The Internet Calls.

Colombia's phone companies meet the future--and they don't like it.

WHEN MARIO Rodriguez, a young banker, saw "#124 Paris" displayed on his mobile phone's readout screen a few months ago, he thought his handset was broken. "I had no idea what it was all about," he says. But the cryptic message was no error; rather, it was Colombian cellular provider Comcel's invitation to call anywhere in the world at rates up to 150% cheaper than the competition.

The Bell Canada-controlled company offers the cut-rate service using Internet Protocol (IP) technology and the same switching network used to send e-mail around the globe. The arrangement neatly skirts regulatory guidelines and licensing fees, while allowing Comcel's 700,000 subscribers to make cheap international calls.

The new service is infuriating Colombia's existing long-distance phone companies. Two firms, Orbitel and Empresa de Telecomunicaciones de Bogata (ETB), paid the government US$150 million each last year to obtain long-distance rights. Comcel, on the other hand, has not paid one cent. Both new providers, together with the old state carrier, Telecom, say the cellular phone company's new service threatens to undermine the industry's entire regulatory framework.

While the three officially sanctioned operators agree that Comcel's service has not yet had a significant impact on their business, its implications are immense, they say. The companies fear that a host of Internet-based operators will storm their market with cheap rates available from a normal phone.

The traditional long-distance business is a capital-intensive affair involving heavy investment in infrastructure. The new system is much less so because traffic is channeled onto the Internet, a network of networks where only a portion belongs to the service provider. It also uses efficient packet-switching, a newer and cheaper way to send voice across continents in little digital bursts. Recent software offerings let adept computer users do the same thing at varying levels of voice quality. In either case, consumers avoid hefty long-distance charges and phone companies face competition for a profitable service that generates hard currency.

Not surprisingly, the three conventional phone companies have taken their complaint to the country's Communications Ministry. For now, they appear to be losing the baffle, as regulators recently gave Comcel a temporary green light to continue providing service.

However, the authorities are conducting a closely watched investigation before making a definitive decision. Analysts say the ministry can either charge Comcel and future IP operators the $150 million license fee or decline to interfere, which would amount to a de facto deregulation of the entire sector.

The government stands to lose either way. If it chooses to limit Internet telephony, it risks putting the brakes on the telecommunications sector, which is growing four times faster than the economy. Yet a ruling in favor of Comcel may force it to hand back the $150 million fees to Orbitel and the ETB. And aggressive, technology-driven competition could threaten the survival of state-run Telecom, the country's biggest, though financially weak, phone company.