Rome To Bonn Via New JerseyPeter Coy
A visit to the headquarters of Howard S. Jonas' discount tele phone company doesn't inspire awe. It's in a former funeral home in the East Bronx, upstairs where the mortician's family lived. Thread your way between the mismatched metal desks, wires, and personal computers, and you can find Jonas' high school debating team trophies.
Don't be deceived by the low-budget digs. Jonas' International Discount Telecommunications Corp. may be tiny, but it has earned renown--make that notoriety--in the global long-distance business. Just look at his clippings from European newspapers. The German and Norwegian authorities are deeply concerned about him. In Spain, the state-owned phone company, Telefonica, denounces his company's discount strategy. And in France, where Jonas' reps told executives how to save money by skirting France Telecom's monopoly, a headline in one newspaper blares: "The minister of the PTT is furious!"
FREE-FOR-ALL. Jonas, a 35-year-old father of five who also publishes hotel brochures, is throwing a harsh spotlight on something that foreign phone monopolies would rather leave in the dark. State-owned phone companies in some parts of the world--Italy, for example--charge three times as much for a U.S.-bound call as U.S. carriers such as AT&T, MCI, and Sprint charge for going the other way. That hurts companies that do business around the globe. For $250 a month, IDT lets customers connect calls from overseas as if they originated in the U.S. You can dial an IDT machine in the U.S., hang up, and wait for it to call back a preset number. Then, you instruct it via your phone keypad to place a call. A Peruvian could use IDT to call Texas--or Ecuador.
IDT is just one force in the free-for-all developing in international calling. On transatlantic routes, multinationals are learning to play carriers off against one another to get the best deal. Fiber-optic lines beneath the oceans have produced a glut of cheap calling capacity, and computer-controlled switches make it easy to route calls via the least expensive route, even if it adds thousands of miles to the journey. Finally, many governments are beginning to promote lower rates, recognizing that cheap international communication is good for trade and growth.
The Federal Communications Commission is leading the push--and for good reason. Americans make the most international calls, about $7.8 billion worth in 1990. Under Chairman Alfred C. Sikes, the agency has sought reductions in the fees that phone companies charge each other for completing calls. In February, the FCC won tentative agreement from an International Telecommunication Union working party--representing phone regulators from 31 countries--that the fees should be reduced toward true cost within five years.
SELLING LINES. And last December, the FCC took steps to open up a potentially powerful form of competition. It said that companies such as multinational banks and oil companies that use leased lines for their internal communications should be permitted to resell their excess communications capacity to other companies. Since leased lines are far cheaper than standard international service, customers presumably would flock to these resellers. The lines would work like a giant, two-way pipeline, diverting overseas calls from the regular phone network, says Leonard Elfenbein, president of Lynx Technologies Inc., a telecommunications consulting firm. Foreign carriers would soon be forced to lower their standard rates to keep customers.
Rates aren't in free-fall, to be sure. Some companies already quietly offer the leased-line resale that the FCC favors, but it's officially permitted only between the U.S. and Canada--and the Canadians tax it heavily. British authorities say they plan to go along with the resale plan, but not until the FCC eases up on British phone companies doing business in the U.S.
Foreign carriers are reluctant to cut rates too quickly because they depend heavily on the cash cow of international long distance. In developing countries, the profits help subsidize the post office and other vital government services. Even in industrialized nations, they help keep down the price of domestic calling. Gregory C. Staple, a Washington lawyer who does research for the International Institute of Communications, a London-based think tank, estimates that gross profit margins from international long distance may run from 33% to 50%. Says Staple: "It's in nobody's interest to drive down margins too far."
MOVING FAST. But the market is forcing reductions, and phone companies may soon begin feeling the pinch. When France Telecom lowered international rates 13% to 18% this year, it said it planned to make up the loss by raising some domestic rates. Within a few years, that kind of move might not beso easy, however. The Commission of the European Communities is investigating a plan that would end telephonemonopolies and open up competition in domestic voice communications throughout the EC. Forced to keep a lid on domestic rates, phone companies would have less flexibility in cutting international rates.
That's O.K. with Howard Jonas. His business plan hinges on only gradual reductions in pricing by the overseas phone companies. When France Telecom cut its rates so deeply this winter, IDT pulled out of the French market because its price edge had become too slim. Recognizing that his window of opportunity is gradually closing, Jonas wants to get IDT established well enough abroad that when new forms of competition such as leased-line resale come about, he'll have a sales network in place to offer them.
For now, at least, business seems good. While Jonas won't discuss IDT's revenue, he says he expects to turn profitable by the summer. To accommodate growth, he's installing hundreds of his machines in a 16,000-square-foot building in Hackensack, N.J., that used to be occupied by a company with a slightly older heritage: American Telephone & Telegraph Co. To the FCC's Sikes, the success of IDT's somewhat kludgy process for bypassing foreign carriers speaks volumes about the state of the industry. "People will do a lot of things to avoid exorbitant rates," says Sikes. Including, it seems, making their global phone connections through Hackensack.