Telcos see the future in 5-cent rates

MCI WorldCom's bid to attract callers with a new 5-cent per minute evening long distance rate is most likely to attract imitators, setting a new standard for low-cost phone service that would ultimately benefit consumers, analysts said.

"We're seeing prices come ratcheting down," said Terry Barnich, president of the New Paradigm Resources Group, a Chicago-based telecommunications consulting firm. "The latest psychological barrier is 5 cents. I think we're going to see this 5-cent pricing all over."

That's good news for consumers, who are seeing increased industry competition, new technology, and deregulation transformed into savings on their monthly communications bills.

Analysts say that more price cuts may be on the way. The fees that long distance companies pay local firms like Bell Atlantic or BellSouth for their networks--which have traditionally made up about 40 percent of the average long distance phone bill--are continuing to fall. Once as high as 17 cents per minute in the early 1980s, calls now average less than 4 cents per minute.

Meanwhile, the actual cost of carrying long distance phone traffic is also going down, as companies build out new high-tech fiber-optic networks designed to handle large amounts of voice and data traffic.

"Cost declines are keeping pace with rate declines," said George Reed-Dillinger, a telecommunications analyst with Washington Analysis.

AT&T's moment of truth
But if most players in the market are likely to stabilize their prices, at least temporarily, around 5 cents a minute, the strategy of dominant player AT&T remains unclear.

AT&T, which still retains about a 56 percent market share, has traditionally lagged behind smaller players in rate cuts, preferring to rely on its brand name and wide range of services rather than price leadership. This tactic has resulted in the firm steadily losing customers--and the new round of price cuts might make things worse, analysts say.

"MCI WorldCom is asking whether this will get market share," said Boyd Peterson, a telecommunications analyst with the Yankee Group. "But even more disturbing for AT&T--they're asking, 'Will it hurt [us]?'"

The answer, at least in the near term, is probably yes.

AT&T has bet its future on its ability to bundle services like wireless, high-speed Internet, cable TV, and local and long distance phone service in a complete package, rather than meeting every competitor's price point, analysts say. The company already offers bundles of services with wireless and long distance, and has committed more than $100 billion to buying cable companies for video and local phone service.

AT&T's competitors are also pushing hard down the bundled-services road. Sprint and MCI WorldCom have spent the last five months buying fixed wireless, or "wireless cable" companies, which will allow them to offer high-speed Internet and video transmissions alongside telephone services. MCI WorldCom and Sprint have also offered discounts on Internet service to long distance subscribers.

Nevertheless, MCI WorldCom is doing its best to undermine AT&T's strategy, bolstered by the fact that far less of its own revenue comes from the residential market. Because MCI WorldCom relies more heavily on business revenue, it would suffer less fallout from falling profit margins in the consumer long distance business, analysts said.

"They're basically taunting AT&T," Peterson said. "They're saying, 'What are you going to do, go ahead with bundles or meet us in the marketplace?'"

But consumer beware
From the average consumer's point of view, the swiftly falling prices appear at first to be an unalloyed benefit.

But consumer groups and analysts warn that telephone subscribers still need to exercise caution. MCI WorldCom's plans are based on minimum monthly flat fees, and include higher daytime phone prices. Thus, a subscriber that pays a flat fee of $1.95 a month will pay 25 cents per minute for daytime phone calls, while the user that pays $4.95 a month will pay just 10 cents a minute for non-evening calls.

Consumer groups have already complained to federal regulators about this practice, which they say is a way to lower prices while still gouging callers that make few long distance calls.

In response, the Federal Communications Commission has already opened a proceeding asking whether it should ban or otherwise regulate these fees.

Analysts also note that many consumers may think they are subscribed to deals like the 5-cent per minute plan, when in fact they are signed up for the long distance companies' basic rate packages.

"Only about 50 percent of people actually sign up for these calling plans," noted Strategis Group analyst Peter Jarich. "I don't think most people realize what they're getting when they're already MCI WorldCom subscribers. Many think they'll automatically be switched to these new calling plans, when in reality they'll be getting something very different."