PHONING HOME

	August 30, 1999
	Jeff Kagan, Telecom industry analyst, and Dennis Kneale, executive editor at Forbes magazine, discuss the current price war in the long distance telephone business.

JIM LEHRER: Media Correspondent Terrence Smith begins our two-part look at the telephone business. TERENCE SMITH: At a press conference this morning announcing his company's new long distance rate plan, AT&T Chairman Michael Armstrong said, "It's amazing how complicated this industry can make saying, 'hello.'" To help us try to uncomplicate "hello," we're joined by Dennis Kneale, the former technology editor at the Wall Street Journal, now an executive editor at Forbes magazine, and Jeff Kagan, an Atlanta-based telecommunications industry analyst, whose clients include many phone companies. Welcome to you both. Dennis Kneale, are we in a full-scale price war now? DENNIS KNEALE: Well, I think we are. What AT&T did today just suddenly slashed its lowest prices by another 30 percent, and it expressed a real willingness it go 50 percent lower, and prices are going to go even lower still once their archrivals, the Baby Bells, get into the market. For consumers it becomes a matter of will you be alert enough to catch it? TERENCE SMITH: Jeff Kagan, what's the significance of this, both for the industry and for the consumer? JEFF KAGAN: Well, first of all, I guess I'd like to also just touch on the price war issue. I don't really think this is as much of a price war as a resettling of the prices at a new level. TERENCE SMITH: What's the difference between the two? JEFF KAGAN: Well, the difference is a price war has no goal in mind other than just to scoop up as much market share as you can, no matter what the cost is. But every few years, as the cost of providing service goes down, you have the opportunity to have the prices find a new level. We saw this happen a few years ago when the prices fell to about 10 cents per minutes, 15 cents per minute. It's happening now it because the access fees that the long distance fees pay to the Baby Bells has been cut. It will happen again in another year or two. And I don't think we're going to see an endless, downward spiraling of the prices. I think we're going to see it find its level around 5 cents to 7 cents per minute, 24 hours a day. And it will stay that way for a year or two and then we'll see it drop again. One thing is for sure -- the price of long distance has come down significantly. In 1984 the price of long distance was 35 cents to 40 cents per minute when Ma Bell broke up. And now we're looking at 5 cents to 10 cents a minute. The long distance industry has come a long way, baby. TERENCE SMITH: Dennis Kneale, what do you think Michael Armstrong was really saying when he talked about the complexity of the business? Was it an argument for simplicity? DENNIS KNEALE: It sure was. I mean, there are so many pricing plans, and consumers are so confused. You know, 25 or 30 percent of customers aren't on a discount plan at all. It's a matter of what time you call and what time zone you're in when you're calling and all kinds of... the dial-around services where you dial 10-10-345, et cetera, et cetera. And he just wants to take a simpler approach...7 cents a minute, no matter what day it is, weekends, weekdays, any time of the day. A 30 percent price cut, though, is pretty significant. I do think that prices...you know, in four or five years, you might see prices go to zero. Long distance might be free if you buy our Internet access, our cellular service, our cable service, our local telephone service -- we'll throw in long distance free. Consumers will benefit here and the companies are going to be having to deliver on that. TERENCE SMITH: Jeff Kagan, is it possible to say what it actually costs one of these companies to provide you with a long distance call? JEFF KAGAN: No, it's difficult because you've got a lot of legacy systems and a lot of new technology mixed in. You've got costs that you pay historically that don't necessarily have any real correlation of what the cost is of providing service today. You see that with the Baby Bells; you see that with the long distance companies. It's very difficult to do that. But the cost of providing service is going down. I think Dennis is right. I think we're going to see the cost of providing service get to be so low that the long distance companies will eventually give it away for free if you buy a larger bundle that they make money on. Now, I've asked Mike Armstrong this from AT&T this morning on the call, and I've asked other telecom executives, and they say no way. They say they're not going to be giving away long distance. But you really what you need to do is put on your visionary cap and you have to realize that if it's only going to cost a penny or two or three for long distance, you can afford to give away a lot of long distance if a customer will sign up for the local phone service, The Internet service, the wireless phone service, the cable TV. And it might not just be the long distance service that's given away for free. Maybe you, as a customer, will say I want my cable service for free so that you buy the bundle that has cable for free; you have to pay for long distance and everything else. I think we're moving toward bundling. We're moving toward the battle of the bundle. And it's getting to the point where the cost of providing these services are going way down. Each company is providing a wide range of services. You're seeing a convergence going on in what used to be previously separate segments and these companies can afford to now bundle economically and give one thing away that's low cost to get to you buy a bunch of other things they make money on. TERENCE SMITH: All right. Dennis Kneale, you mentioned a significant percentage of the customers don't make use of these plans. Is that because they're not sufficiently high volume customers? Or do they just not understand? DENNIS KNEALE: Well, one thing is if you're a low-volume customer, you just don't care. But also it's just hard to even track all this stuff and all the changing prices. Can any of you out there right now pick up the phone and call AT&T to demand you want to get on the new 7 cent plan? I'm not even sure what the phone number is. It's just a lot harder than you think. On your earlier question, though, to follow up, what is the real cost? The newer the player, the lower the cost. Quest Communications is stringing the nation with fiber and its actual cost it said to us is maybe a penny or two per minute. And that's just right now before they've kind of earned out the investment of building all of that network. So it will go even lower still. It's just that the consumer now is going to have to be more activist and more aggressive than ever before. You can call any of the long distance players and they'll quote you different prices and suddenly if you ask and follow up with a new question, they'll say, yeah, I can do that. I was going to sign up for AT&T's 15 cent a minute plan and I was told to ask about ten cents and I said what about the dime a minute plan? They said we have that. They weren't even advertising it. JEFF KAGAN: It's up to the customer. The customer really needs - I think Dennis has hit it right on the nose. The customer needs to be able to take charge. And I think once a year they are should take a look, because I guarantee you, with all the new services that are rolled out every year, every year you're outdated. You need to either sign up for a new service, even within the same carrier that you're already using or with another carrier. Don't just sit it on. DENNIS KNEALE: There's something like 16 million households right now every year surf back and forth among the different plans. You give me $100 check, I'll switch to you. Hey, you give me some free months of service, I'll switch to you. And that number needs to grow if consumers want to benefit from this current price adjustment, shall we call it. TERENCE SMITH: Right. Paul Kagan, there were complaints already today from consumer groups that there's a catch in all of this. There's a minimum price every month. And the consumer groups complain that that's unfair to charge people that, whether or not they use long distance. JEFF KAGAN: Well, first of all, it's Jeff Kagan. TERENCE SMITH: I'm sorry. JEFF KAGAN: That's quite all right. TERENCE SMITH: Forgive me, Jeff. JEFF KAGAN: Paul is a friend out in California. He's in the business, too, so we get confused sometimes. We have to remember that a price war was -- back in the 80's was simple, straight, permanent prices that were being shaved. The margins were being shaved. It was a blood bath for the carriers. They're not going to get back into that kind of a mode again. What happened was the last round of price cuts, which brought us down to about 10 cents a minute, you had to pay $3 or $4 or $5 a month to get that 10 cents a minute. That's not going away. Long distance companies have historically had to spend more money sending a bill to a customer than many customers ever spent. So they would lose hundreds of millions of dollars on many of the customers because they just didn't spend more than a dollar or two a month. So what that charge does is allows the long distance companies to remain profitable. The customers don't have to sign up with a plan that has a monthly service charge. They can sign up for the 25 cent a minute plan if they have only spend $1 or $2 or $3 a month. But if the customer is spending enough to save some money, you can easily make... and if you can make up that monthly charge, then 5 cents a minute is a whole lot better than 25 cents. TERENCE SMITH: Dennis Kneale, very quickly, will all this lead to an increase in caller volume? DENNIS KNEALE: That's a good question actually. AT&T is certainly making that bet. And I know that once I switched over to 10 cents a minute and then I adopted AT&T's Digital One-Rate cellular phone call plan, I started making a lot more calls. And so I think for a certain slice of the consumer population out there, sure it will. TERENCE SMITH: Dennis Kneale and Jeff Kagan, thank you both very much. DENNIS KNEALE: Thank you. JEFF KAGAN: Thanks.