Investors Big and Small Took Their Lumps

The private pay telephone business has provided a painful learning experience for many small investors.

“It’s turned out not to be the mom-and-pop business many of us thought it would be at the outset,” said Steven A. Edwards, president of both the California Payphone Assn. and the Payphone Connection, a small Glendale firm.

Following the Federal Communications Commission’s 1984 decision breaking the local phone companies’ monopoly over pay phones, droves of investors bought interests in privately owned pay phones. At one point, Pacific Bell counted nearly 250 operators of private pay phones in California. Many simply owned a single pay phone in their place of business.

Some investors were burned by get-rich-quick schemes that failed to deliver the promised rewards, although the California Attorney General’s office says it hasn’t seen enough evidence of fraud to warrant an investigation.

Tax Shelters

“The bulk of the early money came from unsophisticated investors lured by promoters rather than by genuine operators who knew the telephone business,” said Scott G. Miller, a Houston financial consultant.

One of Miller’s first jobs in the pay phone field a couple of years ago was to assess a $7-million offering by a New York tax-shelter promoter who promised to install 2,000 pay phones in Miami. Miller’s investigation turned up 10 other private firms already in that market, 10,000 private pay phones already installed and “every good location long since taken.”

In any case, the flow of money from small investors has been turned off; as a result of tax reform, the main tax breaks for investing in a pay phone limited partnership have been eliminated.

Big investors have taken their lumps in the business too.

The industry is in what’s believed to be the late stages of a vicious shakeout, and many experts expect the California market to be dominated by as few as a dozen firms within a few years. Miller said he has doubts about how much profitable growth remains for even those survivors, even though business conditions have gotten better.

Large Networks

The industry “is becoming more sophisticated,” said Marc Ostrofsky, Houston-based publisher of Payphone Magazine, a trade journal. “Now, if you don’t have a plan with a minimum of 150 phones and a lot of deep pockets to finance it, don’t bother!”

Reliable “smart” phones--those equipped with the technology needed to handle credit cards electronically--have only recently become available, and an investor can expect to spend $2,500 to cover the cost of the phone, the installation and the location.

In Edwards’ view, most of the firms that make it through the next five years in the big California pay phone market--the nation’s largest--will need to operate networks of at least 500 phones. That’s necessary, he said, to achieve the economy of scale needed to efficiently service the equipment, deal with customers, locate new sites and, in most states, work with regulators on rate issues and other matters.

“It’s not as simple as just putting 10 phones out and going around to collect the money every other Sunday,” he said.