AT&T pricing flip-flop shows limits of strategy

In a hasty reversal, the long-distance company backs away from price hikes that had recently raised basic rates for millions of consumers, after regulators and consumer groups raise public protests.

4 min read
Ma Bell is going back to the drawing board, with more than a little egg on her face.

In a hasty reversal, AT&T yesterday backed away from a series of long-distance service price hikes that had recently raised basic rates for millions of consumers, after regulators and consumer groups raised public protests.

The long-distance company's actions highlighted efforts across the communications industry to focus on their most lucrative customers-ideally those who subscribe for full packages of voice, video and data services.

But the embarrassing flip-flop may show that companies like AT&T will be hard pressed to abandon traditional businesses and low-end subscribers in favor of more attractive customers, or risk angering regulators with the power to squelch newfound ambitions.

"In terms of their timing, it couldn't have been much worse," said Allan Tumolillo, an analyst with Probe Research.

The price increases were intended to recoup diminished revenues stemming from AT&T's decision to lower rates on Sundays, a day when many consumers make calls. The company also did away with minimum monthly fees for some customers.

The company had vowed to pass along billions of dollars in savings to consumers as a result of reduced access charges, the fees assessed by local phone firms for connecting a long distance call. The low-cost Sunday fees were intended to accomplish this, according to company representatives.

However, consumer groups and federal regulators immediately balked at the plan, leading to AT&T's quick about-face.

"We lowered our rates significantly on Sundays, but that message of real value didn't come across," said AT&T spokesman Mark Siegel. "Based on the feedback we were hearing, we decided to take a deep breath, take a step back and look at other alternatives."

AT&T's basic rate plan typically is used by lower income consumers, or infrequent phone users who don't make enough calls to qualify for lower-priced packages. The per-minute basic rate charges are among Ma Bell's highest.

To make its pricing clear, Ma Bell plans to send a letter to some 30 million basic rate customers, informing them of the new rates and other calling plan options once the company settles on a new proposal. Siegel suggested AT&T would come to a decision shortly.

But the long-distance rate flip-flop raises questions about Ma Bell's strategies for attracting the most lucrative customers to its new voice, video and data services--potentially at the expense of less desirable users.

Communications companies such as AT&T are scrambling to sign up the so-called power users, enticing them with low-cost bundled services but recovering profits through those customers' high usage. Analysts say consumers that have lower usage patterns can actually cost carriers money because simple customer account management and billing can supercede their lower profits.

"These (basic rate customers) are people who for any company are not very profitable. (AT&T's) strategy looks like one of saying, 'Gee, if you don't make many calls we don't want you very much,'" said Paul Talmey, president of Talmey-Drake Research & Strategy, a Boulder, Colo.-based marketing and public opinion research firm that focuses on the communications industry.

"They all want the high-end user," Talmey said. "They need those people to pay for the infrastructure they're putting in."

Some analysts question whether AT&T eventually will employ similar rate hikes and differential fees for its new local cable phone and high-speed Internet access services, two technologies with huge profit potential but which are dependent upon costly network upgrades.

"I don't think you can sustain some of these network models unless you raise some rates," Tumolillo said. "Until people get a handle on how much bandwidth they need, carriers are going to have to keep upgrading their access networks. It's very hard to do on these flat-rate schemes."

AT&T representatives said the company will continue to offer its most active users the best rates, but disputed assertions by some consumer groups that Ma Bell is interested only in high-income customers.

"The more you spend, the better the price is going to be," Siegel said. "That doesn't mean that other customers--even those that don't spend very much--aren't important to us."

Analysts say marketplace competition may ultimately keep AT&T and others' prices in check, whether it is long distance, video or Net access.

"Carriers do these things and sometimes they're flat wrong about elasticity of demand and what people are willing to pay," Probe's Tumolillo said.

AT&T has not yet indicated whether the suspended increase in some rates will affect its annual earnings projections, according to Bloomberg.

Bloomberg contributed to this report.