Phone firms redial marketing strategies
New York — The long-distance phone companies are redialing M - for marketing. In the three years since the break up of Ma Bell, American Telephone & Telegraph has touted quality. Meanwhile, No. 2 MCI Communications and the No. 3 US Sprint Communications have pitched low rates - ``savings of up to 40 percent.''
Suddenly, AT&T's newest ads are touting low rates, too. And its rivals are now championing the quality of fiber optic communication.
What's going on here?
The price gap is narrowing. On Jan. 1, AT&T's rates fell 11 percent - twice as much as expected - per orders from the Federal Communications Commission. AT&T claims its rates have tumbled 30 percent since 1984.
Indeed, the average discount for Sprint and MCI has been trimmed to about 10 percent below AT&T's rates. And that was before the most recent cut. Sprint just announced that on Feb. 1 its business rates will drop 13 percent, residential by 9 percent - almost the same cut as AT&T made. MCI will announce new rates next week.
At current levels, AT&T's rivals aren't keeping their rates low enough to attract new customers on the basis of price alone, analysts say.
``The price differential is dropping into single-digit percentages,'' says Robert Fox, an information technologies analyst at Temple, Barker & Sloan, a Lexington, Mass., consulting firm. ``The fairly high cost of switching over to another long-distance service can no longer be overcome by the price difference.''
But Sprint and MCI can't afford to undercut AT&T much more. Last month MCI, based in Washington, D.C., announced it would write off $550 million and lay off 15 percent of its work force. Making capital outlays on its fiber optic network and keeping its prices below AT&T's have hurt margins. Earnings have fallen from 41 cents a share to 1 cent a share in its third quarter.
Sprint has shown no profits, and continues to spill red ink. Recently revising upward his estimates of losses, Prudential-Bache Securities analyst Robert B. Morris III expects Sprint to lose more than $600 million this year. Yet, analysts are more sanguine about Sprint's prospects than MCI's.
MCI is paring capital outlays, while Sprint is spending freely to capture market share. ``Sprint's the upstart coming up from below,'' Mr. Morris says. ``MCI is caught in the middle between a quality company dropping its prices and the new kid on the block cutting its prices relative to MCI and gaining market share.''
Last July, US Sprint was created anew when GTE Corporation and United Telecommunications combined their long-distance units in a joint venture.
Sprint's new management has accelerated spending ($1.5 billion in 1986, $1 billion this year) on its fiber optic network, undercut MCI's prices, and embarked on an aggressive $70 million marketing campaign heralding the quality and extent of its fiber system.
Of the three companies, Sprint is building the largest fiber network and has some 15,000 miles in ground (7,000 are operational) out of 23,000 planned. Sprint and AT&T have coast-to-coast links in place. MCI, with 5,700 miles of working fiber, expects to complete its cross-country fiber link by the end of this month. AT&T has 10,000 miles in place, but has not yet announced further development plans.
``It's not AT&T's strategy to build a nationwide fiber network. It's laying fiber where it's profitable,'' explains Fulton S. Holmes, an analyst at Thomson McKinnon Securities in New York.
But Sprint's all-out push appears to be working. ``We're picking up a large segment of new business,'' boasts Charles M. Skibo, president of US Sprint.
The company, based in Kansas City, Mo., claims to have added 2 million new customers to a base of 2.7 million since July. Its market share has gone from 4 or 5 percent to nearly 6 percent. AT&T has about 80 percent of the long-distance market and MCI, about 10 percent.
With equal access largely over, both MCI and Sprint are targeting large corporations, emphasizing AT&T-like quality at slightly lower prices. Both have snatched at least part of the long-distance business in most Fortune 500 companies. As prices fall, analysts say, service is becoming increasingly important.
``I chose Sprint for two reasons,'' says recent convert David Smith, senior director of Management Informations Systems at the Singer Corporation. ``They gave me some features faster than MCI or AT&T could. And, longer term, I was attracted by the growth of their fiber optic network, which I expect will give me better quality at a better price.''
AT&T officials point out that large companies are naturally inclined to give a small portion of their business to competing long-distance providers just to keep AT&T alert. But analysts say AT&T has accelerated its fiber network plans, because of pressure from Sprint.
What's the future for the long-distance companies?
Mr. Holmes at Thomson McKinnon reckons that within two years, MCI will be absorbed by International Business Machines, which already has a 17 percent stake. ``In a service-oriented information processing world, it's only a matter of time before IBM wants to take over MCI to improve its data transmission links among networking computers,'' he says.
Despite the huge capital outlays, officials at GTE Corporation recently affirmed their commitment to the Sprint venture. Morris at Pru-Bache says GTE will stick with Sprint at least until late 1988. ``They don't expect [Sprint] to be in a break-even position until the third quarter of '88.''