Pay Phones Go Private : Owners Split the Take With Other Businesses
Good Food & Co., an unpretentious restaurant in St. Louis Park, Minn., made history last August when it decided to offer its customers something more than a new kind of meat loaf or fried chicken. It took out the telephone company’s pay phone and installed a privately owned pay telephone in its place.
Good Food was the first in the nation, but it isn’t alone anymore. A bus station in Minneapolis, a hospital in Chicago and a bar in New Jersey are but a few other places trying to cash in on profits from pay phones. And interest is percolating at such sizable companies as Greyhound Corp., Holiday Inns, Circle K convenience stores and Southland Corp., which owns 7-Eleven stores.
No wonder experts predict a bright future for the fledgling private pay-phone industry, which is offering a line of sophisticated phones that flash the number dialed, the cost of the call and the time remaining on the call.
Experts predict that there may be anywhere from 2.8 million to 8 million private pay phones in the nation by the end of the decade, substantially more than the 1.78 million pay phones owned and operated by telephone companies that were in place in 1983. They stand to take a sizable chunk of the fees--now $4 billion a year--generated by pay phones.
Entrepreneurs are moving quickly into the business, offering a healthy share of their take to stores, restaurants and other places that will let them install their pay phones. And some locations are simply buying their own phones and keeping all the take. All the phone company gets is a monthly payment for each telephone line and a small fee for each call.
William Moorhead, a senior consultant with the Partridge Group, a Washington management consulting firm, says he expects private pay phones to catch on like vending machines, jukeboxes and video games in their heyday. “I think there are going to be an awful lot of phones out there, and the public will be better served,” he said.
The Federal Communications Commission made it all possible last June when, as part of its campaign to deregulate the telephone industry, it permitted private pay phones to compete with the phone companies’ products.
To date, nine states have authorized private pay telephones, and most others are considering various proposals. Decisions are expected this year in California, Michigan, New York, Ohio and Texas, which account for nearly 40% of all coin phones in the country.
In California, Pacific Bell alone had 189,114 coin telephones in 1983. “We expect that one out of every four coin-operated telephones in California will be privately owned by the end of 1985,” Allan M. Glezerman, chairman of Cointel Corp. in Calabasas, Calif., predicted recently. Cointel has the exclusive marketing rights for the Cointel pay telephone, which is manufactured by a subsidiary of Raytheon Corp.
In Illinois, where private pay phones were authorized in November, entrepreneur Elliott Greenberg says the reaction to them “has been great.”
Greenberg, president of Chicago Pay Phone Service Inc., says his company has been installing phones for several weeks at a rate of 40 phones a day. “It’s a salesman’s dream,” he says. “Everybody wants the phones.”
Greenberg’s company buys the phones, installs them free and provides service. It guarantees each location 20% of his company’s net receipts, more than double the commission paid by Illinois Bell to its most profitable locations.
“Who’s going to say no to that?” asks Greenberg, whose experience is in the vending business.
A key factor in the emergence of companies such as Greenberg’s has been the technology that produced a new generation of “smart” telephones. As Greenberg likes to say, “We’ve got the smart phone, and Bell has the dumb phone.”
Still in Infancy
The new computerized phones contain a microprocessor that enables them to handle calls without using the telephone company’s central office. The more sophisticated ones have digital read-out displays and store rate tables for different types of calls. As with existing phone-company models, users can call 411 for directory assistance, 911 for emergencies and toll-free 800 numbers without first having to deposit a coin. Current models range from $400 for a desk pay phone to $2,000 for a computerized wall phone.
“This industry is in its infancy,” says Gail Sherman, vice president of Cointel Corp. “It’s really exciting, because we’re blazing the trail.”
The original trailblazer was Tonk-A-Phone of Spring Park, Minn., whose initial 1982 filing with the FCC led to the ruling to allow private pay phones. “We’re working six days a week,” says Robert Albertson, president of the company, which has already produced 10,000 phones.
A number of companies are expanding into the pay-phone business from other services that brought them into contact with likely pay-phone locations. United Telesis Inc. of San Diego, the largest vendor of pay telephones, also services video games for 7-Eleven and Circle K stores. A vendor leases, services and shares in the revenues of pay phones that it buys from manufacturers.
“We’re taking our background and expertise with coins and electronics and moving toward the smart telephone,” says John Cunningham, president of United Telesis. “We think this is a natural for us.”
Yet he cautions that “there are a lot of people in the vending business looking for the next buck. Those people should not be in this business. And they won’t survive because they don’t have the expertise and financial resources.”
PUC Reviewing Fees
Like other companies eager to move into the California market--the nation’s biggest--United Telesis is awaiting action by the state Public Utilities Commission, which is reviewing the fees that Pacific Bell proposes to charge private pay-phone operators.
Concerned about potential new competitors for its pay-phone business, Pacific Bell has asked the commission for authority to charge private operators $23.50 a month for telephone lines plus a surcharge of 12 cents per call.
Under the proposal, private pay-phone operators could charge a maximum of 25 cents per local call, five cents more than Pacific Bell’s currently authorized rate.
Jim McCraney, a PUC spokesman, said the line charges and rates will take effect on March 1 without PUC action unless there are complaints. “So far we have no protests,” he said.
If protests are filed, McCraney said the PUC will have to consider the merits of the complaints before allowing the tariff to take effect. “If it’s a protest with some meat in it,” McCraney said, implementation of private pay telephones could be delayed by six to nine months in the state.
Cunningham and others plan to protest Pacific Bell’s proposed charges, which they say would be the highest in the country. “This is not free enterprise,” he says.
Bart Kimball, an attorney for Pacific Bell, said his company believes that its proposed charges are fair. “This is not a normal business service,” he said. “I think we presented them (the PUC) with a simple solution.”
If California opens up to the private pay-phone companies, it will join Alaska, Arizona, Illinois, Minnesota, Missouri, Montana, New Jersey, Oregon and South Dakota. But even in these states, the new entrepreneurs are not entirely satisfied with the rules under which they must operate.
In Arizona and Minnesota, Universal Pay Phone Corp. of Dallas has lodged a formal complaint with the FCC about the rates and locations of private pay phones permitted by those states’ utility commissions. It complains that the commissions are too favorable toward the telephone company monopolies; Arizona, for example, bars new companies from putting a phone where the telephone company already has a phone or plans to install one.
Universal Pay Phone has also asked the FCC to set uniform guidelines for the states to follow. An FCC official said a decision is expected in six months.
In its filing, Universal Pay Telephone urged the FCC to reemphasize to the states the federal right of private coin-operated telephone companies to compete in the marketplace. Universal wants the FCC to warn state public utility commissions against allowing phone companies to charge premium rates for access to local phone lines or against imposing location restrictions. The new competitors also said they should not be required by the states to meet existing public convenience requirements such as offering a dial tone or 911 emergency service without inserting a coin.
Universal’s attorneys said that if the FCC fails to act forcefully, “there will be no meaningful competition in the pay-phone industry” and that the coin-operated telephone business “will remain the exclusive province and monopoly of the existing telephone companies.”
Lawyers for several telephone companies, including Pacific Bell, said in papers filed with the FCC that regulation of intrastate tolls and service is clearly within the states’ jurisdiction. Moreover, the phone companies warned that if they are left to provide all special services such as handling person-to-person and collect calls for private pay-phone operators, “other customers will have to bear part of the cost.”
Need Some Uniformity Thomas McCabe, an attorney for Holiday Inns who filed comments with the FCC in support of of Universal Pay Phone, said: “How is a business going to plan on introducing these instruments when faced with a crazy quilt of diverse state regulation? There has to be some minimum level of uniformity.”
The telephone companies argue that the new competitors want to install their phones only in the most profitable locations, leaving the phone companies with remote locations and vandalism-plagued inner-city booths. More important, they claim, any intervention by the FCC in the issue now would intrude on states’ rights.
But the experts believe that most of the thorny issues will be resolved in the next six months. Albertson of Tonk-A-Phone reflects much of the industry when he says, “We’re looking ahead to a very, very good future.”
But a private pay phone does not guarantee a pocket full of extra coins. Gary Quam, the owner of Minnesota’s Good Food restaurant, where the first private pay phone was installed, found that out the hard way. Just two weeks ago, the company that installed the phone removed it because it wasn’t making enough money to cover the company’s costs. “At least it was worth a try,” Quam says.
