Bell Atlantic targets soft spots

For its first foray into long-distance, Bell Atlantic will follow the shrewd Sun-Tzu instead of the ruthless Machiavelli. Rather than start an all-out price war across broad market segments, the U.S. local carrier is focusing on low-volume residential customers by using competitively but not radically priced products.

At the low end of the market, the economics favor Bell Atlantic because it already incurs the fixed cost of billing consumers in New York. The strategy also attacks AT&T and MCI WorldCom where they're most vulnerable.

"This will be the original test case for the power of the [RBOC's] brands in the long-distance market," said John Zahurancik, vice president of broadband research with The Strategis Group. "Bell Atlantic is going into a [market] where it doesn't have much competition on the local services side and can leverage its brand quickly."

If the experiences of GTE and Southern New England Telecommunications are any indication, Bell Atlantic easily will capture 10% to 15% market share in New York, said Fred Voit, an analyst with The Yankee Group. "Droves of people will sign up with Bell Atlantic no matter what the price because they just want to deal with one carrier."

Available last week, Bell Atlantic's standard long-distance plan offers a flat 10cents-per-minute rate for direct-dial domestic calls and no monthly access or minimum usage fees. This plan should appeal to customers who make less than $10 per month in long-distance calls and gain little from paying a fee to get the lower per-minute charges offered by AT&T, MCI WorldCom and Sprint.

"The 7cents or 5cents plans offered by the big three long-distance competitors are phantom long-distance plans," said Maura Breen, president and CEO of Bell Atlantic Communications, the newly formed long-distance unit. "They can cost consumers as much as 16cents or 17cents a minute when the extra charges are calculated."

Although three other plans launched by Bell Atlantic on Jan. 3 compete with existing plans from the big three, none are worldbeaters. For example, the 9cents per minute weekdays and 5cents on weekend rates that are part of the eValues online ordering and billing plan from Bell Atlantic merely match what's already available to New York residents through MCI WorldCom's One Net Savings. Similarly, Bell Atlantic's pricing scheme for heavy volume long-distance users, which includes a $5.95 monthly fee, extends off-peak calling rates by two hours but otherwise differs little from Sprint's Nickel Nights.

Bell Atlantic also introduced a local and long-distance bundle for $19.99 per month. The 10cents-per-minute long-distance rate applies, as does a charge of 3cents to 5cents per local call. The package includes up to eight vertical features, such as caller ID. AT&T's Local One Rate plan compares favorably, costing between $24.95 and $27.95 and offering 75 hours of free local calling, 7cents-per-minute state-to-state calls and 10cents-per-minute toll calls.

"What this suggests is that Bell Atlantic's success will not come down to dramatic discount schemes but rather effective marketing," said Frank Governali, an analyst with Goldman Sachs & Co., in a report.

Still, targeting the market's low end carries some penalties. Although Bell Atlantic initially may win many customers, its revenue share may not be as large. Bell Atlantic hopes to win 1 million consumers in 2000 and capture 30% of the households in New York's $2 billion consumer long-distance market in five years.

"Bell Atlantic can't afford to take on too much right away," Voit said. "If everyone in New York called Bell Atlantic today and requested long-distance, there would be many disgruntled customers."

The company also doesn't expect immediate benefits to its bottom line. It will take Bell Atlantic two to three years to show a profit in long-distance, Chief Operating Officer Jim Cullen has said repeatedly.

Long-term, the company expects profitability at a 15% to 20% operating margin, Governali said.

The real money may come as Bell Atlantic bundles additional services with local and long-distance. Bell Atlantic Communications is looking at Internet, DSL and wireless packages for launch later this year, Breen said. But the company may hold off on a combined Internet services and voice package so as not to muddy the regulatory waters as it tries to get its merger with GTE approved, analysts said.

Last week, Bell Atlantic proposed a spinoff of GTE's Internet backbone operation that would create a separate public company, 10% of which would be owned by the merged entity.