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Companies wage war over long distance

The biggest telcos battle to defend their long distance territory from competitors claiming land of their own.

Ten cents a minute. A check for a hundred dollars. Five cents a minute. A penny a minute on Sundays for calling dear old mum.

The periodic long distance price wars have sparked these offers and more as the biggest phone companies have battled for consumers' hearts and wallets.

But the familiar fights between long distance's big three--AT&T, MCI Worldcom, and Sprint--are being undermined by limbo-style pricing strategies from relative newcomers. Companies like Qwest Communications and Teligent are aggressively marketing new services, and helping to drive a new round of price cuts.

"When you just had the big three, it was much easier for them to agree tacitly on a price structure," said Terrence Barnich, president of the New Paradigm Research Group, a Chicago-based telecommunications consulting firm. Competition from the smaller companies has become much more aggressive, Barnich added. "That is fundamentally changing the business."

The last several months have seen several rounds of price cuts for consumers.

Sprint recently announced it would charge $25 for unlimited calling on weekends, along with the usual 10 cents per minute on weekdays. AT&T responded with a grumpy press release saying it would match the offer for any consumer who wanted it.

Qwest has maintained even lower prices since September, when it offered consumers a plan for five cents a minute, along with a $4.95 monthly fee. Cable and Wireless USA unveiled a $14.95 Internet service plan this week that will also give customers weekday long distance calls for seven cents a minute.

Company officials say these cuts have in large part reflected falling costs. Regulators have cut the fees that long distance companies pay to local phone companies for the use of their networks, and these savings have been passed on to consumers.

But long distance companies also have been more creative in slicing and dicing their customer base, offering different discount plans for different customers, analysts say. This has allowed companies to use their resources more efficiently, and in many cases avoid direct competition with their rivals.

"The big trend in long distance pricing is that we're starting to see very defined retail strategies," said Boyd Peterson, a telecommunications analyst with the Boston-based Yankee Group.

Small companies are targeting specific niches of business or consumer users. Qwest has used its aggressive pricing plans to climb to a one-and-a-half percent market share, while others focus on smaller, more profitable individual sectors.

Meanwhile, large companies are offering a growing list of different discount and service plans for different customers.

"We do segment the market," said Mark Siegal, a spokesman for AT&T. "Someone who makes very few calls has different needs than someone who spends their day on the phone."

This strategy also has allowed companies to focus on the most profitable customers, with plans like Sprint's that are worthwhile only for heavy phone users. It is from targeting these customers that companies will continue to pad their profit margins as competition brings rates even lower, analysts say.

"I think we're all going for the high end of the marketplace," said John Taylor, Qwest's senior vice president of consumer markets. "I don't think anybody wakes up in the morning and says, 'We're going to go after the $3 customer."

For Whom the Bells Toll
Even these new forces are only setting the stage for the entry of the baby Bell companies into long distance markets, which is expected to start as early as next year.

"There's still a lot of opportunity to grab market share," Barnich said. "But a lot of what's driving it is the fear that the Bells will get into the market."

The Bell companies now have a monopoly on their local customers' lines, and have spent the last fifteen years building up their brands. This, along with multibillion-dollar yearly cash flows, will give them huge leverage in marketing and long distance business.

Established companies plan to provide a full range of services, including voice, data, and in the case of AT&T, even cable television, in one package.

"What consumers are telling us very consistently is that they want a single company to provide all their communications needs," Siegal said. "We've been tested in the fires of competition for almost fifteen years now. We're much farther along the learning curve than they are."

"I think it will help us refocus when it happens," said Cable and Wireless USA's chief executive Rich Yalen. His company primarily will market itself as an Internet provider, with cheap long distance service as an added bargain for subscribers, he said. "I think we can very effectively compete with the baby Bells. But we'll have to see what they want to do."

Analysts say the Bells will be formidable competitors, but likely won't push the smaller players out of the market. Companies like Qwest and Cable and Wireless should have a future as long as they stick to niches and pricing plans that fall between the large companies' marketing plans, Peterson said.

"What these companies are very good at is being segmented, and being very nimble," Peterson added. "It's going to be hard, but I wouldn't say this is the swan song for the second or third-tier companies."