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THE CUTTING EDGE: FOCUS ON TECHNOLOGY | SPECIAL REPORT:
INTERNET TELEPHONY

In Latin America, Dominant Players Protect Their Turf

May 29, 2000|CHRIS KRAUL | TIMES STAFF WRITER

MEXICO CITY — Long-distance calls over the Internet may be an idea whose time has come, but the reality will take a while to arrive in Latin America, where big players such as Telefonos de Mexico are resisting the technology as a threat to their market dominance.

Latin America is lagging most of the rest of the world in embracing a future that as early as 2005 could see the majority of global long-distance calls moving as packeted "envelopes" of digital data similar to Internet transmissions, instead of over dedicated circuitry and switching as is the case now.

Like it or not, Telmex and other former state-owned phone systems are already losing enormous amounts of long-distance revenue to the Internet. Telmex admits to losses of $200 million, or 15% of its international revenue, to "bypass" operators in the United States who often use the Internet data "packeting" to deliver calls to Mexico at half the cost or less of conventional calls.

The savings are possible because the infrastructure that Internet-based calling requires costs a fraction of the investment of traditional telephony's circuitry and switching. It is significantly more efficient in volume and speed as well.

More important, the Internet formatting of voice data allows new competitors to leapfrog established companies saddled with investments in expensive, outdated infrastructure, said William Ingram, chief executive of Nuera Communications, a San Diego-based manufacturer of voice-over-Internet hardware. Nuera's customers include WorldCom, China Telecom and BellSouth.

That warp-speed evolution is not great news for companies such as Telmex, the former state-owned monopoly that owns 95% of Mexico's telephone grid and controls 70% of the long-distance market. Nor is it happy tidings for Spain's Telefonica, which in recent years has paid hundreds of millions of dollars for several privatized, traditional phone systems in Latin America.

"In environments where there is limited competition and where the incumbent operator has most of the market share and owns the legacy network, they don't have a lot of incentive or encouragement to embrace the new technology," said Jamila Xible, a telecommunications market analyst with Yankee Group in Boston.

Arturo Elias Ayub, Telmex's director of new commercial technologies, said the company's reluctance to embrace voice over Internet is more a customer service move than a defensive one.

"Long-distance service is a commodity today. The price is going to get lower and lower over the years because of voice over Internet. But today we think the quality is not good enough to substitute for traditional phone service, although it is going to be," Ayub said.

Voice over the Internet is a high-speed train that Latin countries must either climb aboard or risk being left behind, said Eloisa Regalado, Latin American vice president for Concert, a joint venture of AT&T and British Telecom. Concert so far has been largely unsuccessful in wooing Latin players in joining its global network.

Concert needs Telmex if it is to offer its customers broad access to Mexico. "You want the biggest customer base you can get in the individual countries," Regalado said. Ayub countered by saying Concert didn't need Telmex and Telmex didn't need Concert.

With just a few exceptions, such as El Salvador and Chile, no major Latin American country is "licensing long-distance voice use over the Internet or actively using the Internet to make calls," said Juan Fernandez, senior industry analyst at Gartner/Dataquest in San Jose.

Internet technology's rapid evolution puts Latin government regulators in the difficult position of wanting to promote the latest technology to boost development and yet protect investors such as Telefonica who have made huge outlays and who need to recoup their costs, said Chris Neal, Latin American director at Pyramid Research in Cambridge, Mass.

To place bypass calls, U.S. callers to Mexico must first dial a carrier code that routes the call to a "gateway," or black box, that converts voice into packets of data resembling what moves over the Internet. The conversation is then delivered as data to Mexico City, Guadalajara or whatever the destination may be, then reconverted to voice and sent out as a local call, with Telmex none the wiser.

Such a call enables callers to avoid having Telmex or other host carriers terminate the call, a service for which Telmex charges 19 cents a minute on top of what the U.S. long-distance carrier charges. That's why bypass calls to Mexico can cost as little as 3 cents a minute in total.

The calls are often technically illegal in Mexico's view, said Fernandez, but the Federal Communications Commission has up to now looked the other way. "There's is no enforcement on the U.S. side of the border," he said.

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