With long-distance fees falling, can free service be far behind?

Outlook

5-cents-a-minute options ring off the hook

next step is bundling services for fee

August 15, 1999

LONG-DISTANCE price wars are heating up. Last week MCI WorldCom Inc., the second-largest U.S. long-distance company, announced a 5-cents-a-minute plan for evenings and weekends, matching a similar pricing plan introduced by No. 3 Sprint Corp. The next day, Qwest Communications International Inc. announced a plan that packages unlimited Internet access with 250 minutes of domestic long-distance calling for $24.95 a month. No. 1 AT&T Corp.'s lowest-rate plan offers long-distance calls 24 hours a day for 10 cents a minute.

Analysts say the bottom line is that long-distance service is becoming a commodity that is falling in price. Will the fierce competition hurt long-distance companies' profits? What's the strategy behind the price cuts? Is free long-distance service, offered as part of a package, on the horizon?

Jeff Kagan

Independent telecommunications analyst based in Atlanta

In the '80s, long-distance companies AT&T and MCI went head to head in a price war and all they had to offer was long-distance service, not multiple services to customers. The margins were very thin. It was an expensive lesson to learn and they're not going back to that cycle. In the '80s there were no cost reductions, it was just MCI wanting to get market share no matter what it took.

Today the cost structure is changing. The access fees that long-distance companies pay [to local phone companies] have been slashed [by the Telecommunications Act of 1996] and that's supposed to be passed on to the customer. MCI did, and others will probably follow and match MCI's plan when MCI starts taking market share from them.

What will happen is in the next few months everybody will be finding their watermark.

In the next several months or years it may be 10-cent days and 5-cent nights. It may be 5 cents 24 hours a day, that's where I think it's headed. I asked MCI if this was a precursor to free long distance and they said, "No, the cost will never be zero so we will never charge zero" but they can use it as a loss leader.

The future will be to create your own bundle. Internet firms will make money because other services in the bundle will be profitable.

Marjorie Saint-Aime

Telecommunications analyst at Pittsburg Institutional Inc., Garden City. N.Y.

Bell Atlantic [and others] are planning to offer long distance by the fourth quarter and I think that's why a lot of long-distance providers are getting ready for the competition.

In the future, what we might have are companies offering unlimited long distance for such a price per month, or they will bundle it in a package and, for example, have local and long distance for this price then you must have their things like cable or Internet, etc.

Companies also have relatively new products they are trying to offer like Internet access, [digital subscriber lines], cable, call waiting, and caller ID, which has been very hot. So the reason why new products have come in this age is that companies are getting ready for a loss in long distance, so it's a way to balance it out.

Anthony Ferrugia

Analyst at A. G. Edwards & Sons Inc. in St. Louis

WorldCom going to a nickel on residential off-peak service is not an event that is alarming in its proportions.

This represents an opportunity to inflict some pain on AT&T. And they see regional Bell operating companies soon to be in long distance and so the Bells will be charging down the hill and likely enter the market with lower prices. WorldCom is pre-empting the RBOCs [regional Bell operating companies] pricing strategy, stealing their thunder. It's probably a very smart move.

[Free long distance is] like saying if you go to this dealership they will sell you the car with free financing. Nothing is free, they put it in the price. If long distance is free, then they have to be at least recovering the cost in some other product they are bundling the so-called free service with.

Boyd Peterson

Telecommunications analyst at the Yankee Group in Boston

Long-distance revenue is not growing, certainly as compared to other sectors of the industry like wireless and the Internet. Underlying all that is the impending threat that the regional Bell operating companies will eventually be able to offer long distance.

The reaction to this has been to calmly monkey with prices but nothing too radical. Now MCI and Sprint are coming in and playing a much more aggressive role and something radical does have to happen to affect market share.

In the short term, if consumers migrate to lower rates then that is going to have an impact on the bottom line. If everybody went to 5 cents a minute, there probably wouldn't be a major shift and everybody would lose a little bit of revenue.

Some companies like Qwest are saying long distance is never going to be free. If you take a long enough view, you can envision people just paying for phone service and having long distance be part of that package or bundle.

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