Tiny Long-Distance Firms Face Uncertain Future

Times Staff Writer

From his office in Rancho Bernardo, John Thomas can reach out and touch the Southern California long-distance telephone market that is growing like Topsy.

That's important because in a telecommunications world where being bigger is often the key to survival, Thomas is an admitted niche player who is betting that long-distance customers would rather deal face-to-face with a Rancho Bernardo businessman than contend with a faceless long-distance company from New Jersey.

Which is why Thomas believes there is a future for Southwest Interconnect, the long-distance service company he and his wife, Norma, switched on in October, 1983.

But to an unhealthy extent, he said, his company's future is largely in the hands of the Federal Communications Commission and the California Public Utilities Commission, two regulatory agencies that he said are inadvertently working to reinstate the monopoly that AT&T; lost just a few years ago.

"We're the ants at the elephant's picnic," admitted Thomas, a 48-year-old former securities dealer. "Every time the elephant (AT&T;) rolls over, 30 or 40 of us get crushed."

The elephant has moved a lot lately.

Southwest is one of about 300 telephone companies campaigning for the nation's long-distance business, estimated at more than $50 billion per year.

Only one year ago, 400 long-distances companies were chasing that business, according to Jerry McAndrews, executive director of the Competitive Telecommunications Assn. (COMPTEL), a Washington-based lobbying group that represents the nation's smaller long-distance companies.

Some companies have merged with competitors or have been acquired by larger regional and national long-distance companies.

Others have simply turned off their switches and shut their doors.

But all have learned the necessity of reacting quickly whenever AT&T;, with an estimated 96% of the nation's long-distance calls, starts to move.

But that fancy footwork will go for naught, Thomas said, if the PUC and FCC side with the giant long-distance company on crucial rate-making issues.

"We won't be around and neither will anyone else," said Thomas, whose Southwest Interconnect serves 1,800 customers, primarily in Rancho Bernardo. "Within a year and one-half, we'll know whether we'll be hanging from the yardarms or not."

To escape that fate, Southwest and 32 other smaller long-distance companies count on CALTEL, the California Assn. of Long Distance Telephone Companies, to push the right buttons and make things happen for them in Sacramento.

CALTEL Executive Director Jerry Desmond insisted that although the smaller long-distance companies face an uphill fight, the industry is still healthy.

"Some people are talking about a shakeout in the industry," he said. "That may be the case in the rest of the country, but California is having a different experience. Here, the long-distance telephone service market is still a baby."

Figures supplied by the California PUC support Desmond's contention. During the past year and a half, more than 100 long-distance companies registered to do business in California.

Some are small, California-based operations such as Southwest. Others are franchises and branch offices, or boast other connections to larger regional and national companies.

Desmond suggests that "these companies haven't had an opportunity, over a period of time, to stake their claims on the long-distance turf that has historically belonged to AT&T.;"

Will they get a chance to stake their claim?

"The biggest problem is the California regulatory environment," said former CALTEL president Richard Carr, now an Oakland-area consultant. "It's becoming increasingly harsh for smaller telephone companies. The hope was that the regulators would foster a competitive telecommunications environment; that smaller, well-managed companies would get long enough of a period to become solidly established. "But it looks like there's not going to be a sufficient enough grace period."

Number of customers alone, however, isn't the sole reason for success in the long-distance game.

"There's a big difference between 400 customers who do $500 (in calls) a month versus 400 who do $20 a month," Carr said. "But if you're only doing $250,000 a month in business, you're a small company. You can't build up much of a network until you have that kind of base, and a network helps cut overhead."

"The market seems to be opening up more and more every day," observed Gary R. Cook, president and founder of Escondido Tele phone, which, as the name suggests, turned on its Escondido-based long-distance switch Jan. 1. "Eight or 10 months ago, everyone said the small guy would vanish," said Cook, who, with 400 customers, is likely the smallest long-distance company in the county. "The big guys are spending all their (profits) on advertising . . . but they're not providing personal service."

Cook, who admitted there is "no way I can service a Fortune 500 company," is actively courting small, local companies.

To that end, his locally produced advertising promotes Escondido Telephone as the "hometown company with a nationwide touch."

The operator of retirement, convalescent and geriatric care facilities in the Escondido area, Cook said he opened Escondido Telephone because "we all hate the phone company," and--echoing Southwest Interconnect's Thomas--"We're local and we're here. We're not an 800-number in Timbuktu."

Simply being local, however, isn't enough.

Although Escondido and Southwest can be cost-effective because of their decidedly small operations, they also must be very well-managed.

"They don't have near the overhead that the big boys have," said one San Diego telephone industry consultant. "If they're well-managed, they'll make out."

But many of the small firms, he cautioned, have been created by people who "hear there's a fortune to be made in the telecommunications industry, guys who can't engineer or network a switch. These are the guys who loose their drawers very rapidly."

Thomas and Cook are sensitive to those kinds of charges.

"We're the best in this area as far as (keeping circuits operating)," Thomas said.

"Most of those people saw it as get-rich-quick thing," Cook said. "A lot of them went by the wayside. Some did it as a side business, and you just can't do a business like this on the side."

Competition, especially in telephone-rich areas such as North San Diego County, is also making the going tougher, especially as equal access to long-distance lines becomes a reality.

Neither Southwest Interconnect nor Escondido Telephone will appear on the Pacific Bell "ballot" that North County customers are receiving as equal access goes into effect.

Thomas and Cook won't add the expensive equipment needed for equal access because it would boost their access charges. They said that customers who want the ease of equal access--without the added cost--can use "speed dialers," devices which rapidly dial the access and customer codes.

Whether or not that strategy will succeed depends on customer response as well has how Pacific Bell and AT&T; structure their future long-distance rate increases.

Thomas acknowledged that there will be a "great falling out" in the next 18 months.

"The discounters just won't have financial advantages they have now," he said. "That's unfortunate because we're a bunch of new kids without experience, and they (the PUC and the FCC) should let us all get our feet wet before they deregulate the whole industry."

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