By Charlene O'Hanlon

Posted: 01/1998

By Charlene O’Hanlon

Next time you use a payphone at an airport, hotel, shopping mall, or other high-traffic
area, take a look at who’s providing the phone. There’s a chance it’s not the old standby
regional Bell operating company (RBOC) or independent payphone provider (IPP).

Instead, it may be your friendly neighborhood competitive local exchange carrier (CLEC)
that’s making the extra dime. Or, it could be the property management company that owns
the mall. Or even the hotel owner.

Changes taking place in the payphone industry–most notably, the resolution of
dial-around compensation and deregulation of local coin rates–have made payphones an
attractive business proposition for a host of new players in the industry. Groups that
never before thought of payphones as a lucrative venture now are taking a fresh look.

CLECs: The Heir-Apparent

CLECs, in particular, have taken considerable interest in payphones. As the smoke
clears from the fires fanned by the Federal Communications Commission’s (FCC’s) rules on
payphone compensation, CLECs are viewing the payphone industry as a moneymaker for the
first time in their brief history.

"Payphones won’t ever represent a high percentage of the total revenues for
anybody, but CLECs now are looking at them more seriously," notes John McDonald,
president and chief operating officer of Dallas-based payphone manufacturer Intellicall.
"The CLECs are going to look at how they can capitalize on changes that have taken
place and improve the performance of those businesses."

Roger Cawley, vice president for public affairs for Staten Island, N.Y.-based Teleport
Communications Group, concurs. TCG, a CLEC that has been providing payphone service since
1991 and now has 5,000 payphones in such locations as the port authorities of New York and
New Jersey as well as the World Trade Center, views it as a natural expansion of a
company’s service to its customers.

"We viewed payphone service as an opportunity to expand our service
capabilities," he says. "Also, since we have digital switches, it gave us
opportunity to add to the existing platform. We want to be able to provide services to our
customers across the board. I don’t think there should be any area that’s out of reach for
us."

Tracey L. Gray, president and chief operating officer of Sarasota, Fla.-based Elcotel,
also sees a coin-operated future for CLECs. "We see an indication that CLECs will
find payphone operations attractive," he says. "As they establish their
operations, CLECs will find payphone operations to be attractive to them, particularly in
large public facilities such as airports, convention centers and transportation
facilities."

Gray envisions a big push in the next two years as more CLECs become more entrenched in
their markets and consumers recognize and feel comfortable with their service.

Elcotel, whose customer base is primarily private payphone owners, recently merged with
Technology Service Group of Atlanta, a provider of microprocessor-based intelligent
payphones and network management systems. In September, Elcotel acquired the public
terminal assets of Lucent Technologies, which gives Elcotel the tooling, inventory and
license rights of Lucent’s payphone business.

Name Recognition

CLECs also view emerging payphone opportunities as a way to capitalize on what was for
so long either monopolistic and, in some cases of fly-by-night IPPs, without scruples.
Notes TCG’s Cawley: "(Payphones are) an opportunity and a market that is only
beginning to be tapped, because many municipalities of state government in the past have
given their business to the local dominant carrier. Now a real awareness has developed
that there are other players out there besides the carriers and the IPPs; players that can
deliver a certain level of service and quality."

However, he adds, CLECs getting into the payphone business not only must make the
commitment to provide a high level of service, they also must follow through on that
commitment. Cawley expands, "If CLECs are providing payphone service, they must
provide it at the same level across the board. They can’t view it as lesser service just
because it’s not the big moneymaker for the company. The customer expects the company to
provide that service with the same quality as their other services."

Rough (In)Roads Ahead

Although many in the industry view CLECs as the next generation of payphone owners,
especially in light of deregulation and the fact that many RBOCs are up in arms about the
costs associated with dial-around compensation, Kevin Austin, chief operating officer for
North Atlantic Marketing, Norcross, Ga., sees more turmoil ahead before the market
settles.

"There is a real state of confusion," he says. "More than anything I see
IPPs and Bell companies trying to figure out whether or not they’re going to stay in the
business. I think over the next year it’ll shake out and we’ll see whether many get out of
the business. If they stay in, they’ll have to set up a separate payphone division, and a
lot of them are wondering if it’s worth it."

However, out of chaos may come copious opportunities for those willing to take a
chance, notes Elcotel’s Gray.

"With the RBOCs and large independents, we are seeing many initiatives to upgrade
their installed base and improve their payphone operations," he says. "They see
opportunity to improve the revenue stream and justify improving their services as a way to
position themselves to take advantage of better payphone services and better
revenues."

Gray and Greg Hogan, national accounts manager for smart payphone manufacturer Protel,
Lakeland, Fla., both see the future in non-telco providers.

"Today we are seeing a number of companies exploring a payphone opportunity (in
places) where they have some other link to the location," Hogan says. "A good
example would be a property management company that has the volume of locations to justify
the creation of a separate company to provide payphone service in those locations."

Gray, on the other hand, does not see a large infusion of specific groups entering the
industry; rather, he sees entrepreneurs with impressive financial backing.

"I see venture capital money coming back into the industry, which makes it
possible for new players who have the wherewithal and the access to funds to establish
payphone operations," Gray says. "Fairly well-backed interests are beginning to
acquire smaller or medium-sized payphone routes and put together consolidated payphone
operations."

Same Money, Different Strategy

Hogan believes the new breed of payphone owner needs to approach the market differently
than the traditional RBOC or IPP. "These (new payphone owners) already have access to
the locations," he says, so location acquisition and market saturation generally are
not concerns, as with traditional payphone owners. "One of the goals of traditional
payphone providers is to add phones to grow their company. The payphone owner with control
of the location may focus growth strategies on creating new revenue sources from the same
phone, since there is a limited number of potential locations," Hogan says.

Adds Intellicall’s McDonald: "There is great potential for payphone owners now to
bring a whole new world of services to the public. That’s why people who in the past have
not paid a lot of attention to the payphone industry now are seriously looking at it. A
lot of things you can do now just weren’t practical under a regulated environment."

Such new services include adding data ports to phones, offering phones with screens to
enable Internet access and more, depending on the payphone owner’s imagination (and
pocketbook).

Future Outlook

Until the market shakes out and everyone feels comfortable with the FCC’s regulations
on payphone compensation, those in the industry will feel more like they’re standing in
quicksand rather than on solid ground. However, no one can deny the opportunities are out
there.

"There is a lot of untapped opportunity," says McDonald. "Payphone
owners now are taking some time to kick the tires and sort through the weeds to find out
what those opportunities are. Any industry that has been deregulated has become a much
better industry five years later, and I think we’ll see that evolution in this segment of
the industry."