| BUSINESSWEEK ONLINE : OCTOBER 11, 1999 ISSUE | ||||||||
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| SPECIAL REPORT
Coping with the Revolution Many countries rely on high phone rates for cash. Will boosting calls make up for lower rates? Pape G. Toure, president of Senegal's national telephone company, Sonatel, has a problem. In 2002, the U.S. plans a sharp cut in the rate it pays Sonatel to complete the calls Americans make to this West African country from $1.18 a minute to 23 cents. Overall, reductions in international phone fees by other countries will put $30 million in jeopardy--80% of the hard currency the country receives for services. So Toure is scrambling to find alternative sources of revenue. He's increasing the number of Sonatel's phone lines in Senegal by 25% per year, and he's cutting international calling charges, gambling that lower prices will boost traffic. ''We can't hide from the fact that telephone costs are going down in the entire world,'' he says. This is what the short end of the stick looks like. While customers in the U.S. and other developed countries are celebrating the demise of the creaky old international telephone system, it presents a tremendous challenge for the world's most impoverished countries. Those sky-high rates for cross-border phone calls historically have been a crucial subsidy for many countries that are building their telephone networks. India received $450 million in international payments last year--37% of its revenues from telephone services. ''When you are still struggling with basic telecom development, you may need a monopoly and these external subsidies,'' says Daniel Rosenne, director-general of Israel's Ministry of Communications. The prospect of losing those subsidies hasn't gone over well. Many countries blame the U.S. Federal Communications Commission for its unilateral decision in 1997 to slash by as much as 90% what are called ''settlement'' rates--the fees U.S. phone companies pay to carriers abroad for completing phone calls. ''There was a sense that Americans were acting like Father Knows Best, saying: 'We are going to force you with a diktat to lower telephone charges,''' says Jack Nadler, a partner at Squire, Sanders & Dempsey in Washington. Still, there's little recourse. Nadler represented a consortium of Latin American phone companies that sued to overturn the ruling, but the FCC won the case earlier this year. The International Telecommunications Union (ITU) voted 188-to-1 (the U.S. was the only ''no'' vote) to slow the rate cuts for the poorest countries, but it has no power over the FCC. Already, many Third World countries are feeling the squeeze because of the drop in American payments. Sri Lanka Telecom Ltd. has had to double the price of a three-minute local phone call because of the decline in international phone fees. In Senegal, ITU consultants forecast that the drop in settlements will drive down Sonatel's profits 44% from 1996 to 2001 and quadruple the company's debt. The impact will be felt most in small, poor countries, such as the islands in the Caribbean and Pacific Ocean. ''It's a simple question of economies of scale,'' explains Tim Kelly, an ITU economist in Geneva. ''If you have a small country with 150,000 people, such as Samoa, and you need to add satellite links for new lines, the incremental costs are much higher than if you are buying this for the American market with 270 million subscribers.'' What to do? Telecom operators in developing countries are beginning to remake themselves for the new industry order. Chile, Israel, and Tonga are cutting settlement rates even more than required by the FCC in order to boost telecom traffic and spur economic development. ''The poor countries all have gone through the stages of mourning and self-denial and now are realizing they have to change,'' says Judy Reed Smith, CEO of Atlantic-ACM, a Boston telecom consulting firm. HIGH-TECH HELP. Several countries have become models for how to cope. Chile has licensed 10 companies to battle for international telephone traffic, stimulating fierce competition to offer the lowest settlement rate. The result is booming growth in cross-border phone traffic. Israel opened its telephone market in 1997, licensing two foreign-financed competitors to compete for international calls. Each now enjoys total freedom to negotiate its own settlement rates, pushing them down from $1 a minute in 1997 to 21 cents today. Israel no longer receives more than $100 million in telephone fees each year, but government officials think lower phone rates are bolstering Israel's high-tech sector. ''We are a total outpayer [of telephone fees], and I don't care,'' says the Communications Ministry's Rosenne. ''I'm a regulator, not a [telephone company] shareholder.'' Even less advanced countries are learning that change can bring benefits. India lowered rates 30% between 1995 and 1999 and dropped them another 30% since May. Officials say there has been a 20% boost in traffic this year that partly has made up for any lost revenue. India's regulator, the TRAI, says it will continue to push settlement rates down toward costs because lower prices will stimulate more traffic. However, India does not plan to reduce its settlement rate from the current 64 cents a minute fast enough to reach the FCC-decreed level of 23 cents in 2002. Some companies are proving extremely innovative. Sri Lanka Telecom is building its business with a host of new products and services, including a calling card for Sri Lankan expats around the world. It also has begun offering low rates to businesses in neighboring countries if they route their telephone traffic through Sri Lanka. ''The Sri Lankans have taken many sensible business decisions that should ease the pain,'' says Stephen Young, author of the recent book The Rise of Cost Based Interconnect and the Collapse of International Accounting Rates. Of course, adapting to the new telecommunications world still won't be easy for many countries. Because Samoa's market is so small, an ITU study asserts, revenues can grow only 2% a year even if prices are slashed. That means a cut in settlement fees will translate into an immediate drop in local living standards. Meantime, some African nations are just now beginning to prepare for the fall in settlement revenues. ''They don't have telephones, they don't have Internet, and they won't be able to join the global development,'' worries former ITU Secretary General Pekka Tarjanne. Still, many telecom execs around the world recognize the drop in calling fees as part of the increasing globalization that provides them as much opportunity as risk. In Senegal, Pape Toure knows he still has a long way to go before his company is efficient enough to operate without lucrative payments from overseas. But he's determined to build a telecom business with low prices and whizzy new features comparable to those found in France or the U.S. Then, he figures, Senegal will have a telephone company that can withstand the plunge in prices that lies ahead. By William Echikson in Brussels, with Manjeet Kripalani in Bombay _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS Dialing for Pennies TABLE: Dialing Abroad Will Never Be the Same Again Coping with the Revolution TABLE: Third World Backlash A Failure to Communicate TABLE: The Trouble with Global Plans ONLINE ORIGINAL: The FCC's Kennard: Fighting for Lower Long-Distance Rates INTERACT E-Mail to Business Week Online | |||
