Bundle of problems besets long-distance

As profits drain from the business, most telecom companies see it simply as one part of a bigger package.

By MICHAEL BRAGA

© St. Petersburg Times, published July 4, 2000

It used to be profitable to be in the long-distance telephone business. Not these days. Just ask Intermedia Communications.

The Tampa-based telecommunications company, which specializes in providing telephone and high-speed Internet services to business customers, had offered long-distance as a separate product since the early 1990s. During that time, the company spent millions on marketing to attract new customers.

"But it's not worth it anymore," says Intermedia chief executive David C. Ruberg. "Rates have dropped so much that you can barely make enough money to cover marketing costs."

That doesn't mean Intermedia is getting out of the long-distance business altogether. Far from it. The company will still offer long-distance as part of a package of local telephone and high-speed Internet services.

"The idea is to give customers a discount on a suite of integrated products and services and lock them in for a minimum of one year," Ruberg says. Locking in customers reduces the frequency at which they jump to competitors offering lower rates, allowing Intermedia to better predict how much it must spend to lease space on fiber-optic cables that carry the long-distance calls.

All over the country, telephone companies are making similar decisions.

"There's no money in long-distance as a stand-alone product any more," says Michael Gallagher, chief executive of Florida Digital Network, an Orlando-based telecommunications company. " We look at it as more of a feature. It comes as part of our package."

The reasons are economic. Some carriers now offer long-distance for as little as 7 cents a minute, Gallagher says. But after local telephone carriers take their cut for passing the calls from the local telephone network to the long-distance network, there isn't much left over for the long-distance carrier. "They only have about 2 cents to play with," Gallagher says.

According to Ruberg, such low margins don't justify the money spent on marketing to attract new customers. He says the churn rate in the long-distance market -- the rate at which customers switch from one company to another in the course of a year -- is about 36 percent. That means the average long-distance customer only stays with a particular carrier for about four months.

"When prices for long-distance were up around 35 cents a minute, the churn rate really didn't matter," Ruberg says. "You could still recoup your upfront costs in about a month." That meant a telecommunications company could make three months of profits from the average customer. But now that rates have dipped below 10 cents a minute, it takes six months to recoup marketing costs, Ruberg says. As a result, carriers aren't making much money anymore.

The business has gotten so bad that WorldCom Inc., the successor of the company that originally brought competition to the long-distance telephone market, is thinking about getting out of the consumer long-distance business altogether. Last week, the Wall Street Journal reported that WorldCom may sell its consumer long-distance business if it is unable to complete its proposed merger with Sprint Corp. Prices of long-distance have been beaten down too far to make the business worthwhile.

Similarly, AT&T is reportedly considering spinning off its long-distance business, the nation's largest -- and not because its business is booming. "If the shrinking consumer long-distance unit were made separate, the remainder of the company would show faster growth," the New York Times reported.

Prices in the long-distance market have been falling fast over the past 10 years and are headed toward zero, industry analysts say. Some companies, like Dialpad.com, which allow customers to make telephone calls over the Internet, already are offering long-distance service for free. Upstart competitive local telephone companies, which are battling for market share with the established carriers, are also charging nothing for long-distance if consumers buy a bundle of their services. That trend is only expected to accelerate.

Long-distance is dwindling from a prize business to a commodity even as the regional "Baby Bells" that were created from the breakup of the old AT&T monopoly finally are convincing regulators to let them enter the field.

SBC Communications, the nation's second-largest local telephone company, got permission to offer long-distance service in Texas last week, while Verizon Communications, the largest local phone company, is already offering long-distance in New York.

Once these giants get into the long-distance market on a national basis, they will have a distinct advantage. They have large customer bases and their costs in the long-distance business will be lower because they don't have to pay for access to the last mile of copper wires that connects the phone company to local homes and businesses. They already own the last mile.

But even giant companies such as Verizon, the newly merged combination of Bell Atlantic and GTE Corp., aren't jumping into the market because they think they can make money from long-distance. They are doing it because they feel they have to in order to compete.

Competitive local telephone companies, such as Florida Digital Network and Intermedia, already offer discounted packages of local, long-distance and Internet services to business customers. In turn, companies in the cable TV business, such as Time Warner and AT&T, are preparing to offer local and long-distance telephone service in addition to high-speed Internet and cable TV to residential customers.

To compete, the large local telephone companies must be able to offer similar suites of products.

"Everyone is trying to offer bundles of services," says Mark Johnson, the director of marketing for Z-Tel Communications Inc., a Tampa-based telephone company that focuses on offering packages of telecommunications and Internet services to residential customers, so far in New York and Texas.

The benefit of bundling is that it allows telecom companies to keep customers longer.

Says Johnson: "The more services a customer gets from a particular carrier, the harder it is for that customer to leave."

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