BACK TO THE FUTURE : ...
Even before buying his dream house in a Denver suburb, Carl Filoreto put in a call to the local phone company, US West. Filoreto, a cameraman, and his wife Lynn, a news anchor for a local television station, wanted to be sure the phone would be connected when they moved in.
No problem, the phone company said. But in mid-April, a week after arriving at their new address, the Filoretos were still without a phone--and US West was telling them to wait another three weeks.
“I can’t tell you how frustrating it’s been,” says Filoreto, who finally got phone service after badgering US West for weeks and threatening to call everybody from newspaper reporters to the governor. “If it wasn’t for my wife’s status, we still wouldn’t have a phone,” he says.
An isolated incident? Hardly. US West finds itself ingloriously at the forefront of one of the more disturbing trends in the communications business: a general decline in the quality of local telephone service.
The Baby Bells may be drawing praise from Wall Street for cutting employment, “re-engineering” their companies and diversifying into new businesses, but they’re getting more jeers on Main Street, where the high-quality phone service that once helped define American prosperity can no longer be taken for granted.
In Portland, Ore., last fall, US West customers waited weeks to have phone service restored after a mild rainstorm. In New York, which is served mostly by Nynex, the state Public Service Commission reported a “surge” of trouble reports last year, including hundreds of thousands of people left without phone service for more than 24 hours. Ohio’s Public Utilities Commission has received 548 complaints about Ameritech’s service over the last year, 10 times the level of the year before.
Even Pacific Bell, long admired for its service quality, has had a rise in problems. In the first four months of this year, Pac Bell had 744 complaints from California customers, including delays in repairs and missed appointments. That contrasts with 1,084 for all of 1992. And while GTE’s complaint numbers have improved in recent years, observers worry that recent cutbacks in that firm’s work force will lead to a deterioration in service as well.
“There is a feeling that blackouts and service failures are occurring more frequently as [local phone companies] try to cut back on service and maintenance,” says Debora Berlyn, executive director of the National Assn. of State Utilities Consumer Advocates.
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It wasn’t supposed to happen. The gradual deregulation of the telephone industry over the last decade was designed to spur competition, lower prices and improve quality. Advanced digital technologies--the same ones that drop the price of personal computers by the day--were supposed to pull down phone costs as well and make it possible for phone companies to offer everything from video telephones to movies-on-demand.
But for a variety of reasons, these changes have been accompanied by deteriorating basic service. And the vast majority of local phone customers still have no choice about who their local carrier is--and won’t for years to come.
“An overreaction to the potential threat of competition has led [the phone companies] to undermine their own service ethic in a desire to rush out to new markets,” says Gene Kimmelman, a co-director at Consumers Union, which publishes Consumer Reports. “Under the rubric of competition, you could see higher prices, more monopoly and lower services.”
In some respects, the decline in service quality is not surprising. Aggressive cost-cutting and increasing computerization of functions has been standard fare for all the Bell companies for years.
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In the 11 years since a federal judge’s ruling that broke up the Bell System, the seven Baby Bells have cut--or announced plans to cut--about 168,000 employees from their payrolls. US West is eliminating 9,000 jobs as it consolidates 560 service centers into 26. Nynex has eliminated 11,000 workers in just three years, leaving nine service centers to do the work once done by 120. Line workers who handle installations and repairs are often among the first to lose their jobs as the phone companies downsize.
“There is a very radical change going on in this industry,” says Tom Bystrzycki, executive vice president for operations and technology at US West. “From serving existing customers to looking forward to new businesses, we need to change our business processes. The changes must be large and radical.”
But some of these changes have evidently been the wrong kind. Since breaking off from AT&T; in 1984, the Bells have earned a rich return on equity of about 14.5% on their basic phone business, far above the 11.5% average return for all industries. But instead of plowing the money into modernizing their phone systems, the Bell companies have channeled much of the profits to investors in the form of dividends, or put the money into efforts at diversification.
Bruce Kushnick, a New York-based market researcher and Bell critic, estimates the Baby Bells have already written off a total of $7 billion in losses on real estate and financial service investments made in the late 1980s. More recently, they have spent about $20 billion on telecommunications investments overseas--growth businesses that absorb more money than they return. They are also pouring hundreds of millions of dollars into Hollywood, investing in movie and television programming ventures and the cable TV business.
Meanwhile, the phone companies’ capital spending for basic phone services at home has been flat or even down when adjusted for inflation. Today, America’s phone system lags behind those of other developed countries in the degree to which it has installed advanced digital communications systems, according to a 1993 study by the USC Center for Telecommunications Management.
US West is a prime example of a company that has been aggressive in searching out new businesses but weak in providing service to its customers at home.
The company has spent billions of dollars on cable companies, including a minority share of Time Warner Entertainment. It has phone investments in 13 countries, from Russia to Japan, and has put enough into real estate to rack up some $500 million in losses.
But its service at home is so poor it has been nicknamed “US Worst.” In Colorado alone last summer, the company had a backlog of 3,000 people waiting for phone service.
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“They are getting into new markets and their attention is diverted to that,” says Ron Binz, director of the Colorado Office of Consumer Counsel, a state agency that represents phone users.
The company acknowledges that its service has been poor, blaming the problems on faster-than-expected growth in the demand for phone service in its 14-state territory and glitches in its efforts to restructure its customer service operations.
US West officials say its performance is improving, pointing to a recent decline in the number of customers awaiting phone service.
But telephone problems continue to cause headaches throughout US West’s service area.
In eastern Washington, a crisis hot line for pregnant young women was without phone service for a week because US West couldn’t find a technician to hook the center up after it moved to a new location.
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When Barry Diamond, an electronic parts distributor, decided to move from Florida into a new development outside Boulder, Colo., he called US West two months in advance to make sure he would have service. Because he offered emergency service on a 24-hour basis, fax and phone lines were critical. But 2 1/2 months after moving into his new home, Diamond still didn’t have phone service. He had to ask customers to fax their orders to his father in Pennsylvania and to a brother nearby.
Only after he hired an attorney and filed a formal complaint did Diamond finally get a phone. But his business was already badly damaged: Sales in 1994 were just $350,000, compared to $1.2 million the year before. Diamond is suing US West for the difference. The company declined comment on the pending case.
On the East Coast, it is Nynex that is pilloried as one of the region’s worst service providers. The company missed a startling 142,300 appointments during the last three months of 1994, up 30% from the year before, according to a recent New York Public Service Commission report. There were also 212,800 customers whose phones were out of service for more than 24 hours during the quarter, a 39.8% increase from the year before.
Nynex says it has taken measures to address the problems and that performance has improved in the first few months of this year.
Ironically, given the Bells’ obsession with diversifying out of the “mature” phone business, one of the local telephone companies’ big problems has been unexpectedly strong demand for phone services.
Nynex added a record 500,000 new phone lines last year, while US West added 550,000. An increasing number of customers are asking for second or third lines for fax machines, to connect to on-line computer services or to tele-commute.
“Our growth was substantially more than we believed it would be,” Bystrzycki acknowledges.
In many cases, the growth is occurring at the same time the companies are cutting jobs and installing new phone systems, creating stress and morale problems among staffers.
Bell Atlantic, a telephone company with a record for good service, was surprised to find in an internal survey last fall that only 43% of its managers felt the company was doing a better job of serving customers than the year before, down from 57% in 1991. The company said the results were skewed by an announcement shortly before the survey was taken that it planned to cut 5,600 jobs.
At Pacific Bell, problems have been more modest than at many other companies--in part because the California Public Utilities Commission has proceeded slowly in loosening regulations and introducing competition.
But if Pac Bell doesn’t have quality problems now, some critics fear it soon might. The company has announced plans to spend $15 billion over the next seven years on new systems in key metropolitan areas capable of offering video-on-demand--an investment to be made largely with money from phone customers.
“[Bell companies] look for investment opportunities that can be justified to rate boards,” says Fritz Ringling, a partner at Network Dynamics Associates, a New York-based telecommunications consulting company. “Telephones will subsidize video service.”
And the phone companies’ mounting interest in offering video services and developing entertainment to sell over their systems may further distract from their basic phone business.
“They’ve fallen for the philosophy that the money is in content, not conduit,” says Michael Noll, a professor at the USC Annenberg School of Communication. “They have Hollywood fever.”
In theory, at least, new laws boosting telephone competition will help put pressure on the companies to improve service. Already, business customers have better, more powerful and cheaper local phone services in many cities because of competition from alternative providers. In the United Kingdom, to cite one precedent, British Telecom’s service improved substantially after Nynex and US West began offering telephone and cable service in competition with the former monopoly.
Pacific Bell says it is committed to keeping quality high to keep competitors at bay.
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“Service is going to be the big differentiator,” says Darlene Grimm, director of the San Francisco-based firm’s California Markets Group, which is in charge of providing customer services. “We can’t let our service drop because of competition.”
Advanced technology also should help improve quality. New computer systems will enable service representatives to diagnose problems, activate phone service or add new features like call forwarding within hours.
But competition and technology are hardly instant panaceas. New billing and customer service systems have generated huge problems as they have been installed by Ameritech and US West.
Noll of USC worries that a premature move toward the technology that will make video services possible could lead to increased service problems as more and more sophisticated electronics are exposed to sun and rain in the field.
And no matter how far the technology advances, there will always be problems that require personal attention.
“In labor-intensive services, where the man used to be there at 11 a.m., rain or shine, those systems are under pressure,” says Eli Noam, director of the Columbia University Institute for Tele-Information in New York. “You’ll see a deterioration in quality of open-air pay phones and on-time repair schedules.”
Residential customers, particularly in rural areas, will be the last to enjoy either new technology or competitive alternatives. Indeed, the big losers when quality deteriorates are rural customers and the elderly, who tend to use the minimum, basic service.
“Our members depend so much on the phone,” says Susan Weinstock, utilities issues team leader at the American Assn. of Retired Persons, a lobbying group for the elderly. “But it [phone service] is really bad and it keeps getting worse.”
Until competition gets the local phone companies on their toes, critics say regulatory agencies must be more aggressive.
In 1993, when the California PUC discovered Pacific Bell had been wrongly charging customers for late payments caused by the firm’s own billing problems, it fined the company $50 million. US West has been fined $4 million for its service problems.
But regulatory oversight could be weakened by legislation now in Congress. A bill that has passed the Senate and awaits action in the House, for example, would each make it illegal for states to regulate phone companies based on their level of profits. States have already moved toward an alternate regulatory approach that sets price caps on phone rates. The law, if passed, would take away from the states a major tool that enables them to negotiate with phone companies to boost service quality standards and keep prices down.
Such laws, coupled with lower budgets for public utilities commissions, could also chip away at the states’ ability to protect consumers in the transition to wide-open competition.
Says Helen Mickiewicz, staff attorney at the California PUC’s Division of Rate Payer Advocates: “We still need regulation at the local level. If someone has a problem with their phone service, you can’t expect them to go to federal district court in Washington.”
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Taking a Toll
Complaints about local telephone service have jumped substantially, both in rural areas without significant population growth and in big urban states. Critics say phone companies’ focus on new businesses is to blame for the deteriorating quality of basic service.
CALIFORNIA
Complaints to the California Public Utilities Commission about Pacific Bell’s service have more than doubled in five years. In just the first four months of 1995, the PUC registered 733 complaints.
1994: 1,542
NEW YORK
Complaints to the New York Public Service Commission about NYNEX service in the greater New York area have been climbing for three years.
1994: 11,047
WYOMING
Though consumer dissatisfaction is on a smaller scale than in California or New York, complaints to the Wyoming Public Service Commission about US West service doubled last year.
1994: 428
* Source: State public utilities commissions
