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All-You-Can-Eat Long Distance

Posted: 12/1998

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All-You-Can-Eat Long Distance
By Jennifer Knapp

William Ervine, President of San Diego-based USA Talks.com, said it best after his
company was nominated in November 1998 as a finalist for the "Most Innovative New
Product" Award from Connect, the University of California, San Diego Program in
Technology and Entrepreneurship: "We are confident our long distance service will set
the bar for future long distance carrier quality and pricing worldwide."

Ervine is referring to the August launch of USA Talks.com’s flat-rate long distance
service–the first such offering in the United States. The announcement was followed two
months later by No. 3 long distance carrier Sprint Corp.’s flat-rate weekends plan and an
offer to match by rival AT&T Corp.

A new era in long distance pricing has been signaled, and the industry can expect to
see the per-minute long distance system further challenged by "me-too" flat-rate
offerings.

Unlimited Helpings

USA Talks.com broke a paradigm with its Internet protocol (IP)-based phone-to-phone
flat-rate service, which will be available nationwide in first- quarter 1999.

Before the flat-rate model’s debut in U.S. long distance, the standard billing system
was based on a per-minute charge–in itself a recent departure over the pre-’90s time- and
distance-sensitive pricing models. A flat-rate service, on the other hand, allows a user
to pay one rate per month for unlimited calling time.

USA Talks.com’s service ranges from a $30-per-person, per-month business plan to a
$20-per-month economy plan for nights and weekends. These prices are in line with current
spending levels of $18 per month for residences and $250 per month for businesses,
according to estimates by Boston-based strategy consulting firm ATLANTIC-ACM Inc. Of
course, the economics of the plans improve with greater usage.

As Ervine predicted, competitive offerings quickly have hit the market. On Nov. 5,
Sprint introduced its national flat-rate residential long distance service, Sprint
Unlimited. Subscribers to Sprint Unlimited pay $25 per month for unlimited weekend long
distance calling, including interLATA (local access and transport area) and intraLATA
calls. However, Sprint has clung to the usage-based system for weekday calling, which it
has set at 10 cents per minute.

The company arrived at this model based on independent analysis of the market, which
indicated 36 percent of residential long distance minutes are accumulated on Saturdays and
Sundays.

There are, of course, critics of the plan who say it has drawbacks. Competitor
AT&T’s reaction to the Sprint Unlimited launch was twofold. In conjunction with an
announcement that it would match the Sprint offer if consumers asked, company officials
noted that "Sprint’s hefty $25 monthly fee locks consumers into making many calls at
specific times–weekends–to break even."

Breaking even with Sprint Unlimited means a person would have to place one hour of long
distance calls per weekend, and this is not a cost-effective plan for everyone.

"Do the math," warns Network Services Analyst Jilani Zeribi with Sterling,
Va.-based Current Analysis Inc. "[Customers must] look at their historical calling
patterns [to] be sure they will save money by signing up for a weekend plan."

Historical calling patterns, however, may not figure into the flat-rate model as
subscribers may have the tendency to make more calls if they are not hindered by cost
concerns.

"Consumers like flat-rate pricing because the budget amounts are predictable, and
there’s no psychological worry about staying on the phone too long," Zeribi says.

In the Queue

Because a major carrier has embraced the flat-rate price model, competitors will be
forced to follow, says analyst Zeribi. "Datacom companies–both vendor and
carrier–continue to prophesize that voice services will eventually be free. [Sprint’s]
announcement may directionally push the market that way, and will make it difficult for
some carriers to undercut pricing on a per-minute basis."

Realizing Zeribi’s prediction, AT&T made its matching offer. In addition, Los
Angeles-based Media-Ring introduced its Talk99 flat-rate long distance service one week
following the Sprint Unlimited release. Talk99 offers a personal computer (PC)-to-PC
IP-based calling plan for $4.95 per month plus the price of Internet access.

In order to use the service, subscribers must have a PC with 133 megahertz (MHz)
Pentium processor, 16 megabytes (mb) RAM, 7mb free disk space, 14.4 kilobits per second
(kbps)-or-higher modem, sound card, microphone and speakers or an earphone; an Internet
connection; and the Talk99 software.

Features of the product include: voice mail, caller identification (ID), telephone
book, call log, automatic connect–even if the called party is not online–and chat box
for exchanging text messages during a conversation.

While the MediaRing service is limited to the Internet-using community, it is no small
target. eMarketer, a website for marketing research, estimates 64 million users will be
online in the United States by 2002, which expands Media-Ring’s potential users by 53
percent each year.

Certainly, MediaRing’s IP-based PC-to-PC offering is no surprise; it follows the
Internet’s flat-rate pricing model that its targets have come to expect. The more
significant announcements lie with phone-to-phone applications.

While these are new offerings in the United States, Sprint and AT&T have been
putting the business model to test in Canada since July 1998. Their $20 Canadian per-month
service has been so popular there that it reportedly has exceeded the capacity of the
network.

The Canadian experience with flat-rate calling tells us that "the appetite for
conversation has only the limits of needing to sleep," says Judy Reed Smith, CEO of
ATLANTIC-ACM.

It also tells us that flat-rate pricing is here to stay.

Jennifer Knapp is news editor for PHONE+ magazine.


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