Competition Is Boosting Pay-Phone Charges : Long-Distance Companies Vie for Sites, Offer Commissions to Premise Owners
Competition is coming full-blown this spring to a new corner of the telephone market: long-distance calls placed from the nation’s 1.8 million pay phones. But this time, competition will not bring lower prices and, in some cases, will raise them.
Under the new system, owners of premises in which pay phones are installed will receive a percentage of the long-distance charges that callers run up. In some cases, surcharges and higher per-minute rates could raise the cost of a 10-minute call by $2 or more.
This pattern is arising because competition is making long-distance companies vie with each other not to offer the lowest rate for callers, but the highest commission for premise owners.
“You better believe there’s competition,” said David Wagenhauser, staff attorney at the Telecommunications Research & Action Center, a public interest group. “But it’s for the wrong person. So as a result, the benefit that we normally see from competition, lower prices, is not about to come about.” He suggested it could become a “powder keg” consumer issue.
Driving Hard Bargains
Around the country, sales representatives from long-distance companies are prowling airports, truck stops, universities--any place where pay phones are used to make toll calls. Even prisons, where the pay phone on the cellblock wall may be the main link to family and the outside world, have been targeted for the hard sell.
Deals are already being signed: American Telephone & Telegraph, the nation’s biggest long-distance carrier, has signed up American Airlines and Mobil Corp. gas stations; No. 2 MCI has 144 Peoples Drug stores. US Sprint Communications Co., the nation’s third-largest long-distance company, says it has a number of large accounts but isn’t at liberty to disclose names.
Some customers are driving hard and creative bargains. AT&T; and two partners last month signed with Los Angeles International Airport and, at the airport’s insistence, will make payments to it based on the number of passengers who use the airport, regardless of whether they make calls. The 4.888 cents-per-head rate is expected to net the airport about $2.2 million a year.
The stakes are high. Americans make about $2 billion in pay-phone toll calls a year--and the sales representatives pull no punches. “You reach an agreement with a customer,” says Hal Poel, director of the pay-phone drive for Sprint, “And then another competitor comes in and improves the deal and another one improves that deal.”
Currently, long-distance calls placed from the 1.5 million pay phones owned by the nation’s seven regional telephone companies are automatically carried by AT&T.; That system dates from before the breakup of the Bell telephone system in 1984, when the phones all were owned by AT&T.;
About 200,000 more pay phones are owned by independent telephone companies such as GTE Corp. and 125,000 by small firms that own only pay phones. Companies other than AT&T; are already serving some of these phones.
Last October, U.S. District Court Judge Harold Greene, who oversaw the 1984 breakup and still supervises its terms, ordered the seven regionals to open their pay phones to other carriers. Because of technical obstacles, coin calls will continue to go only to AT&T;, but those account for less than 5% of the toll calls made from pay phones.
Greene ruled that it was up to the owners of premises where the phones were installed to select long-distance carriers for non-coin calls. And following orders, the regionals began sending out “ballots” around the beginning of the year.
Most U.S. homes and businesses have taken part in a similar selection process since 1984. It was assumed then that people would search out the lowest-cost deal and take it, because they would be paying the bill from their own pockets. Economic efficiency would be served by channeling business to low-cost providers.
But with pay phones that process has been distorted because the person who selects the service doesn’t pay for it. The manager of a truck stop, for instance, will decide what long-distance company will serve its phones; the truck drivers will pay for the calls.
The pay phone thus is being turned into a money-making machine for premise owners, who are being deluged with offers for windfall commissions in return for rights to connect to the phone. (Many already get commissions from the regional companies in return for rights to install the phones. The new system will greatly increase the commissions.)
Public Phone Market at Risk
As a result, Sprint has taken the unusual step of raising its rates, which are normally slightly below AT&T;’s, to the same level as AT&T;’s. Sprint does not want to do that, argued Poel, but if it did not it would be unable to generate commissions needed to win customers.
MCI will say only that its pay-phone rates will be “competitive” with AT&T;’s. But industry sources say it has also jacked them up to match AT&T;’s.
AT&T;’s goal is to hang on to as much of the business as it can. “A significant part of our revenues and business from the public telephone market is at risk,” concedes Merrill Tutton, vice president for consumer services. To minimize losses, the company has mobilized about 400 extra sales representatives for the fight.
Also in the running is a new breed of company spawned since 1984, the “alternate operator service.” They buy some switching equipment, hire operators, lease long-distance lines from the major carriers and go into business.
Some advertise rates that are comparable to those of AT&T.; Cleartel Communications of Washington, for instance, says its per-minute rates are identical to AT&T;’s. Its charge for operator-assisted calls are lower, while fees are higher for calls processed by computer through credit card numbers punched into the telephone.
Like AT&T;, MCI and Sprint, the companies offer commissions. But people they are calling on say many go one step further, proposing higher rates than AT&T;’s or special surcharges on each call, to be shared with the premise owner or given entirely to the owner.
High prices charged by alternate operator services in other fields--in particular, room phones in hotels--have touched off consumer complaints and regulation in a number of states. Last week, Rep. Jim Cooper (D-Tenn.) introduced federal legislation that would rein in their prices and place other limits on how they do business.
Two regional companies--Nynex Corp. of New York and Ameritech of Chicago--have said they won’t allow anyone connecting to their pay phones to charge more than AT&T.;
In his decision last fall, Judge Greene conceded that this system might work against consumer interests. But he said it was the best route pending implementation of a system in which all credit cards and phones will be equal. That is expected to take several years.
