Telecom: Why Talk Is So Cheap

In the industry's new economics, phone rates are just promo tools

How low can long distance rates go? How about zero? You heard it right, free long-distance. That, industry executives concede privately, may be the ultimate outcome as they vie with one another to sign up customers for bundles of communications services--local and long-distance, Internet access, even television. In those bundles, long distance may be thrown in for no extra charge, even though carriers will lose 2 cents a minute on every call. Long-distance upstart Qwest Communications International Inc. already offers 250 minutes of long-distance calling to customers who sign up for a $24.95-a-month Internet service. Phone companies aren't ready to broadcast the idea, but, says Jeffrey Kagan, an independent telecommunications analyst in Atlanta: "They'll be offering long distance for free."

That sort of puts the latest price war among major long-distance carriers in perspective. Unlike previous battles, in which Candice Bergen morphed into the dime lady to help Sprint grab market share from rivals AT&T and MCI WorldCom by promising 10 cents-per-minute calling, the new rate war is heading into uncharted territory. At any amount below 5 cents per minute, the rate that Sprint and MCI WorldCom began promoting in early August, it hardly pays to send out an itemized bill. That means that you'll soon see major carriers offering flat-rate monthly service.

BUCKETS. What's driving all this are the changes in technology and regulation that are erasing the distinctions between types of calling. With today's digital networks, there's not much reason to think about where a call goes or what it carries--voice, data, or video. On the regulatory side, the Federal Communications Commission and state regulators are getting ready to let local phone companies into long-distance. Once everybody is playing in everyone else's market and the networks are completed, then the battle for telecom bundles will begin: "We can go to a customer and say, `Here's a bucket of 500 minutes and you can use it for wireless and any other calls,"' says Len Lauer, president of Sprint Corp.'s consumer-services group.

For a sense of how rapidly long-distance is moving beyond the old rules, take a look at what's happening to industry leader AT&T. Ever since C. Michael Armstrong took over two years ago, the charismatic ceo has been trying to get ready for the time when long distance will no longer be the phone giant's cash cow. Consumer and business long-distance services now make up 60% of Ma Bell's revenues, but this percentage will be cut in half by 2004, admits the company. AT&T is facing a steady fall in its long-distance market share, from 80% in 1990 to an estimated 40% by the end of this year, says Rex G. Mitchell, an analyst at Banc of America Securities.

With MCI WorldCom and Sprint announcing 5 cents-per-minute calling plans, Armstrong now has had to pick upthe pace. AT&T trotted out its own 7 cents-per- minute plan on Aug. 30, a move that will nearly double the rate at which its consumer long-distance revenues will fall this year, to the 4% to 5% range, rather than 2% to 4%. That will shave some $300 million off AT&T's consumer long-distance revenues, bringing 1999's total decline to about $1 billion. Armstrong told analysts not to worry, however, since healthy growth in data, wireless, and other businesses will more than offset the consumer long-distance decline, which contributes aboUt one-third of the $62.4 billion in total revenues.

AT&T may not be able to hold the line at 7 cents for long. Sprint began offering long distance for 5 cents a minute from 7 p.m. until midnight every day, with 10 cents a minute at other times, plus a monthly $5.95 charge. MCI unveiled nickel calls on weeknights and all day on weekends, and as much as 25 cents a minute during other times, with a monthly $5 minimum. On Aug. 31, idt Corp., a long-distance upstart, downedthe ante--offering 5 cents a minute all day and a $3.95 monthly fee.

These moves aren't as damaging to bottom lines as they might seem. The FCC has been cutting the fees long-distance carriers pay to regional phone companies to carry their calls--from 5.8 cents a minute in 1992 to about 3.3 cents today. "The FCC reduced long-distance carriers' network usage costs, giving them $1.5 billion to pass on to consumers," says FCC Chairman William E. Kennard in a statement on AT&T's latest cut. The next step: an industry proposal to cuT access fees to 1.1 cents a minute in five years. For now, the race is on to lock in customers with long-distance deals, and then sell a bundle of services--such as wireless and Net access--before other rivals can lure them away. AT&T is already offering discounts on its new long-distance plan to wireless subscribers. And it's gearing up to bundle local, long-distance, and cable services as soon as next year.

Bundling is a key to customer retention. Acquiring new customers is a far bigger cost than long-distance transmission. Lower rates also will make it tougher for Baby Bell companies to compete in long distance, even though they'll have an advantage in not having to pay pricey local-access charges. The Baby Bells, notes Armstrong, "certainly have less room to come in and make a difference based on price."

AT&T is best positioned, by far, to compete in bundled services, analysts say. Having paid $110 billion for Tele-Communications International and MediaOne cable properties, it boasts a suite of wireless, data, Internet, cable-tv, and entertainment assets. In contrast, Sprint lacks its own high-speed Net-access service and cable tv; as does MCI, which also lacks wireless. "AT&T will be the ones to beat," says Blaik Kirby, a principal with Renaissance Worldwide Inc., a management consultant in Boston. "They have a bundle of products that over time will replace the core long-distance revenue."

NO LET-UP. Bundled services guarantee simplified billing. But not all will see lower prices. High-volume users, or those who call mainly during off-peak hours, will benefit. But after paying monthly fees of $5.95 and $2.50 in federal line charges, a consumer who makes, say, only 30 minutes of long distance calls a month under AT&T's new plan would pay $10.55, or 35 cents a minute. That's more than double what AT&T charged the same customer two years ago, says Olivia Wein, a fellow at Consumers Union in Washington.

But downward pressure on rates won't let up. When voice calling over the Net improves, a whole new round of price-cutting could follow. Net2Phone Inc., a Hackensack (N.J.) startup, already sells long-distance at 4.9 cents-per-minute, with a monthly charge of just 99 cents. The savings are even greater internationally. If customers can use soundcard-equipped pcs, Net2Phone charges just 10 cents a minute to ring any phone in the U.S. from overseas.

Although still a tiny niche in the global telecom business, Internet telephony is gaining ground. AT&T is leasing international lines to Net2Phone and running its own limited Internet telephony service in Asia. Sprint has begun trials of Net2Phone's service in Asia, and Compaq Computer Corp. is bundling Net2Phone's software into pcs it sells overseas. Next spring, Net2Phone plans to add voice to America Online Inc.'s Instant Messaging service, an offering that could soon be free, says Net2Phone ceo Howard Balter.

It all adds up to a world where consumers pay a fixed fee to access a network that will provide the full range of voice, video, and data services. As with E-mail, distance will be divorced from price. "Consumers will have choices in what to bundle, and we'll offer discounts and incentives to those who use us more," says H. Eugene Lockhart, president of AT&T consumer services. Long distance will cost pennies, but companies will throw it in for free.

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