Call for Action
Working out of a Lawndale garage with $4,000 in start-up money, Fuad Radi entered the fledgling cellular phone industry in 1984 and soon created a $35-million wholesale cell phone company.
The firm’s fall was even faster than its rise.
By 1995 Radi was out of business--a victim, he says, of the duel between cell phone carriers Los Angeles Cellular Telephone and AirTouch Communications, which were giving customers deep discounts on equipment in a battle for competitive edge.
The war between the giants hurt dozens of companies like Radi’s, he says, from wholesalers to cell service resellers to mom-and-pop retailers. Radi and three other small-business owners are fighting back in a lawsuit that has made its way to the state Supreme Court, which could hear the case this fall.
A ruling for the small businesses could mean companies that give price cuts would have to consider the impact on smaller firms.
That would have a devastating effect on business in general, supporters of the big cellular companies say. The prospect prompted the Los Angeles Area Chamber of Commerce, State Farm Insurance and the Truck Insurance Exchange to file legal briefs siding with L.A. Cellular.
“The bottom-line question is, can somebody cut their prices on something they sell if that [cut] has some incidental effect on others in the marketplace,” said Rex Heinke, an attorney for L.A. Cellular. “If the plaintiffs are right, I don’t know how anybody could ever cut prices.”
But for the small companies, the issue is fairness.
“Most people that got hurt were businesses like us,” Radi said. The big companies “created the market off everybody’s back, and then they buried us.”
Radi’s Cel-Tech Communications Inc. no longer operates, and the owners of the other companies involved in the lawsuit sold their flagging businesses. All are struggling to create new enterprises. They are asking for $20 million in damages from L.A. Cellular, which they contend started the practice of below-cost sales. AirTouch is not named in the suit.
The case illustrates how small businesses can be crushed by dueling corporations that in the heat of competition pay no attention to small fry. The irony is that many big companies, particularly cell phone service companies, make a big effort to tap the lucrative small-business market.
It all began in the mid-1980s--when cell phones were bulky, expensive and difficult to install. This was long before personal communications services (PCS) carriers entered the field and forced prices lower.
A variety of small companies sprang up to perform various functions, such as retail phone sales, wholesale distribution, repair, installation and phone service sales for L.A. Cellular and AirTouch. Meanwhile, the federal government licensed only two companies per region as carriers. In the Los Angeles area, that was AirTouch and L.A. Cellular.
With cell phones costing up to $1,700 apiece, the carriers depended on the smaller companies--carrier agents and subagents, retailers and wholesalers--to work the budding industry and scare up customers, Radi said.
“That’s the way I found my niche,” he said.
When banks wouldn’t give Radi a line of credit for his new company, Radi essentially created his own by buying the phones at full price and then selling them so quickly that he got the 4% discount manufacturers offered for full payment within 30 days.
By 1992, Radi had 15 employees, annual sales of $35 million and a place on Inc. magazine’s list of the 500 fastest-growing privately held companies in the country.
But Radi began losing ground when L.A. Cellular and AirTouch hit upon discount phones as a way to lure customers. The two companies took huge losses that they more than made up for with service fees. In 1993, for example, L.A. Cellular lost $1.3 million on equipment sales, but earned $20.2 million from cellular service and other nonequipment items, according to court documents.
“We couldn’t compete,” said Ray Ambraziunas, former owner of Cellular Service Inc. and NuTek, companies that joined in the lawsuit against L.A. Cellular. Like Radi, Ambraziunas started out of a garage, grew to 30 employees and then had to sell his installation, sales and service companies because of L.A. Cellular’s tactics, he said.
“We couldn’t give the equipment away and still be in business,” he said.
The big companies also cut back on the fees they had been paying to small retail businesses that signed up customers. Instead, L.A. Cellular and AirTouch tried retail themselves, opening stores throughout the region.
Charlie Kagay, the attorney representing the small companies, argued in the 1994 lawsuit filed in Los Angeles Superior Court that L.A. Cellular’s actions violated California’s trade and commerce laws, which prohibit below-cost selling and unfair competition. A lower court held that the below-cost tactics did not violate state law.
California prohibits below-cost sales if the intent is to injure competitors or destroy competition. In this case, L.A. Cellular proved that its intent was simply to compete against the larger AirTouch, not injure the smaller companies.
But an appellate court last year ruled that unfair competition might exist because L.A. Cellular enjoyed an advantage. As one of only two licensed service companies, it could collect subscriber fees, an income stream not available to the smaller companies, which had to rely on sales alone.
“What they should have been doing, if they wanted to compete, was they should have been bringing down the cost of air time,” Ambraziunas said. “It was a false savings to the consumer for them to say, ‘We’re giving you a free phone.’ ”
But what constitutes unfair competition is not easy to define, said L.A. Cellular attorney Heinke. Fairness is subjective.
“How do you decide what’s unfair?” Heinke said. “There’s no set standard. If something is illegal, there’s a law against it. If something is deceptive, then there’s something false. But you’ll get 10 different answers for what’s unfair.”
For Ambraziunas, struggling to create a new paging service, what’s unfair is the clout, attorneys and lobbyists the big companies are able to muster before the state Public Utilities Commission, which allowed the cell-phone carriers to sell below-cost phones bundled with service; the Legislature, which enacts laws regulating business; and the courts.
“Nobody is watching out for the consumer,” Ambraziunas said. “Nobody is watching out for the small businesses.”