Business News - Long Distance Price Reduction Signifies Industry Change, Not War

Posted: 10/1999

Long Distance Price Reduction Signifies Industry
Change, Not War
By Liz Montalbano

When Sprint Corp. and then MCI WorldCom Inc. reduced their long distance pricing to 5
cents a minute in service plans contingent on certain calling hours, it was inevitable
that AT&T Corp. would have to rise to the occasion.

On Aug. 30, the No. 1 long distance provider did with two new service plans, one for
wireline customers and one for wireless customers.

AT&T One Rate 7 Cents offers consumers interstate calling from home anytime for 7
cents a minute with a monthly fee of $4.95 if customers also subscribe to AT&T’s
residential offerings. If not, the monthly fee is $5.95.

AT&T’s new wireless offering, AT&T Family Plan, enables up to five family
members to make unlimited wireless calls to each other and unlimited wireless calls to
their home phone when they call within their family calling area and purchase one of
several options for wireless calling.

Earlier in August MCI WorldCom launched its 5 Cents Everyday plan, offering consumers
nickel-a-minute calling every weekday evening and all day on weekends to counterattack
Sprint Nickel Nights, which had been launched a month before offering the same rate
between 7 p.m. and 9 p.m. on weeknights.

At the time, Atlanta-based telecom analyst Jeffrey Kagan said, "I don’t think it
(the announcement of MCI’s plan) will trigger a price war."

But a "price perception" war is a horse of a different color and, in light of
AT&T’s move and recent announcements by smaller long distance providers such as
Talk.com, Reston, Va., and GTC Telecom, Costa Mesa, Calif., that battle may be in full
swing.

A day after MCI WorldCom launched its 5-cents calling plan, which carries with it a
$4.95 monthly fee and offers 10-cents-a-minute calling during other hours, Talk.com
challenged consumers to "do the math" when it comes to their long distance
plans. The long distance competitor claimed low per-minute rates are just smoke and
mirrors when partnered with monthly rates and higher peak-hour per-minute rates.

Two days after Talk.com’s announcement, GTC began offering consumers 5 cents per minute
anytime, any day with no monthly fee, claiming its plan is the lowest long distance
any-day, anytime rate plan available to the general consumer.

All of this jockeying for position and mudslinging still doesn’t faze Jonathan B.
Haller, vice president of telecom business intelligence for Sterling, Va.-based Current
Analysis Inc. He agrees with Kagan’s previous statement even in light of recent events,
taking it a step further by insisting, "There is no pricing war in long distance
voice and there never will be."

Haller says that by the time long distance voice drops to 1 cent per minute or is even
free (and in some cases, such as Landover, Md.-based BroadPoint Communications Inc.’s
FreeWay service, it already is) long distance players will have evolved into data services
players, if they survive at all.

"The pot of the gold at the end of the rainbow isn’t long distance voice–it’s
data services," he says. "In the short term, each of the Big Three IXCs
(interexchange carriers) recognizes the potential for serious damage in igniting a pricing
war right now while long distance voice revenue is still an important revenue."

So if there’s no price war, how to explain the most recent drop in consumer long
distance prices? Both Kagan and Haller agree, it’s just the nature of the beast.

"This price reduction reflects a changing model and lower costs in the long
distance business," Kagan says. He also agrees that long distance will become a free
service bundled with other, more profitable services (following the lead of Internet
access, which some service providers are beginning to offer free–see related story, here), namely data and other more cutting-edge
technologies. With this shift, Kagan says, "there will be a wide variety of pricing
plans and bundles depending on the company, the services involved, the amount of time or
usage the customer is willing to commit to and so on."

Sprint and MCI WorldCom’s nickel-a-minute long distance plans with a monthly service
charge are just two of those variations, he says, adding that AT&T’s plan is also
evidence of competition on a bundle basis rather than one based on price.

Haller concurs. "The Big Three IXCs understand that long distance voice will be a
giveaway in a bundle of access, data services, entertainment and applications," he
says.