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July 25, 2005

The World is Flat: VSNL in Definitive Agreement to Acquire Teleglobe

Global flattening just came a lot closer to home for us.  Subject to the usual regulatory approvals and delays, Indian mega-carrier VSNL (NYSE:VSL) has signed a definitive agreement to purchase Teleglobe (NASDAQ:TLGB) which, just last year, acquired ITXC, the company Mary and I founded.  ITXC grew to be the world’s largest wholesale carrier of international VoIP and, based on minutes of international traffic, the seventh largest carrier of any kind.  Teleglobe was reconstructed from the assets of the former Canadian monopoly international carrier of the same name which were purchased out of bankruptcy by Cerberus, a leveraged buy-out firm.

When I first went to India about five years ago VSNL was a sleeping giant of a monopoly with a franchise to carry India’s international voice and data traffic, nominally public but with government owning a majority stake.  The regulator’s offices were in the VSNL headquarters building.  Calls to India were at least $.50/min and calls from India to the United States were $1.00/min if you shopped for a good deal, more to other destinations.  A few ISPs were carrying VoIP calls and VSNL was doing its best to shut down this competition.  The regulator told me that “VoIP will have to meet the same standards as the PSTN in order to be permitted.”

I didn’t make a friend by replying “you are saying that if people can’t afford a Cadillac, they should walk.  It’s unacceptable for them to choose to buy a Chevy.”  I tried to argue that the regulator should make sure that quality was properly disclosed but should let people choose their own price and grade of service; my interview was at an end.  At other meetings in India officials of state-owned companies were more interested in bribes than business.  People in the streets were desperately poor.  I was discouraged about the possibility of ever doing business in India and about India’s prospects in general.  Three percent of the population had phones.  I didn’t know what was happening in Bangalore.

From my point of view, India was a different country on my next visit two years later. This trip started in bustling Bangalore where streets were crowded with new cars; construction was everywhere; and the poor not very visible.  Indian telecom privatization and deregulation were just nine months away although some people doubted they would ever happen.  Indian entrepreneurs wanted to talk about how to make money by providing service.  Private Indian conglomerates were entering already unregulated sectors and preparing license applications to compete with the former monopoly VSNL.  We began a crash effort to identify those likely to emerge as major competitors and sign them up as part of ITXC’s global VoIP network.  Both the conglomerates and the entrepreneurs understood that VoIP with its fast deployment and low capital cost would be major enabler of practical demonopolization.  It would not be necessary to  replicate VSNL’s legacy infrastructure to compete.

Elsewhere in  Bangalore, call centers and contract programming houses alike were already using private VoIP to communicate with customers everywhere in the world.  VSNL rates would have kept them from ever getting started.

The poor were just as desperately poor in the streets of Delhi and Mumbai.  Not sure whether I imagined it or not but there seemed to be more Internet café/phone shops and a computer school on the second floor of every corner building.  There was hope in the poverty.  A middle class was rising.  Mary and I took a weekend off to visit the Taj Mahal.  We rode the six hours from Delhi in unusual jaw-dropped silence trying to comprehend the contrasts of Bangalore, women making stylized piles of dried cow manure to dry for fuel in the country sun, the cows themselves stopping traffic because they are sacred cows, camels, elephants, Volkswagen busses with impossible numbers of passengers.

Fiercely competitive Tata Group bought a majority interest in VSNL and began to instill competitive ways and competitive people.  Privatization did happen.  First new competitor out of the shoot was Data Access, an Indian ISP with whom ITXC had negotiated an agreement.  There were a painful couple of months when deregulation had nominally happened but Data Access couldn’t start accepting our traffic because original hard copies of their license had not been delivered to all the right places.  The bureaucracy seemed hanging on in rigor mortis.   But not for long.  Soon the cost of calls to and from India declined by 50%.  Cheap cell phones were everywhere.

At the end of January, 2005 Indian teledensity had nearly tripled to 8.79% - in a country of a billion people, that’s 87.9 million phones, most of them added in the last couple of years.   Vonage now charges $.14/minute to call Bangalore from the US.  Skype calls between Skype users in India and in the rest of the world are “free” assuming you have broadband access and a computer.  But this is not such a bad assumption in India anymore, especially in Bangalore.

VoIP innovation had a large role in helping India open up so rapidly.  We’re proud to have had a role in that.  I’m very proud of the ITXC people who developed and implemented and ran the technology which made wholesale VoIP work.  I have a fond hope that the technology we developed will advance rapidly and benefit even more people in the hands of the new VSNL.

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