The Long-Distance Runners

By John S. DeMott

A T& T and its rivals are competing all-out for one another's customers

It looked for all the world last week like a gas station or a bank or a rent-a-car company trying to lure customers by offering discounts on television sets or getaway weekends. Instead, it was A T & T signaling that the once straightforward business of providing long-distance telephone service has drastically changed.

Prodded by new competition from companies like MCI Communications and GTE-Sprint, A T & T announced a program that gives its 80 million residential customers credits toward buying 50 different products and services. By making $15 to $300 a month in long-distance calls, customers become eligible for reductions on Polaroid cameras, airline tickets and nights in a Howard Johnson's motel. If callers reach out and touch someone often enough or long enough, they can talk themselves into $500 off a Toyota truck. The A T & T plan is aimed at helping the company hang on to its dominance of the $45 billion U.S. longdistance market.

The A T & T offer is all part of the new era of choice in long-distance service. Before the end of 1986, telephone users across the U.S. will be asked to pick one of several competing companies as their primary long-distance carrier. If they cannot make up their minds, people will automatically be assigned one of them, probably A T & T. These developments are an outgrowth of the Jan. 1 breakup of the Bell System, and of dozens of regulatory and technical changes in American telecommunications during the past 15 years. Says Edward Carter, marketing vice president of MCI: "For American consumers, it is the most significant change in a day-to-day necessity they've ever seen."

The battle is most intense in Charleston, W. Va. On July 15, Charleston will become the first U.S. city to be technically capable of offering all phone users a choice of long-distance carriers. In August, Alameda, Calif., will become the second city to offer the option. Up to now, only people with Touch-Tone or modified dial phones could use a long-distance company other than A T & T, a technical limitation that excluded the 40% with old-style rotary dials.

The chief challengers to A T & T are MCI and Sprint, small but nimble carriers that nibble away at A T & T's customers with high technology, growing networks and lower tolls. Along with lesser-knowns like Chicago's Allnet, the big competitors are mounting publicity and ad campaigns that would make Barnum proud. Actor

Cliff Robertson does the pitching in television ads for A T & T, while Comic Joan Rivers weighs in for MCI. Companies are offering lures aplenty. A T & T and MCI first gave away an hour of free long-distance time for signing up; Sprint quickly matched them. Before the campaign is over, each consumer in Alameda will be reached four times by mail or phone by Sprint promoting its discounts. There are promises of fee cuts and refunds if users are not satisfied. A T & T plays up services that its rivals cannot match. Examples: collect and person-to-person calls and automatic credit for misdialing.

The companies were literally wining and dining big customers. William C. Norton, who is public work director for Alameda, received an invitation to an A T & T cocktail party, as well as approaches from other carriers. Each firm is ogling his city's annual $50,000 in long-distance charges.

MCI claims to have signed up 5,000 new Charleston customers in six weeks, five times the number during the previous two years. Yet most of the hard sell seems to be going over the heads of ordinary citizens, who remain confused about the breakup of the phone company. Sniffed

G. Ralph Fuller of South Charleston: "If A T & T wants these phones, they can have them. I'll hook up like I used to with two tin cans on a string." Says Ken McEldowney, co-director of a consumer group in San Francisco: "People have no idea what any of this means, and the campaign is just beginning here." The bewildering array facing consumers is most clearly seen at Logan Airport in Boston, where pay phones give people the choice of eight different long-distance services in addition to A T & T.

The confusion is only natural because so much has changed. Says MCI's Carter: "This is either a whole new business, or an old business being completely remade." Long before the Bell System breakup, when Ma Bell had no competitors to speak of, there was hardly any of today's marketing hype. Then came the consent decree of 1982 between A T & T and the Justice Department that split the Bell System into eight entities, a new A T & T for long-distance service and seven regional holding companies for local phone calls and short-haul long distance.

When someone makes a long-distance call, the local phone companies control the connections between the customer's telephone and the long-distance system. As part of the split-up, Federal Judge Harold Greene ruled that the local companies had to make it just as easy for people to use one of the competing long-distance services as it was to use AT&T. This "equal access" provision, Greene felt, would promote competition in long-distance service. MCI has been in the long-distance business since the late 1970s, but its customers have had to dial as many as 24 digits to make a phone call. By contrast, AT&T's customers have only to dial a maximum of eleven (1, the area code and the number). The extra numbers obviously gave A T & T an advantage.

When other U.S. cities follow Charleston and Alameda to equal access, their consumers, too, will merely have to dial 1 plus an area code and then the number. That will hook them into the primary long-distance carrier they have chosen. If they want another company to take their calls, they will have to dial 10 plus a special three-digit code for that carrier before dialing the area code and number. Customers will not be stuck forever with the long-distance service they choose. They will be able to switch from one to another for free for the first six months of equal access, after that for a fee of only $5.

By 1987, 75% of U.S. telephone exchanges should have equal access to several long-distance services. The remaining 25% will probably not have such a choice until the end of the decade, if ever, because they are in rural areas. A T & T will continue to have that business.

For the new competitors, the riches from even a tiny slice of A T & T's long-distance pie are substantial. A T & T's share of the market is 61%, with the new regional companies and non-Bell independents handling an additional 32%. MCI's revenues doubled annually between 1980 and 1983, going from $144 million to $1 billion. In that same period, profits mushroomed from $13 million to $171 million. Yet its share of the long-distance market is only 3.5%, 1.3 million residential customers and 300,000 business clients. Sprint has less than a 2% share, but it is rapidly adding more and now claims a customer base of 1 million, almost double that at the end of 1982.

As of now, the newcomers enjoy a special status because the Federal Communications Commission is allowing them to gain market strength. They are free to charge whatever they want without FCC approval. In contrast, A T & T rates are subject to Government review. A T & T historically has averaged its prices geographically, roughly equalizing them nationwide. The competitors can vary the prices from location to location, charging more for a 200-mile call, for example, in one area than another. A T & T is obliged to serve the whole country, while the new competitors can pick the most profitable traffic areas.

But the new long-distance competitors are going to lose some of those advantages. To gain access to customers' telephones, the new carriers until last month were paying a fee to local telephone companies equal to only 30% of what A T & T paid.

They now pay 45%, and when the equal-access switch is complete, all long-distance companies will pay the same rate.

MCI does not appear too nervous about that problem. It intends to offset the slightly lower profit margin by getting more customers and hanging on to them longer. Currently the company loses about 40% of its customers annually because of MCI's long and cumbersome access codes or occasionally poor connection quality that is due to inadequate switching systems. Those difficulties should ease with equal access to local tele phone systems.

Many customers seem willing to stick with the services because of lower prices.

Mary Plunkett, a sales coordinator for an Atlanta food company, complains that about 20% of the time the Sprint hookup "just refuses to work." Nevertheless, she adds, "But it saves us a substantial amount of money. That's the best incentive there is." Typically, tolls for both MCI and Sprint are less than A T & T's.

For customers with bills of $25 or more, a ten-minute call after 5 p.m. from New York to Los Angeles is $2.52 for Sprint vs. $3.09 for A T & T.

How much of A T & T's long-distance business can the new companies capture? Competitors predict that they could get 20% to 30%. The more likely share will be no more than 10% during the next year or two. Many consumers are as comfortable with their Ma Bell as they were with their Ma, and they will be slow to change.

For the newer companies as well as for A T & T, selling is the order of the day.

Says MCI's Carter: "We're going to give long distance an image. Having specials, packaging it, promoting it. We're going to give long distance a brand name."

The hoopla and promotions surrounding long-distance phone service have clearly just begun.

--By John S. DeMott. Reported by William Blaylock/Los Angeles and Jay Branegan/Washington

With reporting by William Blaylock, Jay Branegan