Long Distance May Face a Very Short Future

As long-distance companies watch their calls and profits slip away to rivals such as cellular phone networks, the day may soon come when their business--once considered a pillar of American enterprise--ceases to exist.

Krystin Alexander is part of the reason. The 33-year-old New Orleans resident no longer makes the distinction between a local and a long-distance phone call. When she dials a number on her wireless phone, she pays the same amount regardless of how many miles separate her from the person on the other end of the line.

“People with land lines have to pay long distance,” said the executive assistant at an engineering firm, who has gone completely wireless. “We don’t even think about that stuff anymore.”

Just as technology dissolved the notion of distance, it now is dismantling one of the key industries built up around it. That, coupled with changes in the laws governing local phone monopolies, has resulted in a steady stream of bad news from blue-chip companies such as AT&T; Corp. and WorldCom Inc.

Long-distance giant WorldCom, the parent company of MCI, said Thursday that first-quarter profit plunged 78%. A day earlier, AT&T; said it lost nearly $1 billion for the first three months of the year as it incurred the defection of customers to wireless services, prepaid calling cards and other less expensive alternatives.

For both companies, call volume fell significantly as customers continue to find other ways to reach out and touch friends and family in far-off places. But revenue dropped even faster as competition and new technology forced prices down.

It’s a trend hammering all long-distance companies--and one without an apparent solution.

“I’m not sure it will ever get better for them,” said Pat Comack, a telecom analyst with Guzman & Co. in Miami. “At the end of the day, they’re pretty much doomed. Long distance will be a memory.”

With it will be billions of dollars of shareholders’ money. Once considered among the safest bets for investors, shares of long-distance companies have fallen sharply since the late 1990s. AT&T;, for instance, closed Thursday at $13.49--down from $49.18 just three years ago--on the New York Stock Exchange. And WorldCom’s Thursday close of $3.53 on Nasdaq is well off its 1999 price of $61.99.

An Increasingly Crowded Market

The problem for traditional long-distance companies is that the market they once had all to themselves is being bombarded by new competitors such as wireless firms, Internet upstarts and cable providers. Even local phone companies such as SBC Pacific Bell, which for years were excluded from the market by law, are winning regulatory approval to offer long-distance services.

At the same time, the prices that long-distance companies can charge to the customers they have managed to hang on to have been falling steadily and now amount to just pennies a minute. That, in turn, helped kill the mind-set that spending time on the phone was a luxury that must be regulated by an egg timer.

“There’s an aura among my parents’ generation that if someone’s calling cross-country, you should get to that call immediately because it costs a lot of money,” said Jeff Pulver, who publishes a newsletter based in Melville, N.Y., about communications technology. “Other generations assume that costs are associated with distance, but now it costs 2 cents a minute. Cost has nothing to do with distance.”

For years, long-distance calls were more expensive than local calls because providers such as AT&T;, MCI and Sprint Corp. had to pay fees to local phone companies to have their long-distance calls begin and end on local networks. Over time, the Federal Communications Commission has reduced those fees from several cents each to only half a penny apiece, Pulver said.

“A lot of cost is from originating and terminating a call, not how far it goes,” he said. The marginal cost of carrying a call farther on a company’s phone network amounts to “some fraction of a penny per call.”

Meanwhile, a new generation of upstarts such as Qwest Communications International Inc. and Level 3 Communications Inc. built fiber-optic networks that relied on more efficient Internet-style systems to move voice and data traffic. The new networks allow vastly more calls to share a single line by breaking them into packets and sealing them in their own electronic envelopes.

“Internet telephony has reduced costs by 80% to 90%,” said Roger Wery, a partner at PRTM, a telecommunications consulting firm in San Francisco. “It’s a dramatically different cost structure.” Wery said his own monthly long-distance bill has plunged from $300 eight years ago to less than $40 today.

The long-distance business was essentially created in 1984, when the federal government carved seven local phone monopolies out of AT&T.; The company formerly known as Ma Bell could offer only long-distance service, and the Baby Bells were allowed to handle only local traffic.

Twelve years later, Congress passed the Telecommunications Act of 1996, allowing local and long-distance companies to enter one another’s markets. But of the two, the local market has proved far more resilient to competition.

“When they broke up AT&T; in 1984, they didn’t allow the [Baby Bells] to offer long distance, so they created a long-distance industry,” analyst Comack said. “When they passed the Telecom Act of 1996, they destroyed the long-distance industry.”

Carriers Try to Diversify

Realizing that they were in danger of getting stuck in a low-margin commodity business, long-distance companies responded by trying to diversify.

AT&T; bought computer giant NCR Corp. and wireless provider McCaw Cellular to gain entry into new markets. It also bought cable giants Tele-Communications Inc. and MediaOne in an attempt to gain direct access into consumers’ homes and return to the local phone business. AT&T; has since shed NCR and is in the process of selling the cable properties, transactions that resulted in billions of dollars of losses.

WorldCom went on its own buying spree to become a company focused on business services such as data networks, Internet access and Web hosting.

Sprint has concentrated on building a wireless powerhouse, Sprint PCS, that treats local and long-distance calls equally. Long-distance companies still collect some money when wireless customers make long-distance calls, but they can charge only wholesale rates with razor-thin margins.

And that ultimately benefits callers such as Alexander, who used to spend about $70 a month making long-distance calls to friends and family in Los Angeles, Salt Lake City and Florida.

“My phone bills used to go through the roof,” she said. “I used to take them out of the mail and hide them from [my husband].”

In July, when the couple upgraded from dial-up Internet access to a high-speed cable modem, they decided to save some money by getting rid of their land line altogether. Now they use e-mail and their wireless phone to communicate instead. Alexander pays just $40 a month for 3,500 minutes of air time.

“It’s a lot more convenient,” she said.