Long-Distance Price War Heats Up With AT&T; Cuts : Telecom: Phone company drops residential rate to 7 cents a minute, 24 hours a day, in bid to secure its dominant position.
In a battle for control of the $80-billion U.S. long-distance market, telephone companies have dropped residential rates to an all-time low, and the price war kept up Monday as AT&T; slashed its rates even further.
The price war has led to speculation that long-distance phone service eventually will be “free” with a package of other communication services.
The intensifying competition reflects the continuing shake-up in the once-stodgy U.S. telephone industry, where phone companies are being forced to reduce rates because of intense competition in the long-distance market stemming from the 1996 Telecommunications Act.
Some telephone companies are making a push to keep consumers by offering package deals with local service, long-distance and Internet connections--and in some cases with dramatically lower prices.
Price-slashing has been commonplace in the residential long-distance market since 1995, when Sprint first introduced a rate of 10 cents a minute.
AT&T;, still the dominant player in the long-distance telephone market, has seen its market share slip, but it jumped in Monday with its own new discount plan to hold onto customers.
AT&T; is dropping its residential long-distance rates to 7 cents a minute, 24 hours a day, in an effort to simplify complicated pricing plans commonplace in the industry. The company’s announcement follows rate reductions earlier this summer by Sprint Corp. and MCI WorldCom Inc., which dropped their evening and weekend rates to 5 cents a minute. Sprint and MCI WorldCom currently charge up to 25 cents a minute for daytime calls.
Although consumers are benefiting from ongoing price reductions in long-distance residential service, investors worry that this will keep cutting into phone companies’ profits and revenues.
Indeed, AT&T;’s move led to a sharp downturn in shares of all major telephone companies. AT&T; stock closed Monday at $46 per share, down $1.50 on the New York Stock Exchange. AT&T;’s stock has fallen nearly 30% since January. MCI shares fell $2.44 to close at $76.06 on Nasdaq.
AT&T;, which holds 62% of the nation’s long-distance market, has been battling Sprint, MCI and numerous companies that resell long-distance to retain the No. 1 spot. The nation’s largest carrier popularized flat-rate pricing 24 hours a day in 1996, when it announced a rate of 15 cents a minute.
AT&T; has lost revenue in the last several years to an aggressive marketing push by MCI for dial-around services that let consumers bypass their long-distance carrier in favor of lower rates.
Lower rates at all three carriers raise the question of whether phone companies will eventually make long-distance calling free to entice consumers to buy bundles of communications services. Carriers hope to use these bundles to sell high-end services, such as high-speed Internet access, that would make up for profits lost on such services as long-distance that have become commodities.
“We’re taking long-distance and integrating it and bundling and packaging it with other communications services that we know consumers desire,” said C. Michael Armstrong, AT&T;’s chairman and chief executive. “So they get superior service, and they spend less by having one connection with one company.”
Although free long-distance could become a reality, analysts said price wars are likely to slow when per-minute rates fall to 4 cents, the amount long-distance carriers must pay local phone companies to access their networks. Long-distance companies rely on the Baby Bells to connect their calls to consumers through the Bells’ local networks.
Analysts said investors are concerned that AT&T;’s announcement will prompt a bruising price war for long-distance services reminiscent of those in the early 1990s, when phone companies dropped their rates in answer to competitors’ plans and in turn saw their profit margins drop.
Sprint’s stock fell after the company announced its lower long-distance prices in July.
The difference this time, however, is the extra monthly fees that phone companies are charging for the cut-rate plans, which will allow them to retain some profitability per subscriber, said Jeffrey Kagan, an Atlanta-based telecommunications consultant.
Consumers who order the new AT&T; plan will be required to pay a $5.95 monthly fee to get the 7-cents-a-minute rate. This fee drops to $4.95 if consumers use AT&T; for their in-state long-distance calling. Those most likely to benefit from the service are frequent long-distance users who also make calls during the day.
“You have to do your division and notice that you’re paying in advance for 85 minutes of talking with this plan,” said Linda Sherry, a spokeswoman for Consumer Action, a San Francisco-based watchdog group.
Sprint’s “Nickel Nights” plan also has a monthly fee of $5.95, but its discount rate applies to only state-to-state calls placed during certain hours. For calls made during other times, the rate jumps to 10 cents a minute.
Competitors say that AT&T;’s push to simplify the industry won’t save consumers money in the long run because most people make calls at night when the rival 5-cents-a-minute plans are in effect.
AT&T; also announced Monday a service that allows its wireless customers to make unlimited calls to family members and their home phone as long as they’re within a certain area. To receive these services, families must sign up for wireless service plans that cost from $25 to $70 a month.
