FCC, Phone Firms Take Notice as Callback Industry Expands

A fast-growing telephone arbitrage industry known as callback services is attracting the interest of big-name phone companies, while at the same time helping federal policymakers pressure overseas carriers to lower their phone rates.

The companies are thriving because of a huge disparity in international dialing rates that often makes it much cheaper to dial overseas from the U.S.--where the highly competitive long-distance market sports more than 500 carriers--than from overseas, where many carriers are state-run monopolies that have charged rates as high as $12 a minute.

The disparity has triggered the Federal Communications Commission to consider new pricing rules that would force foreign carriers to lower their rates or face possible punitive measures. The FCC, which will look at the rules today, sees competition by the callback services as an additional means of encouraging other nations to comply.

Callback services allow international callers to slash their phone bills, sometimes by more than 50%. With the service, callers dial a U.S. or Canadian service that’s monitored by a computer. The call is not completed; instead, the computer disconnects the ringing line and phones back the customer to provide a line that connects calls at cheaper North American long-distance rates. The callback company makes money by adding a small surcharge that varies according to the location of the caller.

In the last decade, the number of companies offering such services has jumped from half a dozen to more than 200. These firms have taken nearly $1 billion of the $55-billion international calling market, mostly through word-of-mouth advertising.

Indeed, some countries are responding to the competition by cutting their own rates. France Telecom plans its third reduction on international rates this year--a move that will push the price of a one-minute call from Paris to New York to less than 72 cents a minute, compared with $1 at the beginning of the year.

Even small, developing countries are lowering rates. When Uganda and Somalia began encouraging limited telephone competition about three years ago, William F. O’Brien, a former GTE executive who operates telephone companies in those countries, launched competitive long-distance service. Subsequently, Uganda’s state-owned telephone company, UPTC, reduced its one-minute toll charge to the United States to $3, compared with $12 a minute in 1993. And O’Brien said that in Somalia, where it costs $1.25 to place a call anywhere in the world, it’s actually cheaper to call the U.S. than it is to dial in to the African nation.

“Callback services are yet another tool for helping to push down . . . rates,” said Don Gips, acting bureau chief of the FCC’s international bureau. “Those things help put pressure on the system and benefit consumers.”

Yet many nations remain unbending.

China--which has added more telephone lines in the last year than the rest of the developed world combined--has tried to ban use of the services. Brazil, also smarting from the effects of the more competitive rates, once blocked its citizens from calling the 406 area code in Montana because many callback services were located in that state.

But such tactics could lose their punch as bigger, more ubiquitous players launch callback services.

Long-distance giant AT&T; is the latest to tap the potential of the callback market, launching a service last month in Tokyo that AT&T; claims could slash the international phone bills in Japan by up to 75%. MCI, which is being acquired by British Telecom, is also said to be eyeing the market, sources close to the company said.

“All hell is going to break loose as the big guys enter the business,” said David J. Roddy, chief telecommunications economist for the Deloitte & Touche Consulting Group in Atlanta. “Typically, it has been the smaller carriers involved in this business, but once the heavyweights get involved I think you are going to see other countries lower their rates dramatically.”

The services have been a boon for international callers such as Aldo Brussoni, director of the Montevideo, Uruguay, office of Albuquerque, N.M.-based Beta Corp. International.

Brussoni said that when he arrived in Uruguay several years ago, he tried to negotiate a break on his phone bill. He asked the local phone company about a discount on the $70,000 in annual long-distance calls for the firm he was working for at the time.

“I said we are a larger user of telecommunications and we’d like to get a special rate,” he recalled. “But they said we only do that for very big customers, like banks.”

So he turned to a Washington-based callback service that has helped slash his international phone bill 60%. He said the savings are so great that it’s cheaper to use the service to place a call to nearby Argentina than to dial that country directly.

“It’s a huge market, and it is growing every day,” said C. Holland Talyor, co-founder of USA Global Link, a Fairfield, Iowa, callback service that bills itself as the nation’s largest.

Taylor said business has been so good that the company, which had revenue of $176 million last year, is using its mountains of cash to build telephone facilities overseas to gain market entry to compete head-to-head with foreign long-distance companies.

Global Link’s transition may be a matter of survival if more nations, responding to international market pressures, open their doors to greater phone competition, thus eliminating the incentive for long-distance telephone arbitrage. Mexico plans to open its long-distance phone market next month, and most countries in the European Union will officially open their state-controlled phone markets a year later.