubled to $450 million. In 1996, say industry experts, total callback sales will range between $900 million and $1 billion.
Eric Doeschler, marketing director for Kallback Inc. of Seattle, says his company alone will have $100 million in revenues this year, up from $60 million in 1995.
"When we first started, consultants were saying the window of opportunity for the industry was three to five years, and then we'd start facing competition from local PTTs," Doeschler said in an interview. "Three years later, we're still growing at 15% a month. We're hiring 20 people every month, and will soon move into a new building that's twice the size of the current one."
Octel Communications Inc., a $473 million company headquartered in Milpitas, Calif., is also getting into the callback business. Late last year, Octel announced it would form a strategic alliance with AccessLine Technologies, under which Octel would incorpo-rate AcccessLine's One Person/One Number, Instant Call-Back and Rebound features into its Sierra product platform; it will also provide AccessLine's Advanced Intelligent Service Node (AISN) platform as part of an OEM arrangement. Company officials say the new alliance will "offer revenue-generating advanced call processing options to wireless service providers that will enhance messaging, telephone, wireless and data services."
Yet the basic technology associated with callback services is simple -- so simple, in fact, that Doeschler says "you can set up your own callback operation with two phone lines, a PC and about $300 worth of software. A number of companies have started out that way."
The essential feature of all callback systems is the ability to offer overseas custo-mers -- regardless where they're located -- long-distance rates at U.S. prices, which are the cheapest in the world. Customers call a special "trigger" phone number in the United States, then hang up after the first ring, paying nothing for the call. The trigger, which is linked to a computer, automatically calls back, asking for the customer by name and extension if necessary. Armed with a U.S. dial tone, calls can then be placed around the world at discounts of between 20% and 70%. Many callback companies use platforms such as the Summa-4, which is also used by AT&T for its USA Direct service.
In Kallback's case, customers pay a one-time $100 activation fee and a monthly $10 fee for itemized bills. That gets them an individual trigger number they can then use to dial into Kallback's central computer; some use a unique voice recognition system, which Kallback claims is not offered by any of the competition.
"Say you're in Quito, Ecuador, and you're shipping sweaters to the U.S. market," Doeschler explains. "You're making $2,500 in phone calls a month. If you can cut that by two-thirds, that's $1,500 in your back pocket. For a small businessman or an expatriate, it's a significant savings."
The undisputed king of callback is USA Global Link Inc. of Fairfield, Iowa, with 1995 revenues of $176.7 million -- of which 90% can be considered callback services. Chief executive officer Holland Taylor says even though many countries have tried to prohibit the technology, demand for callback will only increase in coming years.
"Most government laws were written prior to the computer revolution, which has greatly reduced the cost of switching equipment," he explained. "With Nortel or AT&T equipment that has the intelligence of a high-speed computer, you can process milions of calls very cheaply. This combination of very inexpensive switching and competition among U.S. carriers for international traffic let to the arbitrage industry and cheaper calling rates from the United States."
USA Global Link began in 1992 as a callback company, and has since expanded to provide international virtual private networks, Internet access, travel cards, prepaid calling cards and other value-added services. The company, whose strength is the Asia-Pacific region, announced in early February that it had sold a 20% equity interest to Jakarta-based PT Sisindosat, a leading provider of value-added services for the rapidly growing Indone-sian market. The $20 million transaction will provide USA Global Link with investment capital to purchase additional switches to be installed in Japan, Europe and Australia. It also plans to acquire additional capacity on international undersea fiberoptic cables, linking these switches into a global network. The company plans an initial public offering later this year.
"We're getting the extremely price-sensitive customer," he said, explaining that Kallback bills in six-second increments. "They're sitting next to the phone with a stopwatch in their hands. If we're 12 seconds off, we get complaints."
As the industry grows, callback companies are finding that price isn't the only way to compete. Kallback, for instance, offers its customers KomLink 2.1 communications software, enabling customers to use their modems in conjunction with a separate trigger number for use in data communications. This DOS-based program, which costs an extra $55, automates the procedure of initiating a callback, answering the phone and dialing the desired modem number. It can also be used to access regular trigger numbers for normal voice service -- with up to 20 speed-dial numbers stored for automatic dialing.
It also offers -- for an additional $10 a month -- an automatic connection box called AutoKall, about the size of a Sony Walkman, which plugs into a phone and completes the callback process, automatically converting to touchtones so that rotary phones can be used without a dialer.
Doeschler concedes that callback services aren't practical for multinationals, which are big enough to negotiate their own rates with AT&T and other major long-distance services. Also, the delays associated with callback are a disadvantage. "It takes anywhere from 10 to 45 seconds to receive the callback call. It's not an instantaneous process. If you're working on a billion-dollar deal, you can't afford to wait." Besides, he pointed out, companies of that magnitude "aren't too worried about saving money on their phone bills."
In Africa, a few countries including Zambia and Kenya have tried to declare callback services illegal, as has Thailand, China, Saudi Arabia, South Korea and Malaysia. Uganda's PTT, meanwhile, countered the service by blocking all calls to Seattle's 206 area code, where Kallback is based, while the Uruguay's Antel cut off all transmissions to Nebraska, where rival company Viatel's switch was located. In both cases, the companies outsmarted the frustrated PTTs by rerouting calls to other cities.
At the moment, 35% of Kallback's revenues come from the Middle East -- mostly Saudi Arabia -- while another 20% comes from Japan, 20% from Singapore, Thailand and other Far East countries, and the remaining 25% from Western Europe.
"Singapore tried to declare us illegal, then they realized that the globalization of the international telephone market was uncontrollable. So they asked us to forbid advertising, and they lowered their prices, but we're still 30-40% below them," said Doeschler, adding that callback is almost impossible to detect. "We're technically illegal in about 10 countries. What we do is activate a busy trigger. so if authorities monitor the call, they would hear only a busy signal."
One area where governments have been able to fight callback services, however, is newspaper and radio advertising. In Saudi Arabia -- where Kallback's rates are more than 50% below the Saudi PTT's rates -- the company was prohibited from advertising in the Riyadh Daily and the Saudi Gazette, both of which are read by the large English-speaking expatriate community, which makes frequent calls to the United States.
On the other hand, says Taylor, Europe is moving toward liberalization.
"Certain Eastern European countries like Poland and Hungary have expressed some discomfort with callback, though throughout the European Union, callback is perfectly legal. In France, Germany and the Netherlands, there's no question about it," he said. "In Spain, Telefónica tries to claim it's not legal and that it's an abuse of the network, but their position is contrary to the rest of the EU."
Taylor explained that in Peru, "Telefónica bought a large chunk of the local PTT and paid top dollar. In order to recapture their investment, they have to keep international rates very high, but that's not in the interests of the Peruvian nation. They don't like callback because we offer competition and undercut their prices."
Latin America, in fact, is one of the hottest markets for callback services anywhere. One expert says the region -- with only 8.4% of the world's population -- has 17% to 18% of the world callback market.
In Venezuela, political pressure has made it extremely difficult for the national tele-phone monopoly, CANTV, to raise rates on local service, now the equivalent of $2 a month. As a result, says CANTV executive vice-president Jerry Carney, the company -- 40% owned by Venworld, a GTE-led consortium -- is forced to keep the cost of inter-national service high (calls from Venezuela to the United States cost $2 a minute, versus 60¢ a minute the other way). That has encouraged a proliferation of callback services, which freely advertise in the English-language Daily Journal even though use of callbacks is technically illegal.
"We are, by concession, the only authorized carrier to place calls on the public network," said Carney, adding that until 1999, CANTV must be protected from competition "in order to rebalance rates to get the cost of service in line with revenues."
To help further that goal, the Venezuelan regulatory agency Conatel announced in October 1995 that it would cut off service to subscribers using callback services, though it's hard to see how that would be enforced.
According to the U.S. Embassy cable from Caracas, "it is doubtful that much use of callback is being made by private users. Larger corporations, however, have long complained of the extremely high costs for long-distance calls and may well be tempted to sign up with a callback company in the United States."
The cable adds that "Conatel's threat is probably difficult to enforce unless it resorts to illegal phone-tapping or to surveillance of large corporate customers, in cooperation with CANTV, in an attempt to detect sudden drops in long-distance bills."
A similar situation exists in Ecuador, where the market for callback services is estimated at $8 million.
Last August, the country's telecommunications superintendent, Adolfo Loza, issued Resolution No. 85, which prohibits the publicizing, marketing or exploitation of callback services. Nevertheless, officials of state-owned Emetel concede that at least 35 companies are active in the sector, and that Emetel is losing $4.4 million annually in lost revenue (plus $3.6 million in lost taxes) from these services.
"Although the number of customers is unknown, sources indicate that the majority are exporters, importers, the media sector, large corporations and multinationals," says the U.S. Embassy in Quito. "The overwhelming demand for call-back services among these users is due to the fact that international tariffs are as much as three times lower as those charged by Emetel."
For example, Emetel charges $2.20 for a one-minute call to the United States, plus 25% tax, for a total of $2.75. Using Kallback, that same call costs only 85¢. Emetel's executive president, Sergio Flores, is realistic about.the problem.
"A good percentage of companies that make international calls use callback services," he said in an interview in Quito. "I can't blame them, but I can't justify it either. We cannot rebalance the tariffs in the short term. We'd need three years at least."
Flores said that some callback services are more difficult to detect, such as systems using X.25 packet switching, adding that "it's a very serious problem that affects Emetel's revenues. Whatever mechanism we find to fight callbacks, they'll find another."
Once tariff rebalancing takes place, however, demand for callback services should drop off. Over the next three years, Emetel -- which is in the midst of being privatized -- plans to cut long-distance phone rates dramatically while raising the cost of monthly basic phone service from 50¢ to around $7.00.
Similarly, as rates start falling elsewhere around the world, callback services could find their very reason for existence in danger. In Chile, where free-market economics have made long-distance phone rates among the lowest in the world, an off-peak call from Santiago to New York costs around 20¢ a minute, compared with 90¢ in the other direction and nearly $3 from Argentina to New York. During a recent Fourth of July promotion, one enterprising long-distance reseller even offered calls to the U.S. for 9¢ a minute. Calls are so cheap that callback services have begun to reroute Argentine calls through the Chilean phone network.
Asked, however, if the callbacks might find themselves out of business in a few years, Taylor of USA Global Link was philosophical.
"We've always seen callback as a unique, one-time opporunity to gain entry into these markets and build sales channels and a customer base," he said, "which we can subsequently transfer to other forms of call set-up and transmission, as the legal and regulatory conditions in each market liberalize in the coming years."