Monday, Aug. 25, 1986

Ratifying a Winner in the Phone Vote

By Barbara Rudolph

For more than 18 months the campaign has raged amid a blizzard of contending hype, hoopla and hard sell. Tons of campaign literature have been mailed, endless hours of television commercials broadcast, hundreds of millions of dollars of campaign funds spent. Accusations of lying, ballot stealing and electoral tampering have abounded. But already last week, well before the Sept. 1 deadline when the vast majority of some 95 million eligible telephone subscribers are to choose a supplier of long-distance telephone services, the outcome of the Great Long-Distance Telephone Election was already clear. The most elaborate competitive exercise in U.S. regulatory history was bound to entrench giant AT&T almost as powerfully as ever atop the $50 billion long- distance industry that the company has always dominated.

Never before has there been anything quite like the exhaustive commercial referendum, known as "equal access" balloting, in which consumers select the company to carry their long-distance phone calls whenever they dial 1 plus an area code. In sheer numbers, the vote that was drawing near an end may mark the largest election in U.S. history. Yet the selection was being carried on in such higgledy-piggledy fashion that many consumers were probably unaware that any contest was taking place at all.

Some customers may discover the outcome of the telephone balloting only when their regular long-distance service is suddenly reassigned to a different supplier on the basis of the voting outcome in their designated area. Dozens of such reassignment possibilities now exist across the U.S. as a result of the 1984 breakup of the Bell System. The main focus of the telephone balloting battle, though, was on AT&T (1985 long-distance revenues: $17.3 billion) and its two remaining major national rivals, upstarts MCI ($2.5 billion) and US Sprint ($1.4 billion). Last week experts projected that AT&T would claim 80% of the final vote. MCI will probably trail with 10%, and Sprint will follow with 4%.

The election rules were another outgrowth of the 1984 Bell breakup. At that time, the Justice Department ruled that AT&T would stay in the long-distance business, where it had previously controlled more than 95% of the market, while the seven regional companies, dubbed Baby Bells, managed local telephone service. To whittle down AT&T's market share, the Justice Department determined that consumers should be able to choose their long-distance carrier.

The result has been a widespread competition -- of sorts (see chart). There are now some 450 long-distance carriers in the U.S., in contrast to about 150 before the AT&T breakup. Along with the Big Three national carriers, there are many medium-size regional concerns, like Republic Telecom of Minnesota, which has about 35,000 customers and enjoyed 1985 revenues of $100 million. But a considerable number of the retailers are much smaller operations. What most of them shared was a handicap: to make a long-distance call on their services, customers have had to dial as many as 24 digits on their phones. AT& T alone retained command of the 1-plus-area-code system.

; Equal access was intended to change that. On behalf of the long-distance carriers, the regional Bells mailed ballots to customers formerly in the old Bell System, giving them an average of 30 days to mark and return them. Depending on the services contending in any area, customers may have been faced with more than a dozen carrier names on some ballots. As equipment capable of handling such functions was installed at local telephone offices, retailers in each area would be given equal access to the dial-1 system -- hence the balloting's informal name. By the Sept. 1 deadline, 71% of all eligible U.S. telephone customers will have been polled; the 20 million to 30 million customers served by U.S. companies other than the Baby Bells are not allowed to vote in this election. They face a long-distance choice in the future.

Those consumers who received ballots but did not vote -- perhaps 30% of telephone users -- will find the choice made for them. They will be assigned a carrier according to the outcome in their region. If ballots split 60% for AT& T and 40% for MCI, for example, 60% of nonvoting consumers would receive AT&T service while the remainder would find themselves dialing on MCI. Customers could switch carriers thereafter, but would pay a $5 fee to their local Baby Bell.

With such high competitive stakes, the Big Three long-distance firms spent inordinate sums to woo their customers. AT&T dished out an estimated $200 million on the election, or nearly half its annual advertising budget. MCI invested $75 million, and US Sprint $70 million.

Much of that money has gone for television commercials in a kind of surrogate Battle of the Long-Distance Pitchmen. AT&T employed Actor Cliff Robertson, who had earned a reputation for scrupulous honesty by blowing the whistle on a 1977 Hollywood embezzlement scandal, for a reported salary of $2 million a year. MCI riposted with Burt Lancaster and Comic Joan Rivers. Sprint was represented for a time by Psychologist Joyce Brothers. The campaign has also extended beyond the airwaves to local shopping malls and amusement parks, where the rival long-distance suppliers have even hired acrobats and clowns to promote their cause.

As seems only fitting for a purely commercial election contest, the long- distance companies have also resorted to price cutting to win votes. US Sprint has offered a 10% reduction on all long-distance calls for a year to anyone who signs up for the service before Sept. 30. MCI is offering its users a ! free, one-hour long-distance call to anywhere in the world.

The election has seen its share of controversy, as competitors have accused one another of questionable campaign tactics. Last year AT&T mailed letters to 117,000 residential customers, thanking them for choosing the company's service. In fact, they had not done any such thing. Two months ago, the Miami- based retailer known as Teltec Savings Communications filed suit against AT&T for allegedly misappropriating customers and trying to "undermine" Teltec's business. Sprint and Western Union have also been charged with using bait-and- switch tactics, quoting one long-distance subscription rate to consumers, then charging another. Yet despite all those occurrences, FCC overseers claim the election process has been fair. Says Albert Halprin, chief of the FCC's common-carrier division: "The process was not perfect. But considering its size and scope, I'm surprised at how smoothly things have gone."

One clear advantage that AT&T has enjoyed is its elaborately detailed profiles of virtually every telephone customer in the U.S., amassed during decades of monopoly service. Possession of those records allowed AT&T to adjust its campaign pitch more finely, and at lower cost, than could its rivals, who were allowed under FCC rules to buy customer data from the Baby Bells. MCI estimates that it spent between $10 and $15 to reach each residential customer in the election, more than three times the cost for AT&T. Says Charles Skibo, president of US Sprint: "AT&T had the data to sharpshoot and pick off select targets. We were shooting in the dark with a scatter- gun."

AT&T also benefited from its rivals' failings. Many consumer feathers were ruffled, for example, by the revelation that US Sprint and MCI, among other retailers, have long overcharged hundreds of customers by billing them for long-distance calls that were not completed. The reason: in past years, AT&T alone has had the kind of sophisticated equipment that can set the long- distance meter running only when a successful telephone connection is made. The other companies simply began charging for an average of six seconds of service after three telephone rings, regardless of whether anyone answered. According to some experts, consumers have paid more than $100 million a year in overcharges.

A major irony of the telephone balloting is that resolving the equal- access issue is liable to make business even rougher for AT&T's competitors. | That is because of the fees called access charges that carriers pay to the Baby Bells, whose equipment connects consumer phones to a long- distance carrier. For AT&T's rivals, these fees are rising fast, and will probably grow even faster to pay for the new equal-access connection. In many cases, access fees have jumped from about 10% of long-distance retailer revenues two years ago to more than 50% today. Moreover, the sudden price hikes are coming just as the carriers must further modernize their equipment to take advantage of their improved equal-access connection. US Sprint and MCI plan to invest billions in capital improvements by 1989.

The smaller retailers also have to worry about price cutting by newly aggressive AT&T. Competition has sliced long-distance charges by about 22% since 1984, and the price gap between business calls on AT&T and MCI, some 30% two years ago, is now down to 10%. With such slim advantages, long-distance retailers are huddling together. George Vasilakos, president of Michigan-based ALC Communications, says he receives an offer to buy another firm "almost every day." US Sprint was formed by a merger announced only last January. Some analysts anticipate that MCI and US Sprint will eventually join forces.

When the equal-access exercise is over, the long-distance battlefield is liable to move overseas. Despite the unequal odds, the more combative of AT& T's rivals would like to take further aim at the $5 billion foreign market for long-distance calls, where, once again, AT&T has an intimidating 96% share. US Sprint now operates in 28 countries and MCI in 40, while AT&T services 135 nations. As the exhausting U.S. balloting finally draws near its end, the daunting challenge of wooing customers away from AT&T could become a global pursuit.

CHART: TEXT NOT AVAILABLE.

With reporting by Thomas McCarroll/ New York