Pakistani State Telecom fights back over VoIP

In an office in Pakistan, a phone rings beside a PC. The call's silently connected to a switchboard, and heads out from there to an inland number inside Pakistan. Sounds innocuous; but it's exploiting a quirk of technology that costs the government-owned Pakistan Telecommunication Company Ltd (PTCL) ?500m every year in lost revenues.

The reason: people outside the country are using the internet to avoid PTCL's high charges for international calls to Pakistan. So now, PTCL is trying to stop itself being "hollowed out" by the internet (whose connections it also provides) by fighting back – and offering essentially the same service, through a British company, Alpha Telecom.

The technology that made this feasible was "voice over IP", or VoIP (the "IP" stands for "internet protocol"). VoIP is a method of turning normal conversation into packets, to be sent over the Net just as e-mail or Web pages are. The quality isn't great, because although it takes very little bandwidth to encode speech (which is mostly at about 300Hz), the Net is not a guaranteed one-to-one connection as a phone line is; you take your chances that the packets will be transmitted faithfully and quickly to the other end.

"Standard VoIP is not crystal clear to listen to," says Giles Redpath, CEO of Alpha Telecom. "You sound distant. The call might cut off. There's crackle. People have got the idea that call quality to places like these has to be poor, but the network is good, and it's no further away than the US."

The big advantage of VoIP, companies offering call services to Pakistan and other countries realised, was that it could bypass the international call charge cartels that have existed for decades. It has been a cosy life for phone companies to charge each other (and hence their customers) large amounts for international calls; they were always profitable. But then the internet arrived.

VoIP has been feasible for years. In 1995, Nicholas Negroponte, then head of the MIT Media Lab, and one of the first of the "digerati", suggested to me in an interview that he thought phone companies should be very worried – and perhaps very annoyed – about VoIP. He saw it heading towards a situation where it would eat up swathes of their most profitable traffic, and perhaps bankrupt them. Nobody foresaw that instead it would be the mountains of debt that the phone companies themselves would accrue, or in the case of WorldCom, its bizarre approach to accounting, that would sink them.

VoIP is big, but it's not vast – yet. Even now it only comprises 6 per cent of international traffic. But that proportion is slowly, and surely, subverting the pricing setups of companies, particularly those in less-developed countries which rely on international calls for a major part of their profits. And while Pakistan isn't heavily reliant on those international tariffs, ?500m – the cost to PTCL of companies outside Pakistan using VoIP to make connections into the country – isn't pocket change for anyone. What is also sure is that VoIP is going to grow and grow. "By 2010, all voice traffic will be over IP networks," according to Tom Evslin, chief executive officer of ITXC, the largest wholesale carrier of IP telephony traffic in the world.

Two things drive the use of VoIP: the cost to carriers for sending a call across a border, and the cost to consumers for long-distance calls, according to Jason Kowal, president of TeleGeography. In areas of the world with high "settlement rates" (the charge that one carrier passes to another for accepting a transnational phone call), carriers can use the internet to lower the cost, he said. "The biggest route [for VoIP] is from the United States to Mexico," he says, and attributes this to the lack of competition between Teléfonos de México SA de CV (Telmex) and other Mexican telecom operators to drive settlement costs down. And of course, there are plenty of people living in the US who have Mexican relatives they want to talk to.

Much the same pertains for the UK and Pakistan; and just the same sort of VoIP get-around has become increasingly popular – though not with PTCL. You may wonder who in the UK uses VoIP to make those calls? Pretty much everyone offering calling-card services to Pakistan, says Redpath. That's a lot, as any cursory study of the small ads in the backs of magazines will show. "PTCL started saying that it disliked this grey market and was going to do something more proactive," says Giles Redpath, chief executive of Alpha Telecom.

What PTCL did was to tender for solutions to its problem – which drew 72 companies hoping to win the business. Alpha won on the basis that it was already the dominant player in the UK pre-paid telephony market, according to Akhtar Ahmad Bajwa, chairman of PTCL: "Alpha... has the strongest presence among UK Pakistanis."

Redpath notes that "in Europe, VoIP is perceived as a smart, legal way of terminating traffic. But in Pakistan and Sri Lanka, it's vastly different – the end operator in that country who receives the VoIP call and routes it onward is often acting illegally". That's bad news, he argues, because the line quality is poor, meaning that people use the phone less; operators are liable to be shut down at any time (leaving the consumer stranded); and because "it's depriving an already fragile economy of one of its greatest sources of foreign revenue".

Alpha has been busy enough: it carries 80 per cent of the telephone traffic from the UK to Sri Lanka, and estimates that in the past three years, the volume of calls made has tripled. "For PTCL, if a call is made over the Net, then all they see of its revenue is the local call, where they would have liked to see the international call," says Redpath. "They want to benefit from the rise in telecoms traffic, but they haven't, because while the total traffic has risen by about 50 per cent in the past few years, it's also migrated to the Net."

But the reason why the Net is able to overturn, or at least unsettle PTCL, is that it represents the best form of competition for incoming international calls.

PTCL is a state-owned monopoly, although that market will begin to be opened up next year – so it can presently charge what it likes for international voice calls. International data, though, is a more competitive field, where many players aim to provide incoming links. So the internet provides competition where none existed, and is forcing PTCL to open up.

Deregulation will change that: after the end of this year, VoIP calls won't be illegal – giving those who are now on the wrong side of the law little to worry about. But for PTCL, it will have the advantage of a better VoIP system for whatever competition lies ahead.

Alpha, having got the blessing of the PTCL, will offer VoIP, but will up the quality by using a satellite link rather than undersea cables. "We will also offer a single price for calls into the whole of Pakistan, whereas most VoIP companies are only cheaper than a standard voice call into the major cities. The major cities are perhaps 10 to 15 per cent cheaper to call." Alpha carries about 6.5 million minutes of calls per month from the UK to Pakistan, almost all from people phoning relatives. "They're very much into keeping in touch," he says. And thanks to the Net, they can – and pay less.