Firms Giving Long-Distance Short Shrift
Residential long-distance phone service, the lifeblood that for years has fueled and personified AT&T; Corp., WorldCom Inc.’s MCI and Sprint Corp., has been shunted to the corporate doghouse because it lacks the sexy growth prospects of broadband and wireless phone service.
In the past two weeks, the nation’s top three consumer long-distance companies unveiled plans to de-emphasize their onetime core business by isolating long-distance into a separate tracking stock or by halting residential sales except as part of a package of services.
The moves come despite the tantalizing figures still associated with the consumer long-distance business--millions of customers, double-digit profit margins and billions of dollars in steady cash. Why? Because Wall Street values revenue growth, and long-distance is a loser in that category.
While it remains exceptionally profitable, it is a highly competitive industry marked by falling prices and costly battles over customers. And the future doesn’t look so good, either.
Those dicey market conditions had already sparked a steady erosion in long-distance revenue at the big three providers, even as the overall U.S. market grows at a slim rate of 3% a year. But recently, new factors such as growing wireless and Internet calling have turned the sales slide into an avalanche.
“There are a lot of questions about what’s going to happen, technologically, to long-distance,” said Robert Self, an expert on the market and the author of “Long Distance for Less.” “I’ve personally stopped making long-distance calls with the big carriers, and I’m making calls using dial-around [or so-called 10-10 providers] and my cell phone now. My sister has bailed out entirely and uses nothing but a dial-around carrier and her computer.”
Noting the trends, investors have punished the market’s largest players by bludgeoning their stocks, erasing about 60% of their value this year. Making matters worse, AT&T;, WorldCom and Sprint each warned recently that they expect double-digit reductions in their long-distance revenue in the coming year.
“Consumer long-distance, while a very high-margin business, is a commoditized, dying product with 95% penetration in the United States,” said Meredith Rosenberg, director of consumer market convergence for the Yankee Group research firm. “The only card to play is price.”
Until this year, the price card was the trump card in the U.S. long-distance market. AT&T;, WorldCom’s MCI unit and Sprint dueled for customers using incessant television advertising and promotions, direct-mail offers and flurries of checks to win back lost customers.
Clearly, those days are over. Price promotions and television advertising from the top long-distance carriers have dropped off sharply this year, and executives at AT&T;, MCI and Sprint strongly hinted that they will resist lowering prices.
“I believe that we’re going to get substantial stabilization in rates, and potential for some realistic increases,” WorldCom Chief Executive Bernie Ebbers told industry analysts last week.
Holding the line on long-distance pricing now may help preserve cash generation, but it also could accelerate market gains by new entrants willing to discount prices to win customers.
Many telecommunications experts believe local phone companies such as Verizon Communications and Pacific Bell parent SBC Communications are poised to swiftly capture huge chunks of the consumer long-distance market once they win regulatory approval to sell the service in their home territories.
Verizon, which this year won clearance to offer long-distance in New York state, has snapped up 16% of the state’s residential market and 1.2 million long-distance subscribers in nine months. In Texas, where SBC gained entry to the long-distance market in July, the local phone company said it signed up more than 1 million customers and snagged more than 10% of the state’s long-distance market in its first three months.
The successes by the local phone companies have further spooked investors in traditional long-distance carriers and reinforced the notion that the so-called Baby Bells have an insurmountable advantage with consumers because they own the neighborhood copper lines and have a tight relationship with nearly every phone customer.
“I’ve said all along that the worst thing that could happen to the long-distance companies is to have the [local phone] companies come into the market,” said Self, the long-distance expert. “When that happens, the long-distance companies will get killed.”
With all this going against them, the big-three carriers hope to fight back by pushing data offerings and packages of communication services.
AT&T;, for instance, recently announced a wrenching restructuring that includes splitting off its consumer business into a stand-alone unit with its own tracking stock, 60 million customers, 40% operating profit margins and $8 billion in annual cash flow.
Faced with steep declines in overall revenue--which will lead to smaller profit margins--the company plans to boost its consumer business with a new emphasis on its WorldNet Internet service and digital subscriber line technology, or DSL, which gives users high-speed connections to the Internet.
WorldCom also is creating a tracking stock for its MCI consumer long-distance and related operations, but the company plans to milk the business for cash, which will be used to pay shareholder dividends and retire debt.
Last week, Sprint said it will no longer sell consumer long-distance as a stand-alone product, and it will “dramatically reduce” its reliance on mass-market national sales and advertising.
Sprint Chief Executive Bill Esrey said Sprint will focus on selling consumers packages of services: Sprint long-distance packaged with EarthLink Internet service; long-distance with DSL, local phone service and EarthLink service through Sprint ION offerings; or long-distance with Internet call waiting or with wireless phone service.
“The bottom line is that all these initiatives are great and everything, but unless they actually execute, they will be useless,” said analyst Rosenberg of the Yankee Group. “In the future, I envision voice [long-distance] as an add-on to data services, and that essentially changes everything.”
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Long Division
The overall U.S. long-distance market continues to grow, but the yearly increase in total revenue has become anemic as callers shift to wireless phones, instant messaging, e-mail and Internet calling. the cost of calling afar has been steadily dropping.
Long-distance revenue
Average revenue per minute for interstate and international calls
1998: 14 cents per minute
U.S. long-distance revenue
Annual revenue, in billions (actual and estimated)
2002 (estimated): $122.6 billion
Market share
AT&T; Corp., once known as Ma Bell, had the long-distance market to itself until 1984, when the company was broken up and regulators began allowing new players to compete. In recent years, though, a growing share has been going to the nation’s hundreds of smaller long-distance providers--mostly at the expense of AT&T.;
1998
AT&T;: 62%
MCI: 21%
Sprint: 12%
Other: 5%
2000
AT&T;: 53%
MCI: 13%
Other: 28%
Sprint: 6%
Sources: FCC, The Yankee Group, Telecommunications Industry Revue
