At&T Is Being Bitten On The Ankles

No-name dial-around services steal customers in droves

What's going on at AT&T? On July 18, the nation's largest phone company reported dismal growth in second-quarter call volumes, announcing that the number of minutes carried over its long-distance network for the period increased by only 5%, compared with 15% for MCI Communications Corp. and 19% for Sprint Corp. Bungled forays into computers, online services, and multimedia ventures are an old story at AT&T, but its core long-distance business was supposed to be a market the company had down cold.

Not any more. The long-distance business is not the oligopoly it was just a year ago, when AT&T, MCI, and Sprint controlled 90% of the $75 billion in toll calls made in the U.S. The proof: AT&T won as many as 1 million customers from MCI and Sprint in the first half of the year, but volumes still dropped. Tiny new rivals are grabbing customers and blindsiding the telecom giant. And poised on the horizon are the massive Baby Bells, waiting for regulators to allow them into long distance.

MANY SKEPTICS. AT&T has yet to prove it can thrive in a multifront long-distance market. That's worrisome, given that AT&T Chairman Robert E. Allen's decision last year to break the company into three parts was made precisely so management could focus on telephone service. Wall Street was elated with the plan--the company's stock rose as high as 68 after it was announced last September. But now, given the long-distance problems, skeptics abound. AT&T shares are currently trading around 50, below where they were last September before the breakup plan was announced. Some $28 billion in market capitalization has gone down the drain since February.

Investors are waking up to the fact that AT&T's phone business is coming under siege faster than anyone expected. Most figured AT&T would have two or three years to grab local-calling market share before it needed to worry about losing long-distance share. But now it is clear that that cushion doesn't exist--and the Baby Bells aren't even a problem yet. AT&T lost business over the past three months to a bunch of Lilliputian phone companies such as Telco Communications, Excel Communications, and American Communications Network. And it barely saw them coming.

These Brand X challengers use a variety of marketing tactics that keep them below AT&T's radar screen. Some provide so-called dial-around services, offering callers the ability to dial an access code that circumvents their long-distance carrier of record. Dial-around rates vary widely, but the services market themselves as a low-cost alternative. They transmit calls over capacity purchased mostly from second-tier carriers Worldcom, Frontier, and LCI International, and all AT&T notices is that its customer is calling less. "Dial-around came up fairly quickly, and we didn't suspect it right away," admits AT&T President Alex J. Mandl.

Prepaid calling cards are another stealth missile. These cards let callers pay in advance for calling time with alternate carriers, and major carriers have no idea who is buying them. Then there are multilevel marketers that use independent reps to sell what they often bill as a cheaper, no-name brand of long-distance to friends and relatives for a small commission. Like the dial-around services, only some of these alternative carriers are cheaper--though rates are occasionally as much as 40% below AT&T's--but they all market themselves as low-cost alternatives.

ON TARGET. Mandl pledges a fast response to these new competitors. "Our customers apparently believe there is a big price difference," he says. "But their price is often higher. That reality is something that we need to explain." Mandl expects that a targeted marketing effort will start showing results this fall. "We will demonstrate to [analysts] that have changed their view that we can and will grow this business," he says.

But AT&T watchers are clearly worried that the company has fundamental problems. To begin with, it is more dependent on the consumer market than MCI and Sprint. In the past, AT&T could at least count on the loyalty of its customers, the ones least likely to switch carriers. No longer. "We are seeing more people for the first time leaving AT&T," says LCI Chairman H. Brian Thompson, whose long-distance telephone company uses multilevel marketers. "More of our customers come from AT&T than from any other source."

There are also nascent challenges looming. The Baby Bells are the most notable. But down the road, long-distance phone calls over the Internet, which would only cost as much as the initial connection, could affect the pricing structure of long-distance calling, mandating a flat rate rather than per-minute charges. Mandl says that's one reason AT&T is getting into Internet access--to grab those callers' business.

No one is counting AT&T out just yet. "AT&T has been a very aggressive competitor in the last four to six years," says Gary D. Forsee, head of Sprint's long-distance business. The company is also entering an era where carriers will sell bundles of services, with long distance just one part. AT&T is better placed than any other carrier to compete in such a market, what with its huge cellular network, its plans to offer local calling in every state, its stake in a pay-TV service, and its aggressive Internet scheme. But AT&T has yet to offer a multiservice package--even though it can ill afford to lose more customers. Without some new offering, dial-around services could be the least of its worries.

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