A Boom For The Baby Bells?

Bell Atlantic's long-distance push may spark the industry

On Oct. 19, Bell Atlantic Corp. got the blessing of New York regulators to jump into the long-distance market--all but guaranteeing that by yearend the East Coast phone giant will become the first regional Bell to offer long-distance phone service. Although the New York State Public Service Commission speaks for only its own state, it has been working closely with the Federal Communications Commission and the Justice Dept., which are scheduled to weigh in by yearend. And, if the New York PSC--considered among the toughest in the nation--says yes, other states are likely to follow when other Bells apply.

So, now that Bell Atlantic has the prize that it spent 2 1/2 years pursuing, what will it do? It's planning to approach the long-distance market in a way that, if other Bells follow, could change the dynamics of the industry. The behemoths in long-distance service--AT&T, MCI WorldCom, and Sprint--have been tripping over one another to snag lucrative business customers as price wars ravage margins on residential calling. But Bell Atlantic says it plans to focus initially on consumers--even senior citizens who spend just $5 a month on long-distance.

NICKEL A MINUTE. Of course this approach doesn't hurt Bell Atlantic's image with regulators. But Bell Atlantic President James G. Cullen insists there is more than public relations behind the company's plan. Bell Atlantic says it can serve these customers profitably, despite the $1 billion it has invested in long-distance, including new equipment and creation of Bell Atlantic Long Distance, which now employs about 150 people.

With calling rates plunging to 5 cents a minute or less, how can Bell Atlantic make a buck? Because, says Cullen, it's already providing consumers with local service. Right off the bat, that shaves costs by $2 a month per customer because local and long-distance calls will be on a single bill. A more important savings comes from avoiding local access fees--charges that long distance carriers pay local phone companies to carry their calls. Although recently reduced by federal regulators, those fees still account for up to 40% of the price of a long-distance call.

Finally, about 40% of all the long-distance calls placed in Bell Atlantic territory are from one Bell Atlantic customer to another--so the company won't have to split revenue from those calls with another company. For calls extending beyond the East Coast, Bell Atlantic has a resale deal with Sprint. "For us, this definitely can be profitable," Cullen says. "This is the underserved part of the market, and we have a strong relationship with these customers." Bell Atlantic says it will automatically put all its long-distance customers on a calling plan, so that none are stuck paying higher "basic rates" or minimum charges.

As other Bells get into long distance, Bell Atlantic's residential strategy should make sense for them, too. They also can capitalize on the economies of selling to an established customer base. As their familiar local providers, the Bells may have an advantage in selling bundles of local, long-distance, and Internet services.

SBC Communications Inc., the big local phone carrier in the Southwest, will soon ask federal regulators for permission to offer long-distance service in Texas. BellSouth Corp. is expected to file an application to offer long-distance in Georgia shortly. And Bell Atlantic hopes to submit applications to offer long-distance service in New Jersey, Massachusetts, and Pennsylvania by next April.

AT&T says Bell Atlantic's consumer focus amounts to posturing for the regulators. "I think they are saying anything that sounds like a winning political statement," says Robert Aquilina, president of AT&T's consumer markets for the Eastern U.S. He says there's no way that Bell Atlantic can reach its stated goal of 25% of New York's $7 billion long-distance market in five years by sticking to residential customers.

UP FOR GRABS. Cullen concedes that Bell Atlantic is looking at other segments of the market. A couple of months after market entry, he says, the company will probably roll out service to small businesses. It will start competing for larger accounts 12 to 18 months after entering the residential market.

A battle over the business market could wind up helping consumers, though. As Bell Atlantic starts grabbing business accounts, its long-distance rivals will be prompted to go after its residential base. AT&T has signed up 10,000 to 20,000 local customers in New York and has big plans for local service over its cable-TV system. So, after four years of mega-mergers--including the one creating today's Bell Atlantic--the competition envisioned by Congress could come into view.

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