Howard Jonas Speaks!
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IDT Heralds Release of its First White Paper
HACKENSACK, N.J.--(BUSINESS WIRE)--Aug. 18, 1999--
Highlights Significant Trends Within Telecom; Articulates Underpinnings of IDT's Strategic Direction
IDT Corp. (NASDAQ: IDTC) has released today the first in a series of White Papers concerning changes in the telecommunications industry and how IDT is addressing these changes.
In these white papers, IDT intends to offer its views on the shifting paradigm within telecommunications, and how the Company's strategic direction is driven by these trends.
"The World Needs a Carrier's Carrier," released today, explains how the proliferation of retail international carriers will fuel demand for a carrier's carrier like IDT and how, notwithstanding, many companies are leaving or de-emphasizing their involvement in this industry. IDT intends to dispel misconceptions about the nature of the carrier's carrier industry and to describe the thoughts underlying its commitment to the business.
These White Papers will be released at regular intervals over the next several months. Future topics will include technology and changing demographics, the effects of optical fiber on the power structure in the telecommunications industry, the ascendance of the entrepreneurial and cooperative business model, and the changes that high-speed data will bring to the industry.
White Paper Number One, entitled "The World Needs a Carrier's Carrier," is attached to this release.
About the Company
IDT is a leading emerging multinational carrier that combines its position as an international telecommunications operator, its experience as an Internet service provider and its leading position in Internet telephony to provide a broad range of telecommunications services to its wholesale and retail customers worldwide. The Company provides its customers with integrated and competitively priced international and domestic long distance, prepaid calling cards, and Internet access.
Except for historical information, all of the expectations and assumptions contained in the foregoing are forward-looking statements involving risks and uncertainties. These statements refer to our plans to implement our growth strategy, improve our financial performance, expand our infrastructure, develop new products and services, expand our customer base and enter international markets. The forward looking statements also include our expectations concerning factors affecting the markets for our products, including the demand for long distance telecommunications, and Internet access services. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results that we anticipate. These risks and uncertainties include, but are not limited to, those risks discussed in this release. In addition to the factors specifically noted in the forward looking statements, other important factors that could result in those differences include (a) general economic conditions in the telecommunications and Internet markets, including inflation, recession, interest rates, and other economic factors; (b) casualty to or other disruption of our facilities and operations; and (c) other factors that generally affect the business of telecommunications, Internet and other communications companies. We assume no obligation to update these forward looking statements or to update the reasons actual results could differ materially from the results anticipated in the forward looking statements.
IDT White Paper I
The World Needs a Carrier's Carrier
By Howard Jonas, Chairman and CEO of IDT Corporation
The following White Paper is the first of a series of white papers produced by IDT in order to elucidate IDT's vision of significant trends within the telecommunications industry and how the Company has addressed those trends.
One of the businesses on which IDT has focused its efforts and investments is the construction and maintenance of an international fiber-optic network for providing wholesale telecommunications services. Despite the fact that this business is currently out of favor in the stock market, IDT believes that this business will experience explosive growth and therefore presents tremendous potential. In this white paper, IDT presents a synopsis of its views regarding this potential.
A. The Historical Backdrop
Long distance telephone service has historically been provided by monopolies(1). Each country has had its national, often government-controlled, long distance carrier. A citizen of Spain would have to place all long distance calls through Telefonica and a citizen of France would place all long distance calls through France Telecom. As recently as 1990, the only exceptions to this national monopoly rule were the oligopolies found in the United Kingdom - British Telecom and Cable & Wireless (Mercury Communications), in Japan - KDD, IDC, and Japan Telecom, and in the United States - AT&T, MCI, and Sprint(2). Any differences between the market conditions under the monopolies and under the oligopolies were slight at best.
Because of the national carrier monopolies, all countries experienced the natural effects of monopolies in their long distance telephone service: artificially high prices and inefficient allocation of resources(3). Even as advances in technology permitted carriers to lower prices, prices remained high(4). In addition, even though cooperation among countries would permit long distance carriers to share connections with distant countries, the national monopolies did not do this. Instead, virtually each country established direct telephone connections with every other country - whether or not there was sufficient demand to justify the expense(5). In fact, virtually every telephone company in the world established international connections with virtually every other telephone company in the world.
B. The Seeds of Change
In recent years, governments have refused to tolerate monopoly control of international telecommunications services, and newcomers have been permitted to enter the market to compete with the former monopolists(6). Even with the entry of competitors, change is slow and monopoly pricing remains in effect in some parts of the market(7). Furthermore, whether legal or practical, the restrictions on competition in providing infrastructure have been the most difficult to eradicate(8). The nature of the entry into the international telecommunications market, therefore, has been dictated by the fact that the former monopolists or incumbents controlled the infrastructure(9). Competition by the entrants generally comprised reselling the incumbents' services.
This is an arrangement that satisfies neither the incumbent nor the entrant. Although the incumbent may enjoy the revenues generated from reselling, it does not want competition, and thus makes access by the entrants as restrictive and expensive as possible(10). The entrants, for their part, do not want to be purchasers of their competitors' expensive product. Neither are the entrants in a position to build their own infrastructure. The entrants are competing with former monopolists, whose brand names are synonymous with long distance telephone service. The entrants' capital is necessarily dedicated to marketing their own brands and to building local infrastructure.
C. What the Market Now Demands
At this juncture in the development of the international telecommunications industry, what the market demands is a carrier's carrier - a firm that is capable of constructing its own long distance network and has little interest in marketing its services to consumers(11). A carrier's carrier builds an international telecommunications network merely to serve entrants in the retail market(12). A carrier's carrier can offer rates that are much lower than the former monopolists would ever consider offering to the entrants.
The availability of low long distance rates to market entrants enables them to introduce true competition in the retail long distance market. Such competition can be expected to reverse the effects of monopolization of the telecommunications markets. The providers of telecommunications services will operate in an increasingly efficient and rational manner, and the prices of the services will decrease significantly(13).
One aspect of this new rationality in the industry relates to the construction of infrastructure. Because of the low prices available from the carrier's carrier, the market entrant has little incentive to build its own network. Its capital is better allocated to marketing its product to consumers(14). To the extent that the market entrant has excess capital to invest, it will likely find that investment in its retail business will bring higher margins than will construction of an international network. As a result, there are now hundreds if not thousands of new retailers of international telecommunications services, few if any of which have their own networks. These market entrants need a carrier's carrier.
Furthermore, given the low prices available, even monopolists providing service in small markets will find that operating their own worldwide network is unduly expensive. Unlike most monopolists, a carrier's carrier can fill its network with calls originating in many countries, and is not bound by accounting rates. For these reasons, monopolists too will find that in many situations the most cost effective solution is to employ a carrier's carrier.
Market entrants, once they have a low-cost supply of long distance service provided by a carrier's carrier, will be able to charge less than the incumbents charge. Because of their size, their corporate culture, and their prior glory, the incumbents are unlikely ever to be truly competitive in their pricing(15). Already, the incumbents' shares of the international calls originating in their markets have seen a decline. For example, "In 1991, smaller carriers reported 1.6% of the underlying U.S. [international telephone] billed service minutes. These carriers now [in August 1998] account for 8.3% of underlying service minutes. Since 1991, these carriers show a 50% annual growth in U.S. billed facilities-based and facilities-resale minutes, compared with 19% annual growth for the three largest carriers."(16) In 1991 British Telecom and Mercury handled 100% of the outgoing international calls in the United Kingdom. This changed to 86.8% in 1996(17). In light of this, one can expect the market share of the incumbents to fall to 40% of the markets over the next 15 years. We anticipate that carrier's carriers will provide 60% of the international service.
D. IDT
We are witness to the wholesale shift of worldwide telecommunications services away from the incumbents and toward the carrier's carriers. In it we see the birth of a new model for the industry. In this new model, the carrier's carrier will become dominant in providing international telecommunications network facilities and will disrupt the competitive environment in which the incumbents gained prominence. The birth pangs will be the pain inflicted by the currently large and powerful incumbents, in furtherance of their business interests, upon the upstart carrier's carriers. The incumbents will drop rates and reinforce the recognition of their brands in a barrage of advertisements. They will do their best to promote fetal distress, and they will be successful to some extent. Some upstart carrier's carriers - like Telegroup(18) - will disappear in the course of the birthing process. Almost all of the other EMCs (emerging multinational carriers), like Pacific Gateway(19) and RSL(20), have announced their decisions to de-emphasize their carrier's carrier businesses.
IDT will not despair. We recognize that birth is always painful. IDT has made a commitment to being a carrier's carrier, and it will not waiver in that commitment. This commitment has resulted in explosive growth in our carrier division (38% over the last quarter, 70% over the last year)(21), and we expect robust growth to continue into the future. IDT will be there to provide worldwide telecommunications services to the market entrants as well as to the former monopolists, all of whom will be required to focus their resources on marketing and the maintenance of brand name recognition.
IDT also recognizes that the process has only barely begun. The challenge to the incumbents has not yet really begun in earnest. The strongest challenge in this country will not materialize until the regional Bell operating companies are all free to compete in the market for long distance telephone service. When this occurs, IDT, which already provides long distance telecommunications services on behalf of many regional Bell operating companies, will enjoy an even more central position in the industry.
1 See Dimitri Ypsilanti, "International Telecommunications: A Review of Issues and Developments," (OECD, 1995) at p. 4; Sam Paltridge, "Building Infrastructure Capacity for Electronic Commerce Leased Line Developments and Pricing," (OECD, June 14, 1999) at p. 16.
2 See Pekka Tarjanne, "How Would We Recognise a Competitive Telecommunications Market If We Saw One?" (ITU, 1998) at p. 2. New Zealand may be another exception. See Telegeography 1997/98: Global Telecommunications Traffic Statistics and Commentary at 92. Of course, MCI and Sprint are, from AT&T's perspective, recent market entrants. From a broader perspective, however, they are now oligopolists, not upstarts.
3 See Dimitri Ypsilanti, "International Telecommunications: A Review of Issues and Developments," (OECD, 1995) at p. 9; Sam Paltridge, "Building Infrastructure Capacity for Electronic Commerce Leased Line Developments and Pricing," (OECD, June 14, 1999) at p. 16.
4 See Sam Paltridge, "Building Infrastructure Capacity for Electronic Commerce Leased Line Developments and Pricing," (OECD, June 14, 1999) at p. 7, stating that " . . . leased lines are priced at excessive amounts due to infrastructure providers, with legal monopolies or dominant market power, extracting monopoly rents."
5 Kenneth Cukier, "Prices May Halve as Europe's Bandwidth Booms," Communications Week International, October 19, 1998. The article notes that "telecoms development mirrored the political geography: Small, fragmented projects overseen by national carriers, but few continent-wide initiatives."
6 See Dimitri Ypsilanti, "International Telecommunications: A Review of Issues and Developments," (OECD, 1995) at p. 4; Sam Paltridge, "Building Infrastructure Capacity for Electronic Commerce Leased Line Developments and Pricing," (OECD, June 14, 1999) at p. 17.
7 Jennifer L. Schenker, "Down to the Wire: Businesses in Europe Say Inflated Telephone Line Charges Make it Difficult to Remain Competitive," Time, Vol. 153, No. 5 (international edition, February 8, 1999). The article quotes Phil Sayer, global communications director at Reuters Limited, stating that unlike the pricing of dedicated phone lines between major European capitals, "If you need to do business between Oxford and Lille you've got a problem - the former monopolies will charge whatever they choose."
8 "The Benefits of Telecommunications Infrastructure Competition," a recommendation of the OECD Committee for Information, Computer and Communications Policy (March 14, 1994).
9 See Dimitri Ypsilanti, "International Telecommunications: A Review of Issues and Developments," (OECD, 1995) at p. 19.
10 See Sam Paltridge, "Building Infrastructure Capacity for Electronic Commerce Leased Line Developments and Pricing," (OECD, June 14, 1999) at p. 20.
11 See Sam Paltridge, "Building Infrastructure Capacity for Electronic Commerce Leased Line Developments and Pricing," (OECD, June 14, 1999) at p. 7, which states, " . . . a new type of infrastructure provider is emerging, which aims to specialise in the construction and sale of wholesale capacity. These entities are sometimes referred to as carrier's carriers."
12 The demand for international service has grown significantly. Between 1980 and 1997, the number of calls made from the United States to other countries increased from 200 million to 4.2 billion. "Trends in Telephone Service," (FCC, February 1999) at p. 7-1.
13 " . . . the future pricing and marketing of telecommunication capacity is likely to be radically different from the past. This means that telecommunication carriers can no longer manage supply (i.e. only placing a certain amount of available capacity on the market) and demand (i.e. by charging monopoly prices). In those markets where there are multiple suppliers, the buying and selling of telecommunication capacity is coming to resemble the market for any other commodity." Sam Paltridge, "Building Infrastructure Capacity for Electronic Commerce Leased Line Developments and Pricing," (OECD, June 14, 1999), p. 15. There has already been a decline of 50% in average billing per minute by United States carriers for international calls between 1980 and 1997. "Trends in Telephone Service," (FCC, February 1999) at p. 7-1.
14 Furthermore, even multinational corporations with tremendous telecommunications services needs and seeking to rid themselves of inflated prices from incumbents will generally prefer to employ a carrier rather than inject themselves into the network business. "The Benefits of Telecommunications Infrastructure Competition," a recommendation of the OECD Committee for Information, Computer and Communications Policy (March 14, 1994).
15 As an example, Dr. Sam Paltridge noted the following. "In October 1998 the Global Communications Director for Reuters said, at a Telecommunication Managers Association workshop, that the best available price their company could obtain from BT and France Telecom for a 2Mbit/s circuit price between London and Paris, including tails, was USD 20,000. By way of contrast the speaker pointed to the cost of purchasing capacity from Viatel's new European network (CIRCE) in which the quoted the cost of a 2Mbit/s circuit at the STM-1 rate was USD 587 (for an overall cost of USD 1,022 including tail circuits from Colt. The main point, for Reuters as a major user of capacity supporting electronic commerce, was that telecommunication carriers were charging users 20 times the wholesale cost of the underlying infrastructure." Sam Paltridge, "Building Infrastructure Capacity for Electronic Commerce Leased Line Developments and Pricing," (OECD, June 14, 1999) at p. 19.
16 Linda Blake, Jim Lande, "Trends in the U.S. International Telecommunications Industry," (FCC, August 1998) at p. 16. Seen from a different perspective, whereas in 1990 AT&T, MCI, and Sprint handled 99.4% of the outgoing international calls in the United States, in 1996 they (including WorldCom) handled 96.3%. Telegeography 1997/98: Global Telecommunications Traffic Statistics and Commentary at 92. In 1997, AT&T, MCI WorldCom, and Sprint handled approximately 95% of the facilities-based international service billed. "Trends in Telephone Service," (FCC, February 1999) at p. 7-1.
17 Telegeography 1997/98: Global Telecommunications Traffic Statistics and Commentary at 92.
18 Telegroup, Inc. filed for bankruptcy protection in the U.S. Bankruptcy Court for the District of New Jersey on February 11, 1999. Telegroup, Inc. Form 8-K, dated March 31, 1999. Substantially all of its assets were sold to Primus Telecommunications Group, Inc. on July 1, 1999. "Primus Telecommunications Closes Acquisition of the Retail Business and Assets of Telegroup," (Business Wire July 1, 1999).
19 In a press release over PR Newswire dated July 22, 1999, Pacific Gateway Exchange, Inc. reported that it sold some capacity on its network. The company noted that "The sale of a small portion of the Company's global network is in line with the Company's strategy to utilize its network for the demand that is expected from the Internet and high bandwidth markets. These transactions reflect the Company's success in implementing its diversification strategy and its progress in becoming a provider of Internet and high bandwidth services to the global market."
20 In a press release dated July 26, 1999, RSL Communications, Ltd. announced that "In the United States, we have deliberately slowed the growth and are reviewing our business mix. Going forward, we will put our focus on the highly profitable retail segment of our Westinghouse Communications subsidiary with less emphasis on prepaid card and wholesale."
21 For the quarter ending April 30, 1999, IDT reported wholesale carrier service revenues of $75.4 million as compared with $54.8 million for the quarter ending January 31, 1999 and $44.4 million for the quarter ending April 30, 1998.
This White Paper is the first in a series of white papers by IDT on its role in the rapidly changing worldwide telecommunications industry. Future white papers will address technology and changing demographics, the effects of optical fiber on the power structure in the telecommunications industry, the ascendance of the entrepreneurial and cooperative business model, and the changes that high-speed data will bring.
CONTACT: IDT, Hackensack
Larry Wiseman, IDT Public Relations, 201/928-4452
Mary Jennings, IDT Investor Relations, 201/928-2975
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