The Rules Have Changed

By Khali Henderson

Posted: 10/1998

The Rules Have Changed

By Khali Henderson

The international wholesale buy-sell game is being changed by PTT players,
plummenting prices and inconsitant quality.

It used to be that a U.S. reseller knew who he was buying international termination
from. Today, it’s not so clear. International long distance capacity is often resold three
and four layers from its "source." Confusing matters further, the source isn’t
necessarily a Tier One provider. These days it can be a small, emerging multinational
carrier (EMC) with a single direct operating agreement with a PTT in one of the world’s
230 countries. Or, it could be the PTT itself, bringing the mountain to Mohammed, so to
speak.

Big and small, everyone’s buying from–and selling to–everyone else. This
spontaneously occurring trading environment quickly spawned not only a rate war, but also
the emergence of formalized exchanges that allow carriers to buy and sell international
capacity as if it were a commodity. (See PHONE+, August 1998.) On the issue of
"commoditization," there hangs debate over the widely disparate service levels
being hocked on the open market–from submarine fiber optic cables to leaky private branch
exchanges (PBXs). Finding the right balance between quality and price for the intended
customer, then, has become the game.

Image: Frame Relay Network

As with most sport, the international wholesale buy-sell game began to change
fundamentally with the addition of new competitors. Coming on to the scene in the
mid-’90s, EMCs began forming international gateways in competition with the Big Three
international carriers–AT&T Corp., MCI Com-munications Corp. and Sprint
Communications Co. These companies not only had resale transit purchased from the Big
Three, but they also signed their own direct operating agreements with foreign PTTs and
became signatories and co-owners of transoceanic cables and satellites. Many of these
companies, such as Star Telecommunica-tions Inc. and Pacific Gateway Exchange Ltd.,
emerged as wholesale only while others, such as Tele-group Inc. and Startec Global
Communication Corp., began with a retail focus and, later, began to wholesale excess
capacity.

In the interests of reducing costs and improving quality, these carriers are scrambling
to amass as many direct operating agreements with foreign PTTs as possible. Startec, for
example, has 42 directs, 10 new ones since January of this year. The company’s goal is to
achieve 30 percent on-network routes. Telegroup has only two directs at this time, but
also aggressively is seeking others. In addition to London and Tokyo, the company is in
negotiations for agreements with operators in Buenos Aires, Ecuador, and Jamaica.

While some new carriers are in the midst of negotiating direct operating agreements on
foreign soil, others are finding opportunity a bit closer to home. "The PTTs are
contacting us from overseas looking to put facilities in New York. Why would we want to
buy a direct circuit when they are going to meet us at 60 Hudson?" said James Milana,
chief operating officer for SynergetEx, the New York-based carrier owned in part by the
60-plus member consortium of small carriers known as the international Telecom Buying
Alliance (TBA). "This dynamic will provide the rate structures and competitive
advantage the alliance needs."

Image: Summary of Growth in Private Line and Data Revenues
(1994-2000)

Enabled by relaxed regulations, the big and old PTTs now are the "new"
players in the international wholesale market. Following the 1997 World Trade Organization
(WTO) agreement, the Federal Communica-tions Commission (FCC) issued an order easing
requirements for foreign participation in the U.S. telecom market. Existing rules that
required foreign applicants to pass an effective competitive opportunities (ECO) test
proving their home market offered similar opportunities to U.S. companies were replaced by
an open-entry policy for all operators from any of the 68 other WTO member countries. In
the three months since the new rules took effect on Feb. 9, the FCC International Bureau
granted 26 applications from foreign telecommunications carriers seeking entry into the
U.S. market. Thirteen were from carriers that possess sufficient market power in their
homelands so as to have required application of the ECO test under the old rules. (See
lists.)

U.S.-based international carriers say PTT entrants do not pose an immediate threat in
part because of their monopoly attitude and the equalizing effect of being on foreign
soil.

"[PTTs] have the monopoly attitude that people will use them because of who they
are, not because of the rate [they offer]. They are strong [competitors] to their country,
but just like everybody else to the other countries," says Gary Eisenberger, director
of North American carrier sales for Telegroup Inc., Fairfield, Iowa.

Nevertheless, many international carriers, including Telegroup, are striking agreements
with PTTs, making them strategic partners and taking advantage of their direct routes
through resale or reciprocal agreements. KDD America, for example, set up shop in the
United States this year with switching facilities in Manhattan and soon to be in Los
Angeles. The company, the subsidiary of Kokusai Denshin Denwa Co. Ltd., the Japanese
international long distance carrier owned in part by Nippon Telephone and Telegraph (NTT),
is leveraging its access to submarine fiber optic cables and satellite communications
facilities to complete strategic agreements with U.S. carriers and resellers.

"We have contracted with several companies that have positioned us as a strategic
account," says Richard Martinez, KDD America’s vice president-wholesale.
"Instead of selling their arbitrage to us, they are selling us their cable
facilities, their transit routes or PTT directs."

Through these arrangements, Martinez says KDD America is building an international long
distance portfolio that is 55 percent on-net. In contrast, he says most international
wholesalers are only able to offer on-net pricing for 10 percent to 20 percent of their
routes.

Other PTTs, such as Belgacom, Swisscom and TeleDanmark, also have set up offices in the
United States. Like KDD America, Swisscom North America (SCNA) is engaging in selling and
buying with U.S. international service providers. SCNA recently installed switching
facilities in New York City and has acquired multiple STM-1 (155 megabits per second, or
mbps) circuits on the self-healing SDH Atlantic Crossing 1 cable. In conjunction, the
carrier announced June 30 the availability of World Link, a wholesale international voice
and fax termination service offering U.S. carriers routes where they have no direct
connections and, where they do, the ability to reduce network costs and better manage peak
and overflow call volumes. Other products will include international private lines,
managed bandwidth service, asynchronous transfer mode (ATM) and frame relay. John
Williamson, an SCNA spokesman, says the route is carrying wholesale traffic with
termination to Switzerland, Germany, France and Austria.

New entrant Nexxt Millennium Carrier Services Corp., a wholly owned subsidiary of New
Millennium Communications Corp., was formed in August principally to provide wholesale
international services through partnerships with PTTs. President James K. Mellon, a
25-year veteran of AT&T’s international businesses, says the breakdown in the
bilateral accounting rate regime is creating an opportunity for carriers to partner with
PTTs that have not yet joined an international alliance.

"The key [to being successful in the international wholesale marketplace] is in
establishing partners," Mellon says. "You’ll never meet the lowest price, so
throughput becomes very important."

Mellon’s observation cuts to the heart of the larger dynamic impacting the
international wholesale marketplace. As retail prices are forced downward, quality
concerns will move to the forefront as end user customers will become increasingly
reluctant to trade slim savings for poor post-dial delay (PDD) and answer seizure rates
(ASR).

KDD America’s Martinez says, "What we’ve done [when negotiating carrier
agreements] is to identify routes that have superior quality through sub cable facilities
and say, ‘Look, you are going to get good-quality PDD and ASR through this route, and
although it may not be the least-cost route to this country, … you’ll probably end up
using it anyway because of the quality.’"

Depending on the nature of the buyers’ customer base, the issue of quality can be
significant, says Telegroup’s Eisenberger. "Prepaid callers to Mexico or India may
not care about quality because they just want the cheap minute," he says. In
contrast, Telegroup’s callback customers are not going to tolerate static or poor PDD and
ASR. Since the company’s wholesale traffic rides its retail network, its resellers are
assured of a high-quality connection, he says.

With that quality comes a higher rate, however. "Our wholesale rate is sometimes
too high [for certain resellers]. They put us in routing and we end up with the traffic
because the others didn’t work," he says. "When the call goes through, you’ll
get the traffic."

Cameron Harris, regional manager for Startec’s global carrier services, agrees.
"We have the best rates to Cuba, [for example] but no one is using it because it’s
crap," he says, explaining that the route has 10:1 voice compression and uses an
antiquated local access system.

At the same time, Harris and other carrier sales executives say that rates remain a
significant factor. They only will continue to play a large role as more and more carriers
establish direct connections and they become "overprovisioned." Such is the case
for routes to Germany, Japan and the United Kingdom where an abundance of directs has
resulted in spiraling wholesale prices into pennies per minute.

The trick to winning the buy-sell game, then, is learning to buy well by staying on top
of the going rates and which carriers have direct agreements, and combining those with a
dose of healthy skepticism. Says Eisenberger, "If the rate to India is in the upper
50 cents per minute, how can someone sell it for 39 cents?"

Khali Henderson is Editor-in-Chief of PHONE+ Magazine.