Still waiting

Promised lower prices will take more time Competition is coming! Competition is coming! Like Paul Revere, the Federal Communications Commission has served notice to carriers and customers that full, vibrant competition in all facets of the phone industry is on the way.

Unlike the British, though, the varied, active market that President Clinton envisioned when he signed the 1996 Telecommunications Reform Act has been slow to show the whites of its eyes.

In areas such as major cities, local and long-distance rates are already somewhat competitive. The wireless and Internet access segments are certainly quite lively.

Since the act has been in effect just over a year, major kinks - like access charges and universal service, even with last month's FCC rulings - are still being worked out.

As that process unfolds, predictions, warnings and prognostications abound about what customers will pay for service. Industry analysts and insiders agree on one thing, though: 1997 has become the real start of the telephony revolution.

As of October 1995, the national average for flat-rate residential service was $19.49 a month, according to an FCC report released in March. That number, which is the latest available, includes taxes and subscriber line charges.

The FCC report also shows that in 1995, businesses paid an average of $41.77 a month for service.

Some areas of the country may have seen a 10% to 15% drop in both local residential and business rates because of the increased number of companies reselling the Bell regional holding companies' services. Currently, 90 companies are offering some form of local service to homes and businesses, according to a report from New Paradigm Resources Group. The 1996 annual report reviewed only 36 main players. Revenue in the competitive local services market has doubled to $2.2 billion.

This is the most immediate result of the telecom act, which forced incumbent carriers to open their networks to rivals to promote vigorous local competition before the Bell companies could jump into the long-distance market.

New players Incumbent telcos are now competing with telephone companies that seem to be coming from everywhere and anywhere.

CalTech International Telecom of Walnut Creek, Calif., became one of the first companies to enter California's local market by offering local phone service to businesses and residences statewide at measured rates in January. Most phone companies charge a flat fee for all local calls.

"Everybody's tiptoed going into the local exchange business," says Jeffrey Elkins, CalTech's president. "We're not going to tiptoe in. Since the door's open, we'll go for it.

CalTech has offered long-distance service since 1995. The company plans to package local service with its long-distance, toll, wireless and Internet access services, Elkins says. Although the company initially will offer local service through a resale arrangement, it plans to build its own network.

But an increase in choices has not necessarily translated into lower local prices, says Jim Lande, an FCC industry economist.

"The jury is out as to whether prices are lower as a result of divestiture," he says. "The real information on pricing is too difficult to do. There is a lot of information out there and a lot of people massaging that information without proving anything.

FCC data shows that since divestiture, long-distance rates, on average, have dropped more and increased less than prices for local service (Figure 1).

AT&T, MCI and Sprint offer the best rates to high-volume callers, according to the latest report from Telecommunications Research and Action Center, a non-profit group that follows long-distance prices. Calling plans like AT&T's 10› a minute, Sprint's Sense With the Most promotion, and MCI's Friends and Family, are a good bet if a caller spends more than $25 a month on long-distance calls.

But a less-frequent long-distance caller will do better with one of the smaller long-distance companies. TRAC studied the rates of Frontier Communications, LCI, Matrix and WorldCom. Although Matrix charges 18› a minute during peak hours, the plan requires no monthly charges, minimum usage requirements or additional charges, making it the cheapest long-distance service provider in five of the 18 calling patterns TRAC studies nationwide (Figure 2).

Long-distance rates have settled at a competitive level, but that has nothing to do with the telecom act, says Samuel Simon, counsel for TRAC. "AT&T is being more aggressive, forcing Sprint and MCI to do the same," he says. "There's already competition in that market, so the prices are just taking their natural course downward. And the same will happen [with local service] eventually.

Regulatory challenges The fact and fiction of several aspects of the telecom market and how the act will affect them must be ironed out.

One issue is network capacity, says a spokesman for the Association for Local Telecommunications Services in Washington, an organization of competitive local exchange carriers. Industry insiders agree the long-distance and cable networks have a lot of space to share and resell. But local networks are being squeezed, according to several Bell companies.

"The Bells have a definite agenda where capacity is concerned," the ALTS spokesman says. "They claim the Internet is clogging up the network, which is just built for voice. But they have an ax to grind with the [Internet service providers] because they don't pay access fees. The CLECs have alleviated that problem by building fiber optic networks.

Every major city has at least two fiber optic networks, which have proved good vehicles with high bandwidth for voice and data, he says.

"If the telcos have a problem, then there's the solution," he says. "In 1984, AT&T said it would take until 2000 to build a fiber network. But competition from MCI and Sprint focused them really fast.

Another ball of string that must be untangled before across-the-board competitive prices become a reality involves access charges and universal service.

For decades, Americans have been assured of affordable basic phone service by a policy known as universal service - federal and state subsidies that allow most people to get local service for less than it costs telcos to provide it. One of these subsidies is access charges that long-distance carriers pay to the local telcos to complete their calls. These charges generate billions of dollars a year; local exchange carriers use them to keep local service affordable, maintain networks and string lines out to rural and remote customers.

Last month, the FCC announced a plan to substantially reduce per-minute long-distance access fees over a five-year period. To make up the lost revenues, the FCC raised subscriber line charges - the monthly flat fee per phone line - for residential and business users with more than one line.

Residential customers will continue to pay $3.5 a month for their first line, but they must pay $5 a month for each additional line. The subscriber line charge is waived for low-income customers so carriers can provide them with basic lifeline service. The monthly subscriber line charge for businesses with multiple lines will increase from $6 to $9 per line.

The new ruling also imposes higher per-line access fees on long-distance carriers for business and residential customers with more than one line. IXCs are expected to pass these charges on to customers, adding another $1 a month for additional residential lines and more than $2 more a month for additional business lines.

Still unresolved, however, is how much it actually costs to provide universal service. Last month, the FCC deferred until 1999 a decision on how much should be spent to keep phone service affordable in rural areas.

Estimates of the cost of providing universal service range wildly from $3 billion to $20 billion. If revenues to support universal service are insufficient, local carriers say they could be forced to raise rates.

"Every time the telcos are threatened, they hide behind the flag of universal service," says the ALTS spokesman, who believes the actual cost falls closer to $6 billion.

Customers won't stand for higher phone bills after politicians promised that the telecom act would ultimately result in lower prices, Simon says. "The telcos will not be granted any great big increased because the states will resist it," he says.

The telecom industry should learn from its past, he says. When AT&T split apart in 1984, there was a strong push to increase residential and business rates, he says.

The overall effect of reduced access charges will be lower prices, the ALTS spokesman says. "Carriers will pass the savings from reduced access charges on to their biggest customers. They are the ones they care about the most.

What happened in the wireless market could cause fear for some carriers, says Bob Rosenberg, president of Insight Research Corp.

"There is some competition in wireless minute usage. The analog guys [are] being driven to lower prices by the introduction of [personal communication services]," he says. "If you want to know what will happen in wireline, just look at wireless.

New technology is also frightening the carriers, the ALTS spokesman says. Asynchronous transfer mode is the biggest threat to carrier revenues as far as businesses are concerned, he says.

"Why bother with having a PBX for voice and Internet, when all you need is an ATM link-up to do all of it?" he says.

More alarming is Internet telephony - the ability to make a phone call using a PC. This already presents a massive economical bypass option for some, and as Internet growth picks up, Internet telephony looms as a major threat to telco and interexchange carrier revenues, the spokesman says.

"It works - not well, right now - but you can do a long-distance call over the computer, and that scares the long-distance companies to death.

Carriers can fight these threats with bundling, he says. Offering services to customers in customized packages would encourage carrier loyalty. MCIOne service is a successful bundling example, he says.

"I don't know if that will be the model for everyone to follow, but everyone is going to have to go in the direction of bundling," the spokesman says. "The customers are smarter than the carriers think. They can add up their bills. And thanks to years of long-distance competition, they are smart enough to shop around.

The industry is expecting too much too soon from the telecom act, Simon says.

"It took [the government] 18 months to make the rules," he says. "I think there'll be a period of confusion. People will learn to compete, and probably three years from now, phone rates will come down across the board. But it all takes time. Nothing, except maybe Senate and House pay increases, takes place immediately."