Payphone Hardware Providers Face

Posted: 12/1997

Payphone Hardware Providers Face
Uncertainty with New Products and Optimism

By Debera Bell-Beam

Payphone hardware providers for the most part are looking
forward to next year with new products, new marketing campaigns
and a new year’s optimism, but this year certainly has brought
with it some mixed blessings.

Payphone compensation issues have both positively and
negatively affected providers, who experienced soaring sales when
the order first was announced as part of the Telcom Act in 1996,
only to see sales falter during ensuing litigation that is likely
to continue for some time. "Vendors have decided to pull
their low-income phones and relocate them," says Ron McKaye,
president of Communications Connections, Crawfordville, Fla., a
wholesale supplier of payphone parts and housings in addition to
complete payphones. "It’s affecting the whole industry.
Other suppliers I’ve talked to have said the same thing."

Last year saw increased payphones sales, because the Federal
Communications Commis-sion had ordered long distance carriers to
compensate payphone service providers for 800 or access card
calls. The FCC set the compensation rate at 35 cents. Long
distance carriers filed suit, and a subsequent court order forced
the FCC to reconsider its rate formula, which resulted in a
recently announced sum of 28.4 cents per call. But, the new rate
is likely to find its way into the courtroom, because this time,
both the long distance carriers and the payphone providers are
unhappy with the FCC’s math.

Wholesale suppliers like McKaye are left wondering what the
new year will bring. "The money went away when the
litigation started," McKaye says. "We don’t know what
to forecast next year. Right now, it’s real shaky."

The real problem is wholesalers must leverage volume to get
good discounts. "If I order something in the thousands, I
get a great price. I can pass on savings and still retain my
margins," McKaye says. "Since we don’t really know if
or what customers are going to be buying, because they’re
relocating phones, we are buying smaller quantities.

"But we’re still having to give great prices to keep up
with the competition and to get the sales. In turn, our margins
are smaller, because we’re not getting the discounts for large
quantities," says McKaye, who adds Communication Connections
also took heavy hits in federal inventory taxes once sales slowed
after unresolved payphone compensation issues escalated into
litigation, and the company was left with large inventories.

McKaye’s solution is to buy directly from Asia. He anticipates
being able to acquire half of what Communication Connections
sells next year directly from Asia. "By doing that, we’re
able to bring our costs down to stay in line with our
competition."

Although industry growth has stuttered for wholesalers caught
in the wake of compensation litigation, other payphone hardware
providers–so far, at least–have not been so hard hit. Elcotel,
Sarasota, Fla., a payphone manufacturer specializing in
microprocessor-based intelligent payphones and network management
systems to domestic private payphone operators, has expanded its
market presence with two recent acquisitions.

First, Elcotel signed an agreement in August with Technology
Service Group Inc. (TSG) to merge business operations. TSG,
Atlanta, also specializes in microprocessor-based intelligent
payphones and network management systems but serves public
telephone companies, according to company reports. Both companies
have begun developing international programs: TSG with wireless
card products and Elcotel with wireline card and coin products.

Second, in October Elcotel bought Lucent Technologies Inc.’s
Public Terminal assets, which include tooling, inventory and
license rights to manufacture, market and distribute payphone
products for both public regulated and private operators
worldwide. Moreover, Elcotel has been granted licenses for
patents and technology developed by Lucent Technologies and Bell
Laboratories for such payphones. "We can now provide
domestic and international customers for these products with a
continuing supply and ongoing support from Elcotel," says
Tracey L. Gray, Elcotel’s president and COO.

Elcotel also is working on a new product with a display that
includes call detail information and multiple language
capability, as well as speed dial, a data port and a smart card
reader. Release is scheduled for the first part of next year.
Also, with the focus on per-call compensation, "We’re
putting special software capabilities not only in our network
software but in the phones as well to help people track
calls," says Rick Lubbehusen, senior sales director for
domestic sales.

"There’s potential for growth in the market now which has
not been there in past years," says Intellicall’s President
and COO John J. McDonald Jr., who acknowledges a tone of cautious
optimism has pervaded the payphone industry. In addition to
dial-around compensation, which ultimately will be settled,
McDonald is referring to deregulation as it applies to coin
rates, Canada and Mexico. Also, with telecom providers being
forced to separate their payphone operations, McDonald says the
market is fairly ripe for some healthy sales as the new
stand-alone payphone providers look to replace their dumb phones
with newer technology.

Intellicall, Dallas, is a worldwide provider of payphones and
payphone network platform-based products designed to operate,
manage, monitor and modify payphone systems. Intellicall’s latest
intelligent payphone, the AstraTel-2, incorporates advanced
microprocessor technology that internally performs all functions
associated with placing a phone call. Operational software and
features of these payphones may be modified from a remote
location by means of proprietary software. AstraTel-2 fits into
almost any available housing and can easily retrofit competitors’
payphones with common spare parts to reduce operational costs.
And, AstraTel-2 includes Intelli*Star with its advanced store and
forward capability to process automated 0+ calls.

Protel, Lakeland, Fla., manufactures smart coin/card-type
public telephones for domestic and international markets.
Protel’s Stellar Series Model 310 smart payphone provides a
low-cost, high-value solution to payphone service providers for
locations that demand basic coin telephone service, according to
company statements. The Series Model 310 is offered exclusively
as a complete telephone utilizing Protel’s Habitat housing.
Habitat housings feature electrode-position undercoating
protection, a custom powdercoat finish, super chrome-plated
fixtures, waterguard seals, an all-metal superdial, a
micromagnetic Lexan hookswitch and upper housing lock guards. The
Model 310 includes electronic serialization, 1200-baud FSK modem
communications, downloadable memory, a durable protective chassis
cover, remote diagnostics and call detail recording.

Payphone manufacturer Quadrum, Huntsville, Ala., is
introducing its new Rocket Escrow, phase one of its next
generation coin path technology–The Rocket. The Rocket Escrow
sets new, higher standards for escrow management and is a total
replacement of the industry standard relay/hopper. Featuring an
all-electronic design, with no adjustments needed, greater coin
capacity and minimal moving parts, the escrow minimizes payphone
owners’ most aggravating and expensive service problem–coin
jams, according to a company report. The Rocket Escrow works with
both mechanical coin mechanisms and electronic coin scanners on
standard Quadrum-style housings.

Amtel Service Corp., Banning, Calif., replaces missing and
broken pieces, refurbishing pretty much the whole package.
"We take a piece of junk and make it look brand new and work
brand new," Vice President and co-owner Leona Elder says.
"All of our work is custom work." Amtel also provides
the cosmetic touches to payphones, such as powdercoating a
gold-vein on the faceplate. "The trend is not in the
payphone but in the boards," Elder says. "Customers
tend to swing from one maker to another and back."
Otherwise, the housings are pretty much alike, she says.
"Also, people are refurbishing instead of buying new.
There’s so much equipment on the market that they don’t know what
to do with it," she says. "Why go out and buy new when
you can have refurb for sometimes half?"

Communico Supply Inc., Clearwater, Fla., is a supply company
that sells payphones and all the parts that go into the makings
of a payphone, including installation needs (backboards and
enclosures) as well as tools to install and repair them.
"It’s a mature market now," President John Lilla says.
"Now, many of those people who got into payphones new are in
a position several years later to seek repairs for phones that no
longer are under warranty. It’s time for them to look for
replacement parts."

Depending upon location, handsets are replaced rather
frequently, for example. "I think the average is probably
one to two handsets per year per phone. Some, however, need
replacement once a month due to high usage and, in some cases,
callers’ strength," Lilla jokes. Communico also supplies
collection equipment–coin boxes and carrying cases, to name two.
The coin-box carrying case is a six-compartment case that makes
it easier for a collector going into a mall or store that has
several payphones in it. "More companies are becoming aware
of that piece of equipment," Lilla says.

The bigger news, however, is a low-cost, fiber optic sealing
mechanism. Coin boxes have used lead or plastic in the past. And,
until now, the only companies that used fiber optic sealing
technology were the very largest of providers, in part, because
the sealing machine was fairly expensive, Lilla says. Fiber optic
sealing, then, was cost effective only for companies moving large

volumes of coin boxes in and out of their accounting centers.
Lilla says the manufacturer now has developed a method by which
smaller companies will be able to attach the fiber optics seals
with a hand-held tool. They also will be able to use a hand-held
tester to determine whether the seal has been broken when the
filled box returns, Lilla says. "If the seal isn’t intact,
it means some of the coins have been removed. It’s a security
issue. It also makes the workers who collect and count the money
more comfortable."

Tatung Telecom, Mountain View, Calif., supplies a full line of
payphone housings and parts. "And, we have a brand new
product, the Non-Stop Escrow, which replaces the traditional
relay hopper," says Sales Manager Grace Lau. "It’s
easily field retrofitable, made of die-cast material, and it’s
solenoid-based rather than relay-based." The benefit of
solenoid: fewer moving parts, reduced power consumption, lower
failure rate and, finally, lower price. "We also have a
great product, the StuffBuster Retrofit Kit," which replaces
the traditional mechanical coin mechanism. It’s a combination of
anti-stuffing bracketry and a Mars MS-16 electronic coin
mechanism. This retrofit kit resolves former coin jam problems,
Lau says. And it has improved coin-handling efficiency. "The
combination of the Non-Stop Escrow and the StuffBuster Retrofit
Kit pretty much keeps the phone running non-stop," Lau says.

Universal Communications, Cornelia, Ga., sells payphones and
parts, also offering complete refurbishing services. Moreover,
Universal imports its own brand of parts as well as distributing
other brands. "One of our newest products is a security
cover made of stainless steel. It’s important because security is
becoming a bigger and bigger item as phones become smarter and
cost more," says National Marketing Director Rick Crabtree.
"It’s a big investment."

No fancy names yet, it’s just a Universal security cover.
Crabtree says he believes buyers are becoming more quality
conscious, and Universal is "certainly trying to cater to
that. Price is a wonderful thing, but I think we’re seeing a
close to days past where people were penny wise and dollar
foolish. Those people still exist, but I think a lot of payphone
providers now are thinking that if you can spend a dollar to make
something last longer than if you spend 50 cents, then spend the
dollar. Nothing is more expensive to a payphone provider than a
payphone that doesn’t work."

Everybody’s coming out with new generations of
payphones," Crabtree says. "One is obsolete even before
it’s installed." With that, there’s a big trend to get
involved in a trade-in program, trading in an older generation
for a new one. "We’re heavily involved in that, and, by all
indications, we will be for quite some time," Crabtree says.

But refurbishing also is hot. "It’s part of the national
movement to recycle things. It also offers independent payphone
providers an opportunity to get a like-new payphone for
tremendous savings," he says. Refurbishing is especially big
for such parts as handsets. "We’ll do them for $8 rather
than the $15-to-$20 cost of a new handset," Crabtree says.
"It’s a way to save money and still have a quality product.
And, I have customers who literally measure the life of a handset
in hours."

North Atlantic Marketing, Norcross, Ga., is a distributor for
Quadrum and Protel products among others. But North Atlantic
offers much more than payphones. "We’re bringing in a
diverse number of items to carry other than just payphones
themselves," COO Kevin Austin says. So, for example, North
Atlantic can supply a hotel’s payphones plus headsets for its
operators and even a two-way communications device for its
security department. "We look at ourselves as a complete
telecommunications shop, so people don’t have to call 16 vendors
to get everything they need," Austin says.

He believes deregulation is good for the payphone sector with
Bell companies expanding their lists of suppliers. The result is
competitive pricing, and North Atlantic believes more business
rather than less will be another benefit. Moreover, Austin sees
such trends as more companies getting into smart boards and
increased movement on the international front, where payphones
are especially critical to third worlds.

He notes the uncertainty that has left many with an unclear
idea of which direction the payphone industry will take has begun
to settle, so providers can start making smart business
decisions.

"Whether it’s 12 cents, 42 cents or 28 cents, there’s a
sense of direction now for payphones," Austin says.
"The field is leveling out–that should benefit everybody in
the business."