Top 3 Phone Firms Again Reach Out to Consumers

After a three-year hiatus, the telephone wars are back. On the airwaves, over the phone and through the mails, the three multibillion-dollar long-distance phone companies are regaling consumers with claims and counterclaims about a service that until the 1980s was as generic as electricity, and just about as competitive.

“They called me up,” says the voice in a new advertisement for American Telephone & Telegraph. “ ‘Hey, good news. You can save 35% off AT&T.;’ So I switch.”

By the end of the TV spot, of course, he has switched back, lamenting the allegedly misleading promises of the unnamed “they.”

Establishing Credibility

Not much doubt who “they” are, though. They’re MCI Communications Corp. and US Sprint, once mere pebbles in the shoe of AT&T; but now powerful and profitable firms that are feeling confident enough to launch a new assault on an AT&T; stronghold: the residential long-distance market.

Armed with new discount calling packages, MCI and US Sprint have unleashed multimillion-dollar marketing campaigns. AT&T; has countered with new service options and television ads that, for the first time, challenge the competition head-on, albeit without naming names.

Although no company will admit to taking its eye off the estimated $20 billion a year in long-distance calls that people make from their homes, MCI and US Sprint have for the past three years been preoccupied with technical development and establishing credibility among corporate customers.

Only this spring, boosted by improved earnings and regulatory changes that have stabilized the marketplace, did the two companies bring the individual consumer back into their sights. So fierce is the latest sales battle that the carriers, regulators say, have at times resorted to stealing customers from one another.

“We have seen an incredible increase in marketing by the big three,” said David Wagenhauser, staff attorney at the Telecommunications Research and Action Center in Washington. “The competition has really heated up. They’ve been fighting it out for the residential customer.”

The opening salvo was fired by MCI in late April, when the Washington-based company rolled out its first-ever discount calling plans for residential customers and budgeted $10 million to promote them. Dubbed PrimeTime and Supersaver, the packages give consumers a low, flat hourly rate for weekend and evening calls.

Reduced Fees

US Sprint parried in July with Sprint Plus, a package of preferred rates and volume discounts designed to attract consumers who make $8 a month or more worth of calls in the evening and on weekends. The promotional effort included 15 million pieces of mail that went out in the past several weeks.

AT&T; counterattacked over the July 4 weekend with a new ad campaign and has also reduced the sign-up fee and added some enhancements to its 5-year-old Reach Out America residential calling plan.

Frank J. Governali, an analyst with First Boston Corp., observed: “In the past, (MCI and US Sprint) had to concentrate on building the network and going after the business client base.” He called their recent efforts in the residential arena “a significant thrust.”

Aggressive marketing is crucial for all the companies, since the differences in pricing and service quality among the three big networks have narrowed considerably in recent years. Ken McEldowney, executive director of San Francisco-based Consumer Action, said that outside the special discount packages, “the actual difference between companies’ basic rates is almost nothing.”

The special calling plans, however, can make a difference for some customers, and MCI and US Sprint clearly hope to win business away from AT&T;’s Reach Out America, the original consumer discount program.

Reach Out America was conceived by AT&T; as a way of competing with Sprint and MCI at a time when the two upstarts were able to offer cheaper rates because they had inferior but low-cost access to the local phone network.

High-Margin Traffic

Today, with the laborious nationwide conversion to so-called equal access largely complete, all the carriers in most cases have the same connections. But equal access also means that all long-distance carriers pay the same connection, or access, charges to the local telephone companies, so MCI and Sprint have to be aggressive to keep their rates under those of AT&T.;

After a scramble in 1985 and 1986 to win customers choosing a long-distance company under the equal access program, MCI and US Sprint judged that the residential market was not worth too much effort. Access charges are the same 24 hours a day (and account for a big chunk of the cost of a long-distance call), so they chose to focus on the high-margin, peak-hour business traffic that accounts for more than half of all long-distance revenue. In addition, US Sprint and MCI in the past combined their own facilities with leased circuits from AT&T; or others, so the more traffic, the more costs.

But now, after having spent heavily to install state-of-the-art fiber optic transmission facilities and new switching and billing systems, US Sprint and MCI have plenty of capacity, and the cost to them of serving additional customers is very low. So they’ve once again reached out to residences.

“A company like US Sprint, with aggressive growth plans, needs to participate” in the residential market, said Jorge Rodriguez, vice president for advertising and marketing at US Sprint. “It accounts for 35% to 40% of the total dollars, it’s growing 5% a year, and it’s a segment where AT&T; retains an important share.”

In addition, AT&T;’s rate structure, which is now governed by a new regulatory system called price caps, has changed to make the residential business more profitable relative to business markets, according to Governali. A decline in access charges has also made the segment more attractive.

See Opportunity

The market research firm Dataquest estimates that AT&T; retains 82% of the residential traffic, while MCI has 10% and Sprint 7%, with the remainder divided among a raft of small regional firms. So MCI, which more than doubled earnings to $285 million on revenue of $3.1 billion in the first half of the year, and US Sprint, which returned to profitability in the first quarter after several years of heavy losses, see a lot of opportunity.

But they still must persuade consumers to buy something that’s virtually identical to something that they already have. MCI therefore accompanied its new calling plans with a $10-million ad and promotion campaign, said Wayne Gattinella, consumer marketing vice president. Sprint has also upped its ad spending, according to Rodriguez, though he wouldn’t say by how much.

AT&T; hasn’t actually increased its promotional budget in response to the challenge, according to Merrill Tutton, vice president for consumer marketing, but it has given a “more fiercely competitive tone” to its new ad campaign. “Competition has heated up. No question about that,” added Tutton. “But AT&T; has been there all along.”

Plus for Consumers

Steven Sazegari, senior industry analyst at Dataquest, predicted that price wars in the residential sector would continue, resulting in 17% to 25% discounts off regular, day-to-day long-distance prices. And the carriers also try to compete with general claims about service quality and special deals such as US Sprint’s half-hour of free calling for customers who switch.

For the savvy consumer, the competition is clearly a plus, although the discount plans should be examined carefully since their usefulness is determined by specific calling patterns, experts point out. And choosing a long-distance carrier is, after all, one of the less traumatic buying decisions that one has to make these days. For just a few dollars, you can always switch back.

CHEAP TALKBasic features of the discount calling plans from the “Big Three” long-distance companies

MCI Supersaver: $5 per hour for all interstate calls on Saturdays.

PrimeTime: $8 for the first hour of interstate calling in the night/weekend period (7 p.m. to 8 a.m during the week and all weekend except Sunday evening). Additional hours are $6.90 per hour, and customers also receive 10% off daytime and evening calls.

AT&T; Reach Out America: $7.15 for the first hour of night/weekend long distance calls (10 p.m. to 8 a.m. during the week and all weekend except Sunday evening). Additional hours are $6.90 per hour. $1 per month buys a 15% discount off evening rates and 5% off daytime rates, and $1.50 buys 20% off evening rates and 5% off daytime rates.

US Sprint Sprint Plus: $8 per month minimum usage qualifies customers for discount rates which vary according to time and distance. Also offers volume discounts ranging from 5% to 20%.

Source: Consumer Action News and companies

SLICING UP THE LONG-DISTANCE MARKET

Share of total long-distance telephone service market in 1988, valued at $47.7 billion:

7.3%: Sprint

74%: AT&T;

10.7%: MCI

8%: All other

Share of residential long-distance market in 1988:

7.2% Sprint

9.7%: MCI

81.9%: AT&T;

1.2%: All other