AT&T, the targeted giant of the US telecommunications industry, responded with a lawsuit. But IDT won the day, and six years later has grown into a company with pounds 125m in sales. IDT turned profitable this year and now it plans to open an office in London, on BT's home turf, in the next three months.
The New Jersey-based company is one of a growing band of upstarts that have carved a business out of undercutting the telecommunications establishment around the world.
Now they are turning to the Internet to extend their market reach. Technology is developing that allows people to make voice calls over the Internet for as little as 10 per cent of the price charged by traditional phone companies.
The Internet is already siphoning revenues from telephone companies worldwide for data traffic. Now it has begun challenging the 90 per cent of their revenues that originate from ordinary voice calls.
The technology is still in its infancy but by the turn of the century it won't just be nerds with specialist software who will be calling friends over the Internet, according to a new report issued by consultants Phillips Tarifica.
Internet phone calls could squeeze well over pounds 1bn in revenue worldwide from conventional telephone companies in the next few years, the report forecasts.
"If Internet telephony stole only 6 per cent of US phone traffic, this could potentially eliminate the profits of the US public phone companies in the absence of volume growth or increases in the price of leased lines," according to another report released last week by the United Nations agency, the International Telecommunications Union (ITU).
The phenomenon does not apply just to the US: BT will lose pounds 44m in revenues to Internet phone services by 2001, based on current usage patterns, the report estimates. That figure could rise to pounds 103m, including e-mail and fax revenues, it said.
The figures are still small compared with BT's overall revenues of pounds 14.9bn for the year to March. But although there are only 60 million people around the world using the Internet, compared with 741 million ordinary phone users, the rate of growth in use of the Internet has doubled each year for the last decade, according to the ITU.
Other phone companies will lose more, Phillips Tarifica estimates. AT&T will lose the equivalent of pounds 145m in voice call revenue to the Internet in the same period, some pounds 218m when fax and e-mail revenues are included.
Telephone companies are watching quietly. Some of them maintain that the quality of Internet phone calls is sufficiently poor for them to ignore the phenomenon for the moment. So far, they are right in many cases.
When the technology was introduced earlier this decade, conversations were hampered by delays in the caller's words reaching the other end of the line. And whole chunks of sentences can go astray when the routes are congested.
Now the technology has improved to the point where the delay is less than a second, though still annoying in some instances.
The telephone firms are beginning to get worried. Last month Deutsche Telekom bought a 21 per cent stake in VocalTec Communications, an Israeli company that makes software for Internet phone calls.
Non-telephone firms are also moving in. At the Net Conference in Boston later this month, Microsoft plans to lead 30 companies in a demonstration of a technology standard that can mix voice, data and video .
IDT's president, Jim Courter, believes that Internet and traditional phone calls can both survive - but not exactly in perfect harmony.
Many telephone companies are selling Internet services in addition to their public phone services. And they make money from selling leased lines to service providers.
"With global deregulation moving apace, we think we can compete favourably with all other telephone companies," said Mr Courter. "They have enjoyed a monopoly so far, and they now need a radical restructuring."
Last year IDT introduced a service that allows customers with access to a personal computer and special software to call anyone with an ordinary phone over the Internet. The service has already attracted around 200,000 customers.
Now the company has introduced a US service tapping the Internet that allows anybody with an ordinary phone to call another conventional phone customer at a flat rate of eight cents per minute. "Customers won't need to have a computer, so it's going to broaden our audience by as much as 100 per cent,'' said IDT's director of sales, Mordy Rothberg.
Customers make a local call to IDT's network, which connects the call from the public phone network to the Internet and back to the public phone network at the other end. The company plans to roll the service out internationally.
It said that it has partners in international markets - including Marubeni of Japan, Daewoo of Korea and Telint of Italy - to distribute the service in their domestic markets by the end of the year.
"London is going to be our hub for Europe," said Jon Peters, managing director of IDT's UK operation.
"We're a new kid on the block in the UK, but we plan to do what we did in the US."
IDT took the industry by storm in 1991 when it started selling a dial- back telephone service, which offered cheap US prices to customers in countries where prices were considerably higher.
Customers buy special telephone cards, each of which has a code number and an IDT phone number assigned to it. They dial the IDT number, let the phone ring once and then hang up. The IDT computer picks up the call and rings the caller back with a US dial tone.