Long-distance providers, hobbled by double-digit revenue declines, have begun to push through sizable rate increases for the first time in years.
WorldCom Inc., the scandal-plagued company now in bankruptcy protection, was the first to announce a rate increase last month. Since then its MCI Group subsidiary has announced two more waves of price hikes covering per-minute fees and other monthly charges. AT&T Corp. followed this month with its own slate of rate increases, and Sprint Corp. is expected to boost charges shortly.
Long-distance rates collectively have declined 17 percent in the past six years, but the struggling long-distance companies can no longer afford the price wars that brought costs to consumers to as low as 5 cents per minute.
When WorldCom moved to raise rates, AT&T and Sprint "breathed a sigh of relief," according to Scott C. Cleland, a telecommunications analyst with the Washington-based Precursor Group. "Where they can raise rates, they want to and need to," Cleland said.
The fee increases show up in several places. For instance MCI is raising a 7-cents-per-minute charge to 9 cents for several of its plans. In addition, it is raising the base fee it charges in many of its plans to $5 from $3. The base fee represents what a user would pay monthly if calls are never made. Some AT&T customers will see their base fee raised to $4.95 from $3.95.
WorldCom spokeswoman Claire Hassett said her company's decision to raise rates stemmed from an ongoing evaluation of the market. "We continually review our products and services and change them in response to changing market conditions and trends in the marketplace," Hassett said.
And AT&T spokesman Gary Morgenstern said his company decided to raise rates because WorldCom and others adjusted theirs. "We are always looking at the market and evaluating our pricing strategy and how it compares to our largest competitors," including MCI and the local telephone companies, Morgenstern said
The rate hikes are coming just as AT&T, WorldCom and Sprint face increased competition from local Bell telephone companies such as Verizon Communications Inc. and BellSouth Corp., which have been freed by regulators to enter the long-distance market for the first time. But analysts say that the long-distance companies' desperate need to slow the decline in revenue has trumped concerns about defending themselves against new rivals.
Besides, the local telephone companies appear to be not particularly interested in starting off another round of price wars just as they enter a new line of business, analysts said. Instead of trying to lure consumers with lower prices, local telephone companies are emphasizing the convenience of bundling local and long-distance and other services in one bill.
"We never went into the price gutter with everyone else," Verizon spokesman Jim Smith said.
Consumers who purchase long-distance service from Verizon on a stand-alone basis pay $21 per month for 300 long-distance minutes, whether they use them or not. If a customer uses more than the 300-minute allotment, additional calls cost 8 cents per minute. If a customer buys the long-distance service in a bundle with local, the monthly fee drops $1 to $20 per month, a savings of less than 5 percent.
With the local telephone companies focused on convenience rather than price, the long-distance companies believe they can raise rates. It is a matter of survival, Cleland said.
AT&T, once a blue-chip stock included in the most conservative of stock portfolios, has been ravaged during the past several years. After selling its cable unit in November, AT&T shares went through a 1-for-5 reverse stock split, in which the company reduced the number of shares on the market in order to lift its price from just over $5 per share. AT&T closed yesterday at $27.48, down 18 cents or less than 1 percent.
Cleland, who had a negative rating on AT&T for several years, has recently declared a positive outlook for the company. He doesn't expect the rising rates to save AT&T. Instead, he thinks it is a likely takeover target from a major local telephone company such as Verizon or BellSouth.