Wired
Fairfield, Iowa is home to some of the wily callback companies that are now turning themselves into virtual phone companies to battle telco giants.
September 1997
The plane lands without incident at Chicago’s teeming O’Hare International Airport, where everyone’s on a mission, going somewhere, doing something. The industrially correct word for such an airport is hub, but it’s a turnstile more than anything else, flinging us to our diverse destinations: this one goes to Los Angeles, that one to Paris, another to Caracas. Me? I’m going to Iowa. I board a half-empty connecting flight, and an hour later the plane lands in Cedar Rapids. It’s the only passenger jet in sight, and it will not stay for long–this plane has places to go.
I get in my rental car and head away from Cedar Rapids–far away. I drive a few miles on Interstate 380 and peel off at Route 1, which has one lane going each way–and if I make the mistake of swerving just a tiny bit, I will end up flattened like a bug against the grill of an oncoming 18-wheeler. This is rural territory. There are cornfields all around, an occasional farmhouse with a Ford pickup in front, and modest crossroads sporting the likes of a Dairy Queen and a gas station where the attendant knows most everyone. Traffic congestion is caused not by a scrum of horn-blowing lunatics, but by lone tractors putt-putting along the road, the farmers waving at you as you pass. I drive for an hour, until I reach a marquee-style sign:
Now Showing
Fairfield
A Cast of 10,000 as Themselves
A Story About Excellence
in Community Living
I have reached my destination, but this is all a bit strange. I am working on a high tech story, yet I am not in Silicon Valley, nor in Manhattan’s Silicon Alley, nor in Seattle or Boston or any city associated with high tech. I am not even in a city, not even close to one, and my hotel is on a dirt road. The companies I seek are located on patches of earth that until recently were cornfields, and that ground–upon which the future of global telecommunications is being sculpted–is surrounded by cornfield upon cornfield upon cornfield.
I have come to Fairfield to interview the high tech entrepreneurs behind Telegroup and USA Global Link, telecommunications firms whose wily use of callback technology helped break the spine of the world’s telephone monopolies. The upshot may be as earthshaking in the US$600 billion global telecom market as the breakup of Ma Bell was in the US market. Consider this: The average cost of an international phone call is poised to drop as much as 80 percent over the next few years. To anyone who has made an international call and cursed its exorbitant cost, these guys are heroes. Their reward has been considerable so far, leading to annual salaries in excess of half a million dollars for some–and the prospect of greater riches ahead.
It started quite modestly a few years back, when callback companies arrived on the scene using a high tech trick to capitalize on the fact that foreign telephone monopolies charge many times more for international calls than American companies such as AT&T and MCI. The trick consisted of setting up phone switches in the States that customers would call from abroad. Callers would hang up after the first ring, avoiding any charge, and a phone switch would call them back instantly, connecting them to a stateside phone line. The customers then dialed their calls on the American line, incurring reasonable US rates rather than exorbitant rates charged by the foreign monopolies.
Telegroup, which grew from practically nothing a few years ago into a firm that raked in $213 million in revenues last year, just went public, is valued at about $300 million, and aims to evolve into a global phone company offering a full range of services. A few cornfields away, Global Link aims for a similar transition and has unveiled grandiose plans to build an Internet-based phone system. If Telegroup or Global Link stumble during their transitions, they’re telecom roadkill. Splat. If they stay on their feet, they’re players in an explosion of riches in the warp-speed world of global telephony.
Yes, Fairfield is hot these days. The locals call it Silicorn Valley.
Just prior to my visit, Telegroup had opened a new headquarters building, an attractive structure that stands out amid the area’s grain silos because it’s topped with Buddhist-style spires. Yes, it looks a bit odd, and it makes you wonder. Staff is still feeling its way around the place when I visit, and workers rumble down the corridors girded with tool belts and wielding power drills, providing low tech solutions for a high tech company. The company has that unmistakable Silicon Valley feel–the casual dress, the sea of young faces, the absence of corporate rigidity, the we-are-building-a-new-world atmosphere.
I head toward the office of Fred Gratzon, the wizard of this Oz. As chair of Telegroup, he pulled down $850,000 in salary and bonuses last year and owns a big chunk of the firm. His clothes are Eddie Bauer-ish, he wears leather slippers, and he has the endearing manner of an ice-cream vendor–which he used to be. Sales tags still hang from underneath his office chairs, and a picture of a familiar-looking Indian guru is propped against a wall. There’s something rather special about this office, but a first-time visitor might need some time to piece it together. Because Telegroup’s growth has been so fast and hectic, Gratzon hasn’t had time to arrange the stuff in his new office, and I jokingly ask how long it will be before he needs to move into a bigger one.”No more than a year,” he replies, and he is not fooling around. “We play seriously, we play to win, and we’ll be successful. But one of the secrets of our success is to not take it so seriously.” There’s a Zen-like contradiction in him and in his company, an unusual calmness/earnestness. It has something to do with those spires atop the roof and the picture of the guru on his wall, but that’s getting ahead of the story.
Gratzon has had the sort of business career that would be defined in a résumé as “wide ranging.” More than a decade ago he set up the Great Midwestern Ice Cream Company, which did quite well for a while, earning a couple of culinary prizes–and Nancy Reagan even invited him to cater a White House picnic after she tasted his product. Gratzon took on new investors, but they booted him from the firm in 1988, leaving him to collect unemployment checks and worry about how to support his family in Fairfield.
This guy is no farmer, so he began fiddling around in the phone industry, buying blocks of discounted long distance time from AT&T and reselling bits and pieces to friends. Working out of a spare room of his house, he teamed up with fellow Fairfield resident Cliff Rees, a successful oil trader with an arbitrageur’s acute, go-for-the-kill mind-set. Thus was Telegroup born.
Gratzon and Rees stumbled into callback in 1992 after reading a magazine article about the infant technology.”Callback is an arbitrage play,” Rees says calmly, as though remarking on the weather. His office boasts a number of unusual artifacts, including two samurai swords and his grandfather’s cavalry blade on a display case, a wall-sized world map, and a statuette of Lakshmi, the Hindu goddess of wealth. Rees, president and CEO of Telegroup, explains arbitrage as finding price imbalances and exploiting them with whatever weapons you have–callback technology, for instance.
In the early 1990s, callback’s commercial potential was vast. The new callback firms in Iowa and other states aggressively marketed it and underpriced the big guys by margins that were tempting for individuals and small companies–the sort of customers who feel the pain of high phone rates more acutely than large firms (although the US State Department, the United Nations, and the World Bank reportedly used callback). This ignited a somewhat amusing yet momentous war in which foreign telephone monopolies tried to crush the callback upstarts. They failed, and the world will never be the same again.
Estimates of the magnitude of today’s callback market vary, but most guesses converge at about $1.5 billion in 1996, and the market is believed to have doubled annually since 1992. It didn’t take long for foreign, government-run telcos–known in the industry by the initials PTT (Post, Telephone, and Telegraph)–to realize that they were losing valuable business and that the hemorrhaging would worsen unless something was done.
Basically, international calls have been a glorious cash cow for the PTTs since the dawn of telecom time; until recently, the PTTs faced no competitive pressures and could charge whatever infernal rate they wanted. It was like harvesting cash. A call from Buenos Aires to Miami, for example, would cost $5-$6 per minute for a minimum of three minutes. Ditto for most other countries; rates varied but almost always bore little relation to the PTT’s cost of completing the call. They charged as much as they could get away with. It was a racket.
Things began changing in 1992 and 1993, when callback hit its stride. At the start, some PTTs were confused–they knew that callback firms were stealing their business but they didn’t quite understand how. One day, a Global Link salesperson in Spain got a visit from several officials of the Spanish PTT who–expecting a switching system of some sort–were surprised to find nothing more than a telephone and a fax machine. In fact, the switches were located in the US, and the salesperson was merely signing up customers for Global Link’s service, giving them the callback numbers in the US, and faxing their account information to headquarters in Iowa.
The PTTs–and the governments that operated them–got wise to the system and decided to crush it. A number of countries took legislative action–the Bahamian Parliament passed a law authorizing a $10,000 fine for anyone they caught using callback services ($20,000 and a two-year jail term for a second conviction), and 26 other countries have prohibited callback, according to a US government tally. The European Union, a bit more subtle, imposed a punitive value-added tax on callback firms. Most crucially, PTTs blocked telephone numbers used by callback firms; if you tried to dial a callback firm’s number in the US from, say, Paris or Jakarta, you’d get a busy signal.
Like clever mice outwitting fat cats, the callback firms prevailed by changing their numbers as soon as they were blocked. The PTTs were not amused. Instead of using a flyswatter, they took out a hammer and blocked three-digit exchanges within an area code–for example, every number in the 212 area code beginning with 864. The callback firms just laughed, changed their numbers to different exchanges, notified customers of the new numbers, and carried on. So then the PTTs blocked those exchanges, and, of course, the callback firms just hopped to other ones, and so on. In one case, a callback firm, hounded by Uruguay’s PTT, acquired the same three-digit exchange as Uruguay’s embassy in Washington, DC. The PTT was trumped: if it blocked the exchange, the country’s embassy would be cut off from the motherland.
Some PTTs–mostly in the Third World–abandoned the hammer and used the shotgun, blocking calls to entire area codes. This had two results: callback firms changed numbers to different area codes, and the PTTs were inundated with complaints from customers who couldn’t call their friends in, say, Seattle. The game became increasingly sophisticated. Realizing call blocking wasn’t working too well, some of the PTTs blocked tone dialing after calls from the US were connected, thus making it impossible for callback customers to use their touch-tone phones to communicate with the callback computer switches (or for traveling businesspeople to access their voicemail back home). The callback firms got around this barrier by using voice-recognition software to complete the calls: instead of dialing numbers, customers pronounced them aloud. Some firms used a particularly nifty device to turn the trick–a human operator. The cat-and-mouse permutations took on myriad forms, but in each case the mice came out on top.
“Some of the callback operators proved rather ingenious,” admits Jonathan Nadler, an attorney for Squire, Sanders & Dempsey, which represents a consortium of Central and South American telcos. He acknowledges that the economic incentive for callback firms is quite strong.”It’s classic arbitrage,” he said.”It doesn’t cost anything to be in the business. You buy a cheap switch, you make no contribution to the infrastructure, you don’t pay taxes in the country where you’re providing the service. It’s a great party as long as it lasts, with the one problem being that the party is not necessarily a legal one in a lot of countries.”
To make matters worse for the PTTs, late last year AT&T rolled out its own callback service, which was like a trusted ally defecting to the other side. For a variety of reasons, AT&T had long resisted callback technology and had even asked the FCC to crack down on callback firms operating in the US. (The agency refused.) For one, when a PTT transmits a call to America, it can channel the call through any US carrier line. It is supposed to do this proportionally–if AT&T transmits 60 percent of calls from the US, then it should get 60 percent of calls to the States. But if a PTT got miffed at AT&T for some reason–say, because AT&T was operating a callback service or failing to stand in the way of callback services–the PTT could reduce or threaten to reduce the calls channeled through AT&T lines, thus diminishing AT&T’s revenue. Even so, AT&T realized last year that in some markets callback’s pros outweigh the cons, and it switched sides. Despite the high tech wizardry of global telecommunications, sometimes business decisions boil down to a very old motto: If you can’t beat ’em, join ’em.
With the sky falling in, the foreign telcos began reacting in strange ways. Indosat, the international arm of Indonesia’s government-controlled PTT, invested Rp4.68 billion ($20 million) in Global Link last year, even though an Indonesian government decree bans the use of callback. Others emulated this schizophrenic strategy.”I remember going to trade conferences, and PTTs would ask, ‘What is call reorigination?'” says Joel Eisenberg, chair of Seattle-based International Telcom, one of the first callback firms.”Then, they asked how they stop it, and now they want to get on the gravy train.”
The PTTs weren’t just swatting at the callback firms–they had other forces to contend with. They were being pinched by international calling-card services, such as the one AT&T operates. The company’s service allows cardholders in foreign countries to get international AT&T lines by dialing local access numbers. The service is similar to callback, but the calls can be made only in countries where AT&T (or any company offering the service) has local access numbers, and the rates are generally more expensive than callback.
Then there was the growing practice of reselling international line time, which enabled competitors of the PTTs to purchase international line time from foreign carriers and offer international service at lower rates. Most powerfully, a trend toward privatization was creeping across the globe, which meant that foreign governments faced new pressure to open their markets to competition, especially in the hyperprotected realm of telecommunications.
The end of the ancien régime came on February 15 of this year, when 68 countries agreed in Geneva to open their telecommunications markets in 1998. The agreement, under the auspices of the World Trade Organization, marks a new era in telecommunications, according to industry and government officials. US Trade Representative Charlene Barshefsky predicts that the $600 billion global telecommunications market will double or treble in the next decade, and few experts dispute her estimate. The accord was reached under heavy pressure from the US government, which believes that liberalization will benefit lean-and-mean American firms because they know how to operate in a competitive environment.
US officials hammered away at their counterparts from Europe, Japan, and the Third World, warning them that if they didn’t agree to orderly deregulation, American telephone companies would begin their own disorderly deregulation like piranhas going for the kill.”The callback phenomenon is tremendously important in terms of where we got,” a US trade official told me.”It’s proof that technological improvements will defeat regulatory structure. It provided us with leverage.”
Nobody knows what’s going to happen next, except that tectonic shifts will occur as phone companies try to best each other with improved services. The cost of international calls is likely to drop like a rock in a dry well–Barshefsky predicts an 80 percent slide, from an average of $1 per minute to 20 cents within a few years. Rates would plummet even more dramatically if the telcos put the Net to commercial use, which seems inevitable though not imminent (the bandwidth isn’t there yet). If you doubt these predictions, just look at Sprint, which in April slashed weekend rates on calls to Great Britain to 10 cents a minute.
Services are likely to get not only cheaper, but better, as telcos offer integrated packages of voice, voicemail, conferencing, paging, cellular phones, fax, email, and Internet access. The idea is that you could access a sophisticated range of personalized phone services from anywhere in the world at the touch of a few buttons. For example, pick up a phone in Budapest or Buenos Aires, and you’ll be able to dial a local or toll free number and pick up your voicemail, get voice translations of email, faxes, or pager messages, and be able to respond to all of them on the spot–and, after that, call wherever you want at low prices and on flawless lines. No echoes, delays, or static. That’s the idea, at least.
But where does that leave our friends from Fairfield? You would think the game is over for callback firms, and in a sense it is. With phone rates dropping and a range of new services on the horizon, the incentive for customers to use a clunky callback service is fading fast. After all, why bother with the hassle of callback if, instead of saving $2 a minute, you’re just saving a few pennies? Telegroup, like Global Link and other callback firms, sees the handwriting on the wall.”Nothing lasts forever,” says Rees, Telegroup’s nonplussed president and CEO.”Any arbitrage situation always collapses sooner or later, whether it’s in the telecommunications market or the stock market or the gold market.” Telegroup’s new strategy is to try to accomplish globally what MCI achieved in the US market when deregulation got under way here–take advantage of a newly competitive environment to outhustle the 800-pound gorillas and do what they’re doing, only better and cheaper. The global telecom market is up for grabs, and Telegroup wants a piece of it.
The big players realize that they need to expand beyond national borders to prosper. Alliances and takeovers are being made at breakneck speed–the British Telecom/MCI merger is just the largest example. It’s no longer enough for Deutsche Telekom to have a stranglehold over the German market. In order to fulfill the needs of its corporate clients–the meat and potatoes of any major telecom’s revenue–it must provide worldwide services, so that a German company’s subsidiary in Japan or Australia has the same quality of service as the home office. The upshot is that the PTTs, some of which have been loosely allied with each other for years, are expected to broaden and deepen those alliances in the next few years while setting up their own switching facilities in foreign lands. Some will prosper; some certainly will wither.
Enter the small guys, the Telegroups and the Global Links. Telegroup has issued about $40 million in stock, and Global Link executives are traipsing across the globe touting their plans for an Internet-based phone system–a Holy Grail in the telecommunications world that many industry officials think is beyond Global Link’s reach. Telegroup and Global Link contend that they have the nimbleness to become”virtual” phone carriers offering a full range of global services without owning all the clunky hardware typically associated with industry behemoths–everything from ditchdiggers to transcontinental cables and geosynchronous satellites.
“There’s a lot of room for mixed players in the future,” says Eli Noam, a professor of economics at Columbia University and head of the Columbia Institute for Tele-Information. Noam defines mixed players as system integrators:”I’ve been arguing for years that they will become the telecom companies of the future. They will be doing a lot of bundling together of other people’s elements rather than providing their own. But of course everyone’s jumping on that, and whether it’s the small companies that will be able to play the global role is questionable to me.”
It’s not questionable to the small companies. Global Link executives say that their know-how is more important than their infrastructure and that the firm could be valued at $3 billion to $6 billion in the proposed share offering. Gratzon, Telegroup’s chairman, believes that the now-dominant PTTs are as dim-witted as IBM was in the early 1980s, when Apple emerged from nowhere with a better idea and the ability to move quickly.
“We have salespeople in more countries than just about any phone company in the world,” Gratzon says.”We have customers in more countries than just about any phone company in the world. It’s a good springboard.” But what about the, um, other guys?”The competition out there is inept when it comes to marketing, even locally, because they’re monopolies,” he says.”Their customer-service track record is abysmal. They clearly have zero competence in marketing over the border. Does France Telecom have any experience in Japan? I would say close to zero. Does Deutsche Telekom know the first thing about Brazil? No. All the phone companies in the world, with the exception of some Yanks, are very geocentric. Their networks are highly localized, they have no marketing infrastructure, they have no cultural experience, they have nothing. So the opportunity is huge.”
A word of caution is in order here, and the word is Viatel. This small phone company began with callback services and migrated to conventional international service, primarily in Europe. It went public late last year, promising to dance around the big guys and set up a global phone network similar in scope and strategy to the systems Telegroup, Global Link, and others in their class are planning. One of Viatel’s early shareholders was investor George Soros, a man known for having a golden touch. But Viatel has failed to live up to its projections, posting a $29 million loss in 1996 on revenue of $51 million. Its share price, $12 when it went public in October, has tumbled by nearly half. The truth is that although Telegroup would not mind growing into a global MCI, it doesn’t need to become that big to become big. Confused? Look at the numbers again. The global phone market is worth more than half a trillion dollars now and could be worth a few trillion dollars in 10 or 20 years.”Not a month or a week goes by that I don’t have an experience that stretches my perception as to realizing just how big the telecom market is,” says Ronald Stakland, Telegroup’s vice president for international marketing and operations (and a former oil broker).”The market is so big, it may as well be infinite in terms of market potential. In that sense, any company is going to have the opportunity to be very, very big.”
The interesting catch is that in order to be very, very big, a company will need to control only a small piece of the market. In a filing with the SEC, Telegroup reports that it is the second largest carrier of international calls in France, The Netherlands, and Switzerland, though it has no more than a small share of each market. Big deal, you say? Well, the French, Dutch, and Swiss together spend more than $35 billion on both domestic and international phone calls annually, so if Telegroup gains just a decent slice of those markets as they liberalize in the next few years–let’s say 3 percent–it will have locked up more than $1 billion in revenue.
Not bad for a couple of guys who started their firm in a spare bedroom in Fairfield, Iowa. But why Fairfield? What’s special about these guys, or about Fairfield? The answer may surprise you. Remember those Buddhist spires atop the Telegroup headquarters? (The Global Link headquarters has a similar set.) And remember the picture of the Indian guru propped against the wall in Gratzon’s office? And the fact that Gratzon wears slippers in his office?
It’s simple: Fairfield is ground zero of the transcendental meditation movement in the US. More than one-third of the town’s residents are devout meditators, including the senior executives at Telegroup and Global Link and most of their employees. The Indian gentleman whose picture is in Gratzon’s office is Maharishi Mahesh Yogi, leader of the TM movement. Gratzon, a longtime TM instructor, ran for the US Senate last year as a candidate from the Natural Law Party, a spinoff of the TM movement. In fact, Telegroup got its commercial liftoff from TM. Guess who constituted the bulk of Telegroup’s international sales force at the outset? Meditators who Gratzon and Rees had gotten to know through their years in the TM movement.
“All my success is due to the practice of transcendental meditation,” Gratzon says.”I see TM as an enormous competitive edge. People here are enormously focused. It’s breathtaking how dedicated and focused everyone is, and at the same time there is a lightness in the air, an easiness. As far as I’m concerned, corporate America is missing out by not considering a TM program for their management.” Over at Global Link, where visitors to the corporate headquarters building are expected to remove their shoes before walking on the pristine carpets, the attitude is the same. Global Link founder Christopher Hartnett describes TM as a”mental technology” that has given his company a competitive edge.”I don’t think we could have had our growth without it,” he says.”It has provided me with a tremendous amount of clarity of mind.”
It’s a simple thing, TM. For 20 minutes in the morning, preferably before breakfast, and for 20 minutes in the evening, preferably before dinner, you sit in a quiet place, close your eyes and silently repeat a sound, your mantra. You repeat it over and over again, and if you do it right, your mind wanders into a zone that is neither sleep nor wakefulness–it is between the two and beyond the two. When the session is over you open your eyes, and, if things have gone right and TM does what it is supposed to do, you feel relaxed, refreshed, clearer, as though you have gone for a swim in a mountain lake. For Telegroup’s Type A personalities, it means that they can be Type As without the usual hang-ups of Type As–the ulcers, the outbursts, and all the rest. TM calms them down and allows them to work harder; Rees, for example, often slips back into his office at ten at night–after his evening meditation session–and stays until two or three in the morning, working on problems or sending email. And he’s up the next morning, ready for more work, ready to conquer the world.
TM can be more than just a matter of meditation: it can include a holistic régime of eating and health care known as Ayurveda and even a form of architecture known as Sthapatya veda, which is said to generate success. Telegroup and Global Link embrace both principles: the spires atop their headquarters, their east-facing entrances, and each building’s bramistan–its quiet reception area–are derived from Sthapatya veda. Telegroup goes a step further and offers its employees a health-care package that includes free Ayurveda treatments at The Raj, a local health spa and hotel that offers, among other amenities, herbal massages and”elimination therapy” (known to the rest of us as enemas).
So why Iowa? The followers of the Maharishi (“great seer” in Sanskrit) founded the Maharishi International University in Santa Barbara, California, in 1971. The institution’s students soon overcrowded the small apartment complex the university was renting. When a small college in Fairfield went bankrupt and offered its campus for a song ($2.5 million) in 1974, the Maharishi’s followers decamped to the heartland. The campus, a smattering of classroom buildings and podlike living quarters, suited them well, though they had to build the meditation domes, one for men, one for women. More than two decades later, the meditators have deep roots here. The town features a couple of vegetarian restaurants, a few New Age bookstores, and a natural-vitamin store, and there’s a Maharishi High School, too, for the next generation of meditators. It all lends Fairfield the tie-dyed feel of Berkeley, though of course Fairfield is not Berkeley and Iowa is not California (for which the residents of both states are no doubt equally grateful). No hills surround Fairfield, no bays or bridges or tall buildings, just one movie theater–and if you wander around asking where you can get a double-decaf skim latte, well, you’ll find out what Iowa laughter sounds like.
In other words, after a few days it was time to leave Fairfield. I got back in my car, drove back up the dirt road, passed a barn with “Pride-o-Prairie” painted on its side, pulled onto Route 1, waved at the farmers on their tractors, and kept on cruising until I reached the Cedar Rapids Municipal Airport. I arrived home soon enough, turnstiling through O’Hare, but from time to time my mind floats back to where I was on that journey, and what I saw–things I would not have expected to see–and a gee-whiz question rustles around my head like a cornstalk in a breeze. It’s a whisper of a question, just one word long, and it is this: Iowa?
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Peter Maass, a writer based in New York, is the author of Love Thy Neighbor: A Story of War, a memoir of his experiences covering the Bosnian war.
