A story yesterday about Bell Atlantic incorrectly identified its group president for consumer services, Frederick D. D'Alessio. (Published 09/28/99)
As anyone who has tried to enjoy dinner free of interruption knows too well, the long-distance telephone business is defined by fierce competition. Even so, you've yet to hear from some of the biggest telephone companies, which have thus far been legally confined to the sidelines.
That may be about to change: This week Bell Atlantic Corp. is expected to ask federal regulators for the right to sell long-distance service in New York, a right no other local telephone company has managed to secure.
The New York-based company's prospects appear good. If it succeeds, the results would supply a view of which future awaits the American communications world -- one defined by greater competition and expanded choice, or by resurgent monopolies.
"This is a seminal event," said Mark N. Cooper, director of research for the Consumer Federation of America. "Once New York happens, it happens elsewhere."
The Telecommunications Act of 1996 was supposed to foster competition throughout the industry. Local phone companies such as Bell Atlantic, which control the wires to homes and businesses, were offered an incentive to loosen their monopolistic grip. If they could satisfy the Federal Communications Commission that their local markets were open to competition, they could claim the right to sell long-distance service.
Though several former Baby Bells have sought to exploit the new opportunity, none has passed the test. Bell Atlantic's competitors say the company shouldn't be allowed into long-distance service either, maintaining that New York still is unfairly dominated by a single local player. If Bell Atlantic is allowed to expand now, it won't bring more competition, they say; it will merely hand the company a stronger position than ever.
But even those competitors concede that Bell Atlantic has done more than any other Baby Bell to open its local franchise. If federal regulators rule that Bell Atlantic has done enough, local companies across the nation, which also hope to get into the long-distance market, would be handed a map.
"The whole world is watching this filing," said Rex G. Mitchell, an analyst at Banc of America Securities in San Francisco. "Now that Bell Atlantic is getting very close, other companies are sharpening their pencils."
Already, BellSouth Corp. has been rebuffed by the Federal Communications Commission in seeking to provide long-distance in Louisiana and South Carolina. SBC Communications Inc. is pressing to enter the Texas market, while Pacific Bell is seeking approval in California. Bell Atlantic has filed to get into long-distance markets in Massachusetts and has given notice of intent to do the same in Pennsylvania and New Jersey.
"All the regional bells follow one another," said Charles Carbone, consumer advocate for Utility Consumers' Action Network in San Diego, which represents about 40,000 consumers in Southern California. "They learn by imitation. There's sort of a domino effect in the market."
Three years ago, when Congress rolled out the Telecom Act, local companies were keen to get into the long-distance market for the simple reason that it was lucrative. It still is: Nationwide, long-distance service is worth about $95 billion a year, according to Prudential Securities Inc. The New York market alone is worth about $8 billion.
But as intense competition has dropped many residential rates to 5 cents a minute, long-distance is no longer seen as the cash cow of yore. Rather, it is viewed more as a service that companies must provide to keep pace with the competitor. In an era when all the big players aspire to become one-stop shopping centers, long-distance is not an optional part of the package.
"This is not a business that's going to be profitable for us on day one or, for that matter, on day 700," said James G. Cullen, Bell Atlantic's president and chief operating officer. "Frankly, it's something we have to do. If you just look at the competitive campaigns and public statements of the big three, AT&T, MCI, and Sprint, it's very clear that they are bundling services. If you're going to compete with those companies, you have to have long-distance in your package."
A Baby Bell Among Giants
Bell Atlantic, the largest Baby Bell, has staked its future on being able to offer a complete array of communications services, giving it footing to compete with the titans of the industry, AT&T, MCI WorldCom Inc. and Sprint Corp.
Studies have shown that customers who buy bundled services are much less likely to switch companies for simple reasons of convenience: While changing long-distance carriers may be as easy as making a phone call, switching one's e-mail address or cell phone number is a hassle most people would rather skip.
"Every company's looking for hooks," said Guy W. Woodlief, an analyst with Prudential.
AT&T is perhaps the most visible proponent of the one-stop shopping strategy. The company has been snapping up cable television franchises across the nation in the hopes of using those lines to sell the full spectrum of services. Talk that MCI WorldCom is pursuing a merger with Sprint is fueled by sentiments that the combined company would gain similarly expansive reach.
But Bell Atlantic has refused to be left out. Two years ago, the company merged with Nynex Corp., another former Baby Bell, consolidating its position in the Northeast. A pending merger with GTE Corp. and a recently announced joint venture with Vodafone AirTouch PLC have made Bell Atlantic the largest cellular phone player in the nation.
A failure to get into the long-distance market would punch a gaping hole in its strategy. Thus, Bell Atlantic has gone further than any other local company toward opening its market in the hopes of winning regulatory blessing, agreeing to discount what it charges competitors for tapping into its telephone network, while adding electronic systems to process orders to switch service to a competitor.
"We've met the requirements," Cullen said. "We've spent about a billion dollars to open our markets to competition."
Cullen said Bell Atlantic expects to make long-distance service profitable within two to three years, after absorbing the costs of marketing new services. He said the company plans to focus on the residential market, offering customers the convenience of a single bill for multiple services.
Even as Bell Atlantic's competitors acknowledge the company's New York filing is likely to be more credible than any to date, they insist its systems are not up to the task of processing orders from customers who want to switch to a different local carrier.
"They have made more progress than any other operating company," said Michael J. Morrissey, vice president of law and government affairs for AT&T. "They are close. But they can't handle the volume of orders that we and MCI will be sending them."
The FCC appears slated to take on the role of referee. Bell Atlantic has long said it plans to enter the New York long-distance market before the end of the year.
Two weeks ago Bell Atlantic's chief executive, Ivan Seidenberg, created a stir when he told reporters the company would file the request within days. At a technology conference in Washington last week D. D'Alessio Frederick, Bell Atlantic's group president for consumer services, said the company would file by the end of the month.
Ready to Compete
The New York battle features a see-saw of competing claims and counterclaims, but, boiled down, they amount to this: Bell Atlantic says its systems are ready for local competition; its critics say they are not, accusing the company of impeding orders from customers wanting to switch to a competitor.
"They clearly could exploit their monopoly position to stall competition in the local market," said John Donoghue, senior vice president of consumer marketing for MCI WorldCom.
Bell Atlantic notes that since January MCI has signed up 160,000 local residential customers in New York. AT&T, which quietly launched local service in New York in August, claims nearly 5,000 customers. While Bell Atlantic still controls 11.6 million local phone lines in New York, competitors have 1 million, according to the company.
Bell Atlantic said those facts prove New York is unalterably open to competition: The only reason MCI and AT&T don't advertise for more customers is because doing so would remove any doubt. "The long-distance companies will do and say whatever it takes to keep us out," Cullen said.
But MCI and AT&T say they haven't mass-marketed for local service because Bell Atlantic's system is unable to process a flood of orders to switch service. If they did move aggressively, they say, the result would be thousands of frustrated customers who would quickly conclude that switching service is more trouble than it's worth.
Donoghue, the MCI executive, accused Bell Atlantic of employing "strategic incompetence. . . . Someone's made a decision not to resource this thing to get it to work right."
Bell Atlantic counters that it now handles the vast majority of orders smoothly. What troubles do occur often result from errors made by competitors, the company says.
But critics note that studies cited by Bell Atlantic in support of its filing found some problems with how the company handles orders, prompting the New York Attorney General's office to weigh in against the application.
Donoghue said nothing would prevent Bell Atlantic from shutting down the local market once it got the green-light to go into long-distance service. Bell Atlantic has proposed penalties that would apply in that scenario, though consumer groups have dismissed them as too slight to prevent mischief.
In the middle of these dueling claims sits the New York Public Service Commission, which, for the last two years, has held hearings on whether Bell Atlantic's market is open. The commission has issued no opinion to date. But the FCC must solicit the commission's view within the first 20 days of a company filing, under the Telecom Act.
Those views would appear to color more than the future of New York's communications battles.
"We're about to have to have this great big experiment," said Richard Kirsch, executive director of Citizen Action of New York. "New York not only becomes a floor for the country in terms of standards, it becomes a test for the whole country of whether the Telecom Act will work."