Most long-distance phone companies plan to cut their rates soon to match a $1.5 billion cut announced last week by AT&T, but virtually all of the savings for consumers will be offset by higher local phone charges.
Because of the increase in local bills, the 9.5 percent cut by AT&T will not mean lower phone bills for most residential customers, said Gene Kimmelman, legislative director for the Consumer Federation of America.
Local phone bills all over the country will go up by $1 a month starting June 1. Local rates will increase because the Federal Communications Commission has decided consumers should pay directly for the cost of connecting their local phone line to the long-distance networks. The long-distance "subscriber line charge," as it is called, will double from $1 a month to $2.
That extra dollar is more than most residential customers will save as the result of the cuts by AT&T and the other long-distance companies, Kimmelman said.
Most residential customers make less than $10 worth of long-distance calls a month, according to the CFA, a Washington advocacy group. Most of those calls take place on weekends and after 11 p.m., at times when rates are cheapest, but when AT&T proposes a discount of only 2.7 percent.
"For consumers who make their calls at night or on weekends, they'll need to run up more than a $37-a-month long-distance bill to come out ahead under this AT&T proposal," he said. Residential customers could save more money if they shifted their calling patterns to more expensive calling times, but "that's crazy," he said.
Other analysts said the price shifts mean at best no difference in the majority of overall residential telephone bills. "The majority of residential households will see a wash or an increase in their overall monthly phone bill," said Robert Morris III of Montgomery Securities.
The shifts in rates will mean more competition and lower prices for long-distance calls, but the biggest cuts will be in services used mostly by businesses, consumer advocates and stock market communications specialists said.
But AT&T spokesman Herb Linnen said, "It's not true that residential customers are at a disadvantage.
"Seventy-two percent of the revenues AT&T derives from residential customers occurs during the day and evening hours when the reductions we had proposed are most heavily used."
AT&T has proposed a reduction of 11.4 percent for calls made between 8 a.m. and 11 p.m., Monday through Friday, as part of an overall reduction that would amount to 9.5 percent of total revenues for its long-distance unit. The reductions range from 2.7 percent to 11.4 percent for residential customers. Proposed reductions also include a substantial drop in fees for WATS long-distance service and 800 service.
Analysts said yesterday that the AT&T cut, which will go into effect June 1 unless disapproved by the Federal Communications Commission, will squeeze MCI Communications Corp., GTE/Sprint and other AT&T competitors, and spark further rate cuts. At the same time, the discount from AT&T's rates that competitors use as a major marketing tool is eroding and will shrink further.
Companies will have to be more innovative about selling their services, and will have to increasingly target the business market, as MCI has done, said Morris, a telecommunications analyst at Montgomery Securities.
"It turns up the competitive heat," said Morris. "The long-distance companies have to manage their businesses, and that means bringing something to the table besides lower prices."
The FCC in June imposed a local monthly telephone charge of $1 for residential and single-line business customers and a fee of up to $6 per line for multiline business customers. Last spring, when the $1 fee went into effect, AT&T also lowered rates by 6.1 percent, and its competitors followed suit. The same thing is expected to happen when the fee doubles this June.
The FCC made clear AT&T was expected to offset the increase in local rates by reducing long-distance rates.
"This is in no way a competitive response by AT&T," said AT&T's Linnen. "It is a question of passing on to our customers those savings that we derive from the lower charges we pay to the local phone companies for connections to their networks."
On the question of long-distance competition, analysts say MCI and Sprint will keep gaining market share by offering new business services. But they said the firms will lose their ability to offer big long-distance discounts over AT&T.
Frank Governali, a telecommunications analyst at Kidder Peabody, estimates MCI and Sprint will lower prices by about 5 percent in response to the AT&T proposal, but their discounts over AT&T will be reduced by 40 percent.
MCI and Sprint said their rates would remain lower than AT&T's, but could not be specific about their rate cuts.
The AT&T proposal "inhibits their marketing strategy, their margins are going to be squeezed and it will inhibit long-term growth," said Governali.
Discounts are further shrinking as AT&T's competitors start paying more for special connections that allow consumers to make long-distance calls without dialing lengthy access codes, say analysts.