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Tel-Save in AOL long distance deal

Tel-Save Holdings reaches an exclusive agreement with AOL to offer long distance telephone service to AOL customers.

The much-hyped promise of bundling information services such as phone, Net access, and cable television, is increasingly becoming a reality.

Today Tel-Save Holdings (TALK) announced an exclusive multiyear pact with America Online (AOL) to offer what it called "very competitively priced" long distance phone service to AOL's more than 8 million customers. Local and wireless phone service could be added later.

Company sources expect the cost to be less than 10 cents per minute for interstate calls. The service begins with a sampling of customers in early summer and will include all customers this fall. Customers will sign up and pay their bills online by credit card.

Stock in Tel-Save, an independent long distance carrier, leaped 5-7/8 to 19 on the news in midday trading, and at least one analyst, Salomon Brothers, said it upgraded the stock to a "strong buy" and nearly doubled the company's 1998 revenue to $900 million.

The deal is a financial coup for AOL: The nation's No. 1 online service receives $100 million from Tel-Save. (The $100 million payment, structured more as a loan, represents about half of Tel-Save's annual revenue.) Tel-Save has agreed to provide future payments to AOL based on a percentage of Tel-Save's profits.

The deal also shows how AOL is starting to leverage its brand identity and subscriber base to generate revenue. "This demonstrates our ability to use the unique position of AOL in the online world to generate significant, high-margin new revenue streams," said AOL Networks chief executive Bob Pittman.

Communications companies increasingly are bundling their services to provide so-called one stop shopping for customers. Surveys show that many consumers would like to have such services bundled for the opportunity to receive discounts and a single bill.

Tele-Communications Incorporated and Sprint have such an arrangement. In a recent promotion, TCI customers were offered a discount of up to $4 per month on their cable TV bill in the San Francisco Bay Area if they were to sign up with Sprint for long distance phone service.