Long-distance rates are rising despite increased competition

NEW YORK -- It seems to defy a basic law of business: Competition is increasing in the long-distance phone market, but prices are going up anyway.

How can this be? Companies and analysts say it's partly because prices for long-distance calls -- and many other telecommunications services -- simply got unsustainably low in recent years.

But it's also because of the nature of the competition itself.

Increasingly, long-distance calling is available as part of "bundled" packages that also include local phone service and high-speed Internet access. Customers who don't sign up for such packages, and instead take basic services a la carte, are less profitable for the leading long-distance players, AT&T Corp., Sprint Corp. and WorldCom Inc.

Those basic calling plans are the ones that have seen increases in recent weeks. AT&T and WorldCom's MCI division -- Nos. 1 and 2 in long distance, respectively -- have raised several monthly fees and per-minute rates, and indicated more increases are on the way. Sprint, the third-largest long-distance player, is widely expected to follow suit.

With landline revenue plunging at AT&T and Sprint, and WorldCom in bankruptcy, it makes sense that the companies would try to extract more money from customers who make relatively few calls, or steer them into bundled services, which are likely to maintain more attractive prices, analysts said.

"To a certain extent, they realize they're going to lose many of their low-end customers" because of competition, said F. Drake Johnstone, a telecom analyst for Davenport & Co. "But they don't really mind, because they're making the most of their money from higher-paying customers."

Any increases in long-distance rates by AT&T, MCI and Sprint might seem to play right into the hands of their newest competitors: the nation's four huge regional phone companies, Qwest Communications International Inc., SBC Communications Inc., Verizon Communications Inc. and BellSouth Corp. Those four have won regulatory approval to offer local and long-distance calling in 36 states, with more likely in 2003.

But those companies don't offer big discounts either, especially since they badly need long-distance revenue to counteract weakness in the local phone business. That market is suffering because second and even primary land-lines are increasingly being replaced by wireless phones, voice-enabled cable TV connections and other new communications technologies.

The local market also has been invaded by none other than the big long-distance companies, though the regional phone giants hope federal regulators soon make that process more difficult.

Overhead too high

Essentially, none of the giant companies in this game can tolerate bargain-basement prices.

"In the short term, the Bells could put some pressure on the big three to delay rate hikes, but they cannot afford to lower rates," said Rich Sayers, who runs consumer Web sites such as 10-10PhoneRates.com and Phone-Bill-Alert.com. "AT&T, MCI and Sprint have overhead that is far too high to compete on price."

AT&T spokesman Gary Morgenstern said long-distance prices fell to "irrational" levels in recent years partly because WorldCom used financial shenanigans to mask the impact its bargains had on its bottom line. He said AT&T will raise other rates in 2003 but insisted they would be minor in comparison to MCI's "desperate measures to remain market-viable."

"You have to maintain some margins to stay in business. We're in an environment where long-distance revenues have been falling for the last few years, and so has our market share," Morgenstern said. "We do have the best margins in the industry, and we want to maintain them."

MCI spokeswoman Claire Hassett denied that WorldCom used its $9 billion accounting fraud to push long-distance prices to artificially low levels. She said competition kept prices down, but rising overhead has made that unsustainable.

"Our rate changes are not tied to anything other than trends in our industry," Hassett said.

Fortunately for consumers, there still are plenty of options for inexpensive long-distance calls, especially wireless phone plans that offer free nights and weekends.

And for people willing to take extra steps, some "dial-around" services and prepaid calling cards -- offered by both big companies like MCI and upstarts you never heard of -- charge less than five cents a minute or have shorter billing increments. In comparison, MCI recently raised calls on some plans to nine cents a minute.