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March 26, 1996

CALLBACK COMPANIES MAKE PROGRESS IN INTERNATIONAL TELEPHONY DESPITE TELEFONICA’s MONOPOLY

By CBR Staff Writer

Despite the fact that basic telephony services in Spain are not due to be liberalized until January 1 1998, a number of companies have sprung up in the last two years offering private and corporate subscribers international connections that undercut Telefonica de Espana SA’s rates by as much as 70% depending on the destination. The callback companies are mainly based in the US and claim they are able to offer such low prices because of the high level of competition between service providers and the advantage of exemption from value-added tax. It is thought that these companies could have snatched more than $16m of potential international business from under Telefonica’s nose during 1995, if telephone calls, facsimile and electronic mail transmissions are all taken into account. Perhaps the callback operators are not exactly threatening the livelihood of Telefonica, which earns some $820m a year from its international business, but they are a source of considerable irritation to many European operators, forcing them constantly to rethink their – extortionate – international rates pricing strategy. Given the savings available, it is surprising just how few people are actually taking advantage of the rival services. Like many of its European counterparts, Telefonica recently cut its international rates, in some cases by more than 30%. Off-peak rates to Japan have dropped 31% to $2.19 a minute, while services to Australia, Egypt, China, India and Korea have fallen by a similar amount. Calls to Africa excluding the Maghrib have dropped 26% and it now costs $1.24 a minute to call the US at peak time. Canada and the Caribbean area received reductions of 22% and Western Europe now costs $0.76 a minute. Only Latin America remained practically unaffected by the recent cuts ($1.80 a minute). All rates quoted include value added tax (16% in Spain), but exclude an initial connection charge of $0.43. One of the dozen or so callback firms operating in Spain is New York-based Phono World Inc, currently servicing more than 25,000 clients in 47 countries around the globe. Within 48 hours of signing on with Phono World, the client is given a number to ring for international calls. On the second ring, the user hangs up and the carrier’s computing system will automatically call the user back, asking for the desired number to be dialed. Once the first conversation or transmission has been made, the user can make a new call or sign off. Phono World will accept payment by credit card or alternatively users pay into an account in advance, whereupon they are given the corresponding credit. In a comparative study, Computing Espana found that Phono World offered substantial savings on Telefonica’s rates, particularly to the US and Japan. Phono World itself claims that if in the course of a month a total of 600 calls are made – 360 to the US and 60 each to the UK, Sweden, Japan and Hong Kong, each lasting an average of three minutes, Telefonica would currently send Spanish callers a bill for $2,303.60 compared with the $1,075.57 which Phono World would charge. This represents an overall saving of 53%. Furthermore, some of the callback operators claim that Telefonica has resorted to illegal measures in an attempt to frustrate rival services. At the end of February El Pais reported that a group of callback firms including Phono World, Dial International Inc, Intelnet Europe and Elitel have reported Telefonica to the European Court, the Parliamentary Commissioner and the Defence of Competition Tribunal for allegedly blocking some automatic dialing lines out of Spain, namely lines to a group of numbers that include one of the companies’ computing centers in London, thus making it difficult for the callback operator to service its clients. A number of Telefonica’s rivals also stated their intention to form an association the better to fight their corner.

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