• E-mail
• Print
• Comment
• Font Size
• Digg
• del.icio.us
• Discuss article

Long-Distance Phone Service a Buyer's Market

Posted on: Monday, 26 July 2004, 06:00 CDT

Long-distance phone service a buyer's market

Consumers have plenty of options, keeping prices low

By ELLEN SIMON Associated Press

Saturday, July 24, 2004

New York -- Although AT&T Corp.'s decision to stop marketing its residential service could drive more consumers into the arms of their regional Bell companies, that shouldn't lead to a rise in prices, thanks to increasing competition from cable TV providers, Internet phone companies and cell phones.

If the Bells try to increase rates, "Consumers will say, 'Go ahead, raise your prices, I'll go somewhere else,' " said Johna Till Johnson, president of Nemertes Research. "As a consumer, it's time to start rethinking how you'll get your phone service in the first place, and from whom."

Many consumers have already made the switch, from a generation of college kids, whose only phones are in their pockets, to cable customers, who have tacked phone service onto their bills. Cable companies had 3.2 million phone customers at the end of 2003, 2% of the total lines, according to the Federal Communications Commission.

Cable company Cox Communications Inc. has more than 1 million phone customers. It has about 50% of the telecom market in Orange County, Calif., where it began selling phone service in 1997, said Thomas Eisenmann, an associate professor of business administration at Harvard Business School, who recently co-wrote a study of Cox's telecom service.

"With cable, with wireless, consumer long-distance is irrelevant," Eisenmann said. "It's an artificial distinction."

Back in 1908, when the telegraph was still an important part of AT&T's business, it promised regulators universal phone service, which it subsidized with artificially high long-distance rates. Ever since, long-distance rates have dropped, measured in constant dollars. Once MCI Inc. muscled into the long-distance market in the 1960s, the decline became more dramatic.

Despite AT&T's announcement Thursday that it would stop marketing its consumer long-distance service and focus on selling to business and wholesale customers, long-distance rates will continue to drop, said Amy Muller, AT&T's former director of corporate strategy.

"The price of long-distance telephony for consumers is making its way toward zero," said Muller, now a director at Strategos, a consulting firm.

When she worked for AT&T in 1995, she used to march around the company with a graph showing the decline in long-distance prices from 1908 to 1995. "We used to call it 'the freight train,'" she said.

Most executives didn't respond well. "They'd say, 'If we start a marketing campaign to attack MCI, we can change the direction of that curve,' " she said. "Those were the forces of denial."

Even if AT&T stops aggressively marketing its service, loyal older customers may stay. Eisenmann points out that while Americans have been able to buy their home phones since Jimmy Carter was president, there are still people who lease their telephones from Ma Bell. "Never underestimate the inertia of the American public," he said.

That means AT&T, he said, could go on for years with a group of customers who have a $5.99 long-distance bill, but pay it reliably.

Customers will continue to have plenty of other options -- even if MCI also leaves the residential market, as rumored. MCI refuses to comment on the topic.

An estimated 5% of U.S. customers have gone all wireless and unplugged their home phones, according to industry analyst Gartner Inc. The number is growing 1% or 2% a year, but that doesn't tell the whole story: With wireless companies selling buckets of 800 minutes a month and up, the nation's 165 million wireless customers are increasingly using the phones for long distance.

That's just one more factor keeping household expenditures on phone service constant at 2% of all expenses -- right where they've been for the past 15 years, according to FCC statistics. Whatever happens in the industry, that figure is very unlikely to rise.

More News in this Category