A Telecom Market Revolution:
Callback Challenges the Status Quo
Though it accounts for less than 1% of the international telecommunications market, callback had grown into a $488 million industry in 1995, and is expected to surpass $3 billion in revenues by 1998. Little wonder, then, that it has escalated from innovative technology to a politcal football.by David Schilling
George Jetson never had to tolerate a callback; his world was too advanced, what with wireless videophones and commuting to his office each day in a flying saucer. And Star Trek taught us that, in the not-too-distant future, we would be able to communicate directly from point to point, conducting instantaneous conference calls across galaxies and black holes with crystal clear sound. Even Fred Flintstone seemed to enjoy better phone service, quicker connections, and superior sound than the current users of callback.
So why do people put up with callback services? To save money.
Callback, for those yet unfamiliar with the service, is a "reorigination" technology whereby a caller in a country with high phone rates (let's say Japan) can place an international call via a service provider in a country with relatively low phone rates (like the US). To use the service, the caller in Japan dials up a computer in the US, lets the phone ring once, and then hangs up. Because there was no connection on the call, there is no charge to the caller; in other words, no money is collected by the local carrier, such as KDD. The computer determines who rang (each user has an assigned access number) and, in about 7 seconds, "calls back" to a preassigned number and provides a US dial tone. Usually, a voice prompt asks the caller to enter their destination number, and the computer then connects the call normally.
Because the call technically originated in the US, the only phone fees incurred by the caller are those charged by the callback service provider. And since these are based on US phone rates, the caller enjoys savings of up to 80% off the rates charged by privatized Japanese carriers such as KDD, or by government-owned monopolies such as Telecom Italia, Korea Telecom, or China Telecom.
Sound tricky? It's not -- though it is controversial. Large international carriers who traditionally have experienced little or no competition in the voice market try to argue that callback is congesting their networks, impairing service quality, draining revenues, and undermining the International Telecommunications Union (ITU) international accounting rate regime. (See "The international call accounting system" sidebar.)
The US Federal Communications Commission (FCC), though, and the US Department of State have judged that callback service from alternative telecommunications companies does not violate international law. Rather, they view callback as increasing free market competition (and, incidentally, giving a boost to the US telecommunications industry). Even the Japanese Ministry of Posts and Telecommunications, in spite of pressure from Japan's international telecom giants, has tacitly acknowledged that callback does not contravene existing Japanese or international laws.
For consumers, callback is a godsend -- but only when the quality of the service meets their expectations. For some carriers, however, that too often is not the case. (Do you want it cheap, or do you want it good?)
More than a technology
On one level, callback is simply a technological achievement that has grown out of the computer hardware and software revolutions and advances in fiber optics over the past three decades. On another level, though, it is also a mega-economic phenomenon with striking political dimensions.Callback companies are starting out just as MCI and Sprint did in the US domestic long-distance resale market in the early 1970s, giving mammoth Post, Telephone, and Telegraph companies (PTTs), or recently privatized PTTs such as KDD, the same headaches experienced by AT&T when it first encountered competition two decades ago. And just like MCI and Sprint during that period, there are line quality issues, billing problems, and marginally acceptable customer service from the generally undercapitalized alternative carriers. For an industry that is growing at a rate of 30% a month, these types of problems are not surprising, but vexing to customers and bad for callback's reputation nevertheless.
The quality and range of a callback company's service depends in part on the quality of the software that sits on its telecommunications switch. A whole industry, termed "computer telephony," is devoted to designing, manufacturing, and marketing the hardware and software signaling components for call processing systems. Voice mail systems, which employ touch-tone detection, are the precursors of callback switching platforms. Callback systems are much more complex, however, requiring hundreds of applications and functions -- everything from human voice and answering machine detection to call-disconnect detection and call routing. Most callback companies utilize this technology to provide myriad services: roving callback for traveling employees, calling cards, debit cards, speed dialing, teleconferencing, account codes, voice mail, store-and-forward facsimile, and automatic dialers that render the callback process transparent to the user.
The technology is still being developed, however, and until recently callback operators have had trouble getting software and hardware that works accurately and efficiently under battlefield conditions. For the better financed callback companies, who can afford to hire world-class engineering talent, major bumps and bruises are a thing of the past. The priority now is fine-tuning the customer service side of the business.
The FCC gives a green light
The first callback services were offered in the mid-1980s. In September 1994, ruling on an AT&T petition to outlaw the practice, the US Federal Communications Commission officially granted several companies the right to resell the international long-distance service capacities of other carriers (AT&T, MCI, and Sprint, for example) using a callback configuration. The FCC made this decision in spite of overt pressure from foreign governments and their PTTs. The issues of international law, international comity, and the sovereignty of national governments that were raised took a back seat to the FCC's conviction that free competition in telecommunications is in the best interest of US industries and consumers.The reaction of the Japanese Ministry of Posts and Telecommunications (MPT) has been similar (perhaps not surprising for a country under international pressure to reduce its high trade surpluses). There is, however, a more important principle at work than international trade balances. Telecommunications is a strategic industry that has a great impact on all other industries. Technological innovation, corporate efficiency, and consumer spending are the most important concerns of the MPT at this time, prompting it to view callback as an outside pressure that will force lower telecommunications prices for Japanese consumers and businesses.
According to Katsuki Oshiden of Mitsubishi Research, "Japan faces a situation in which its high international phone rates are proving to be a barrier to communication between Japan and the rest of the world -- even driving foreign companies to less-expensive locations, such as Singapore. This does not bode well for the Japanese economy as a whole. Callback companies are playing a leading role in challenging Japan's big carriers to lower their rates and become more competitive."
Market size
Both worldwide and in Japan, callback companies hold less than a 1% market share of the international telecommunications sector. Globally, that market produces total revenues of about $300 billion a year, and this is expected to double in the next decade.While the AT&Ts and KDDs of the world sell their services through brute muscle, capturing the lion's share of this growing pie, they are happy to take in additional revenues by leasing their idle capacity to resellers such as callback companies -- as long as the callback companies don't get too big. Should the callback business become too threatening or too large, the most healthy and dynamic callback companies will be bought up, and the smaller ones driven out of business.
This may actually happen sooner than latter. In 1990, callback produced just $10 million in revenues worldwide. By 1995, the callback industry had grown nearly 50-fold, to $488 million. This year, callback is projected to produce $766 million in revenues, and by 1998 revenues are expected to top $3 billion. (At the same time, the number of callback companies has increased from 6 in 1990 to about 650 in 1995, although only about 15 are major players). So while callback currently holds less than 1% of the international telecommunications market, it is becoming a major industry whose effect is perceived as out of proportion to its market share.
Direct callback?
Actually, within the next few years, callback as we now know it will cease to exist. Demands from consumers for direct service, and the incessant progress of technology -- including the blossoming of the Internet -- will allow callback providers to offer direct service because of new signaling alternatives. Callback companies are beginning to use new techniques such as X.25 call-completion via packet switches at local switching centers.The system works in the following manner: When a subscriber places an international call through a callback provider, it triggers the X.25 switch collocated with the local switch. An X.25 message is sent to the US callback switch, completing the call setup. The local switch then links back to the customer, who, after only a slight delay, hears the ringing of the number he has called. In other words, callback that works, as far as the user is concerned, like a normal phone call.
Many callback providers are deploying switches in deregulated markets, and it will be easy for them to adopt this technology. Other alternative providers are employing TCP-IP protocol to accomplish the same ends.
For consumers, then, the future looks bright. For large companies, though, the message is clear: to survive, the dinosaurs must evolve and become more agile. The future will bring more competition than ever before with companies from many industries (Microsoft, for example) jumping into the telecommunications arena. Telecommunications institutions such as KDD cannot expect to maintain their traditional privileges in an industry experiencing such phenomenal upheaval.
The race in international telecommunications will go to the most competitive companies operating in free markets, which is what the Japanese government has been espousing as its goal in trade negotiations over the past several years. And the net result will be cheaper and better service for the consumer.
Even Fred Flintstone might be impressed!
David Schilling is a freelance writer and infonaut at Eureka!, a new information search and report service for "temporally challenged" executives. He can be contacted at dschilling@mcimail.com.
