Claims from phone company executives aside, anyone who expects clear-cut phone bill reductions once local service competition kicks in probably hasn’t tried shopping for the best deal in long distance.
Instead of promoting easy-to-understand price cuts, phone marketers are offering a dizzying array of discount plans and special come-ons in long distance–and they seem ready to use the same approach in wooing customers for local service.
The ads and direct-mail solicitations promise big savings. But few realize that amid the ballyhoo, only about 30 percent of Americans spend enough money on phone calls to qualify for the various long-distance discount plans.
And judging by the early days of local telephone competition, the local market looks like it won’t be much different.
Since last April when AT&T Corp. launched the opening volleys in its war to win local customers from Ameritech Corp., the two firms have engaged in plenty of competitive rhetoric, but little real price-cutting, according to consumer advocates who have analyzed their offerings.
It may be possible for people who use their phones a lot to get more service for less money as new firms compete for their business, but making wise choices likely will be difficult, early experience suggests. Indeed, many people seeking a haven from complexity may well be seduced by seemingly straightforward calling plans that actually cost them more than they pay now.
The muddle is no accident, say consumer advocates. Despite each phone company’s insistence that it charges rock-bottom rates, the companies really want to avoid an all-out war for customers based on slashing prices because that would be disastrous to their bottom lines.
Instead, say critics, they prefer to win market share by giving the appearance of cutting prices, but not really cutting them all that much.
Paul MacAvoy, a professor at the Yale University School of Management who recently published an analysis of long-distance phone competition, said that the pattern likely will be repeated in local service.
“If a company wanted to give you a deep discount to win your business, you’d know it,” said MacAvoy. “There wouldn’t be any confusion. The reason for the confusion is that the marketers want you to be befuddled. They want to win your business with movie star endorsements and bonuses and gimmicks, but not real rate cuts.”
Because of various discount deals included in their offerings to Chicago-area customers, it is virtually impossible to make a straight-forward cost comparison between AT&T and Ameritech for local toll service, said Martin Cohen, executive director of the Citizens Utility Board.
Part of the confusion, he said, is caused by the Illinois phone rate structure that allows calls to be charged according to time and distance rather than a flat rate.
The advertising pitches from AT&T and Ameritech appear simple.
In launching its offensive against one-time monopoly Ameritech, AT&T’s main lure to customers was three free months of service, the equivalent of the cash bonuses long-distance companies provide customers who sign up with them.
“Free is free, and you can’t beat it for the three-month period,” said Cohen, “but after the free ride is over, it isn’t clear that AT&T’s rates are better than Ameritech’s. It all depends on how many calls you make and what kind of discounts you’re getting.”
Ameritech’s main response to AT&T’s million-dollar marketing campaign has been a gimmick of its own: reintroducing CallPack pricing options for local customers,
But even though these programs are easily understood, they cost more for most people than the current rates charged by Ameritech, said Cohen.
CallPacks enable a customer to buy a package of 100, 250 or 400 units for a set price of $10, $20 or $30. Each local call counts as one unit no matter how distant from the caller’s home, its duration or time of day. Each call exceeding the CallPack total is billed at a straight per-call rate.
“CallPacks make sense for people with unusual calling patterns who mostly call places 20 miles from home instead of calling people near where they live,” said Cohen. “The latest information we can get suggests that 80 percent of calls are close to home, so for most people, CallPacks won’t save money.
“On my local phone bill last month, I paid $17.77, for example. If I’d had CallPack, it would have cost me $31.28 to make those same calls. Another problem with CallPack is that you pay for the service even if you don’t make any calls at all. If I’d been on vacation last month and made no calls at all, it still would’ve cost me $30 for CallPack.”
Jason Few, a senior marketing manager for Ameritech, said that his company already had planned to reintroduce CallPacks to the Chicago area even before AT&T’s marketing blitz for local toll customers. The major selling point for CallPacks is their simplicity and predictability, he said.
“Our plan provides a per-call rate that is easy to understand,” said Few. “AT&T’s rates vary with the time of day you call, the day of the week, the duration and the distance. CallPacks let you avoid all that.”
Few agreed that CallPacks can end up costing customers more than basic Ameritech rates if they don’t place a lot of calls to places 15 miles or more from their homes.
“It depends on what the customer wants,” said Few. “Some people see more value in simplicity and predictability. It’s like going to a restaurant. It might be cheaper for you to park your own car, but a lot of people take valet parking because they find added value.”
CallPack’s simplicity still requires some attention from savvy customers, Few acknowledged. Customers who go on vacation can call Ameritech and cancel service during their vacation at no charge to escape being billed for calls they won’t make, he said.
The CallPack packages don’t offer the ultimate simplicity of one flat rate to cover unlimited local calling, said Cohen of the Citizens Utility Board.
“In most parts of the country they just have a flat rate for local calling, so things aren’t nearly as complicated as they are in Chicago with our different calling areas and toll charges for local calls,” he said. “If a company wants to simplify things, it could offer a flat-rate plan.”
Bill Ketchum, AT&T president for central states operations, said that his firm’s offer of three months free toll calling lured more than 400,000 new customers, which was near its goal.
“We weren’t targeting every household in Illinois,” said Ketchum. AT&T’s marketing aimed at people who already use AT&T for long-distance service and who are relatively big telecommunications spenders.
About 70 percent of Americans spend less than $10 a month on long-distance phone calls, however, and aren’t terribly attractive to phone companies. These people don’t usually qualify for discount plans, and in recent years their rates have been creeping up, regardless of which long-distance company they use.
Competition in local phone service may follow a similar pattern with the best, most-complex discount deals going to customers who use a lot of telecommunications service, said Ketchum.
“By this time next year we’ll be offering Chicago residents service in long distance, toll, local, wireless, Internet and entertainment,” said Ketchum. “Not everyone will want all those services, but we’ll offer packages to suit each customer.
“Our challenge is to come up with plans that are easy to understand but that also offer incentives for people to overcome inertia and leave the monopoly provider.”
Ketchum said the complexity of the Chicago area’s local calling rate system based on distance and length of call makes competing here more difficult than it is in Michigan and Wisconsin where flat rates prevail.
Yale University’s MacAvoy said that he doubts that price-based competition will come to local phone service in this country until the next century, although competitive rhetoric with confusing offers and special bonus deals certainly will abound within the next year or two.
Gabriel Battista, chief executive of Cable & Wireless Inc., a long-distance phone company based in Vienna, Va., also believes that it will take a few years of competition for local phone business before residential customers will see significant and fairly straightforward rate reductions.
Battista’s company caters to business customers in the long-distance market and hopes to do the same in local service, and most of the phone companies poised to enter the Chicago market are targeting business customers rather than residences.
“There’ll be a lot of activity between AT&T and Ameritech, but it’ll take a few years before you get more players really making a serious play for segments of the residential market,” he said.
