As wireless providers practically give away long-distance calling and RBOCs gain approval to offer long distance around the country, the traditional long-distance providers have been feeling the heat. Realizing that their very relevance in the industry is coming into question, AT&T and MCI have rolled out drastic new long-distance packages to keep hold of customers and dollars.
But will these plans work? And how will carriers’ attempts to retain consumers take their toll on billing and OSS systems?
The Plans
AT&T’s Unlimited plan, announced in February, gives consumers unlimited state-to-state, in-state and local toll calls that are direct-dialed from a customer’s home to other AT&T residential long-distance (LD) subscribers for $19.95 per month. Domestic calls outside the AT&T network are still 7 cents per minute.
MCI’s Neighborhood Complete plan offers unlimited long-distance calls, unlimited local calls, call waiting, caller ID, speed dial 8, three-way calling and voicemail for $49.99 to $59.99. When MCI announced the plan in mid-April, it was available in select areas in 32 states. The company plans to offer it in all other states by early 2003.
The industry is now waiting to see how others carriers react. As of early May, Sprint had yet to answer its competitors’ announcements. Yet, many in the industry believe that Sprint may have started this rethinking of LD with its Anytime plan of 500 for $25.
Changing the Face of LD
AT&T’s Lou Delery, vice president of consumer long-distance services, says AT&T wanted to revolutionize the way people think about long distance.
“We decided it was time to offer a plan where consumers could stop worrying about the meter ticking,” he says. “We’ve found very clearly when you put a flat rate in front of a customer, they reacquaint themselves with what it means to use long distance again.”
Since implementing the flat-rate plan, Delery says, AT&T has seen an influx of customers who had begun using wireless phones for their long distance come back to AT&T to use their wireline phones. “In fact, they are using [long distance] in greater numbers and greater minutes than they would otherwise,” he says.
A Last-Ditch Effort?
Long-distance carriers are embattled on every front, says Ed Shanahan, principal and general manager at TMNG. He says the question being asked about these plans is whether they will be smart and successful marketing strategies or just slow down the inevitable financial decay of some of these companies.
Providers are trying to offer packages to users to try to hold on to waning revenue. A lot of the basic rate customers aren’t the heavy users of LD, says Imran Khan, senior analyst of consumer research with The Yankee Group.
Often, according to Khan, AT&T spends more money to send basic rate users their bill than these customers spend on their LD. That is why the carriers are pushing lower rates at a cost of 3.95 - 4.95 per month—these providers need a guaranteed revenue stream from these customers.
“The carriers are suffering in terms of their usage,” Khan says about the carriers who are starting to increase the line item taxes on their bills to make up for losing money to customers who are turning to email and wireless phones for their long distance communications. To remain competitive, the carriers can only go up so much on their basic rates, so they turn to taxes as a way to recoup some of that revenue lost to low-end users.
“I think the dynamics are very different for those that are on the basic rate,” Khan says. He predicts that some low-end users may subscribe to these new LD plans so they do not have to worry about rates going up. Khan adds that these new plans point to the fact that stand-alone long distance may no longer be successful. “It reinforces the notion that LD is becoming a commodity,” he says. “In fact, it’s going to be an add-on to other products.”
“It’s a very difficult situation they are in right now,” Shanahan says. “You obviously have a market share erosion problem today.” The providers must be losing money on these plans, Shanahan says, yet they are hard-pressed to halt the churn rate for their LD customers, which he says is more than 6 percent.
Shanahan says MCI is likely trying to hold on to its largest consumer customers as well as encourage minutes usage. He believes the company could eventually add to this plan by offering even better deals for MCI customers who call other MCI customers, something AT&T did from the beginning.
While Khan says carriers’ revenue may be impacted by cannibalizing of some of their higher end users who might turn on to these bundled or lower cost LD packages, the revenue they incur from these plans is more guaranteed this way versus risking churn from customers who may feel less loyal.
The Power of the Bundle
It is no secret that a bundle is a powerful tool to help providers’ reduce their churn.
In order for a provider to sell a customer off a competitor, it has to provide all of the same services to the customer at a competitive price, especially since most customers do not want to turn back once they have enhanced services and packages. Among the other logical services that could be added to a bundle are wireless or data services; however, billing and OSS systems don’t always support merging all of these services into one package, and provisioning for a variety of services may not be possible all at one time. As a consequence, for example, how would a provider discount and bill a customer if services were not all activated at once and on time?
Taking on the RBOCs
“The big threat that we see the MCIs and the AT&Ts reacting to is the encroachment of the RBOCs as they get their [Section] 271 approval” to offer long-distance service, explains TMNG’s Shanahan. RBOCs are rapidly gaining such approval around the nation. To date, Verizon has rolled out long distance in 42 states. It is asking for permission to serve six other mid-Atlantic and Northeast states and Washington, D.C. It already offers long distance in New York, Massachusetts, Connecticut, Rhode Island and Pennsylvania.
On the residential front, most of the local companies that come into the market can plan to pick up about 30 percent of the residential base from the long-distance companies with very little marketing. “If you think about how it looks from a local telco’s point of view, the incremental cost to pick up the long-distance traffic that you’re already carrying, you’re already billing, you’re already doing all the account maintenance, the incremental cost is not high,” says Shanahan. “It’s a nice low-margin business.”
MCI has stated outright that its Neighborhood assault is “the communications industry’s first large-scale, credible threat to the local phone monopolies’ lock on the consumer market.”
Nor is AT&T standing on the sidelines. “Obviously, we are looking at the fact that many of the RBOCs were going to come into the long-distance business,” Delery says, and the company sought to protect its base by offering a plan that persuaded customers to stick with AT&T.
Shanahan believes that three years ago, MCI, Sprint or AT&T might have been more willing to let those customers go, because a lot of the ones RBOCs were picking up were the smaller, less sophisticated customers. Today, carriers can’t afford to turn over anyone.
Khan points out: “It has never been more of a buyer’s market than it is now. [The customer is] not held hostage by a carrier or by a set of carriers.”
Adding Local to the Mix
Although MCI has added local calling to its plan, AT&T has not quite achieved its competitors’ projected local reach. AT&T currently offers local calling in four states—New York, Texas, Michigan and Georgia. The company ran a promotional campaign in New York in April offering local calling bundled with the AT&T Unlimited plan for $39.90.
“One of the reasons why we offered a separate LD plan was to reflect the fact that since local is still in many ways controlled by the monopoly, if you want unlimited service from AT&T you can get that as a standalone; but for those customers that want both, you can get them for $39.90,” Delery says.
“We will enter states where it’s economically viable for us,” says Tom Hopkins, a spokesman for AT&T. “We’re encouraged that a lot of state commissions are now making it more feasible, but what we want to make sure is that it’s economically viable. We are encouraged, now that a lot of commissions are now lowering rates to make that possible.”
In New York, he explains, AT&T was able to negotiate a reasonable cost of goods from the ILEC.
How Are They Doing This?
For AT&T, the critical element of its new rating plan is being able to identify whether the party being called is an AT&T customer. “Our databases track PICC [pre-subscribed interexchange company charge] status, so we are able to take every call that comes into us, every message, bounce it against that database and see if the called party is AT&T PICCed,” explains Mike Tempora, operations vice president of billing solutions. If the call is to another AT&T customer, the CDRs are dropped and not rated for the bill. “It’s essentially doing less rather than more.”
Delery notes that AT&T’s unlimited plan merely acts upon existing capabilities in the company’s systems. “When a call is made, it has actually gone through a series of checks. We check a number of things, including caller class, where it’s originating, where you’re calling. We have a database that first establishes how you point that call,” he says. “When you think in terms of a PICC status, all we’re doing is essentially putting in another database, and it just becomes another bit of information the call has been marked with—and then ultimately based on that mark, we treat it effectively through the billing systems.”
Shortly after launching the unlimited plan, AT&T introduced a feature to alert a caller on the plan that the call recipient is another AT&T customer, signifying that they can remain on the line for as long as they wish without being charged.
Saving a CLEC
The story behind MCI’s billing and OSS for The Neighborhood is drastically different from AT&T’s, but straightforward all the same (see “A CFO’s Perspective: How MCI Group Lowered its IT Cost Structure.”).
It involves Z-Tel, a CLEC that might have been headed for extinction had MCI not recruited it to support The Neighborhood. The company has struggled recently, as have many other CLECs, announcing 350 layoffs in April, mainly in their consumer business, as well as in a consolidation of their customer care operations. The company had a net loss from operations of $56.9 million in 2001. Z-Tel’s revenue stream will undoubtedly receive a boost from MCI’s new plan.
So how does The Neighborhood platform work? “It’s a UNE-P, so it’s a non-bundled local loop,” TMNG’s Shanahan explains. “It’s inexpensive, they can offer it nationwide, the product is up, and it works. Z-Tel has pretty cost-effective provisioning and is pretty highly integrated; their customer care, billing and provisioning platforms work fairly well, better than most. So it’s a real smart strategy.”
With a UNE-P, MCI does not have to put physical facilities in except for the voicemail, which is on Z-Tel’s platform. Calling features such as call waiting and caller ID come straight from whoever the local telco is, Shanahan explains. Z-Tel uses Telution’s integrated suite for order management, billing and customer care, as well as Launch-Now by Accenture for OSS interconnection between telecom providers and incumbent trading partners. Z-Tel integrated these systems into its existing ones to manage The Neighborhood.
“What makes the MCI thing work is they are dealing with one unified platform, and the interesting thing is they didn’t try to do it internally. It’s totally externally supported, and a majority of the infrastructure was there at Z-Tel, and MCI has beefed it up for volumes and scale,” Shanahan says.
Yet Telution’s Kent Steffen, president and CEO, remarks that building a platform to support The Neighborhood was not without its challenges: “If you look at their footprint, they are going across all four RBOC regions as well as GTE and some of the other ones, so the ability to manage the same product offering from a customer face—even though you’ve got a heterogeneous network and a heterogeneous set of partners in the back—was definitely one of the huge challenges we had to overcome to roll this out on a national basis,” he says. Steffen also notes that billing challenges were inherent in offering regulated and non-regulated products jointly. Another issue was collecting taxes for the various services in the bundle.
Telution had to support collections and dunning for products the provider can turn off if a customer only makes a partial payment.
When a provider brings a bundle like The Neighborhood together, certain regulations—mostly at the state level—affect how a partial payment must be allocated. “I apply all payments to the local product first, because those are regulated and have certain rules about what I can get from a disconnection and a dunning process, whereas voicemail is non-regulated; I can shut that off before I have to follow a specific rule,” Steffen says.
Z-Tel had to worry about scalability—not only in terms of volume, but also geography. “They’ve got a lot of call centers that are geographically dispersed across the country,” Steffen explains. “So being able to support not only lots of customers in the system but lots of customer service representatives in the system was really important to them, as well as being able to take a diversity of products and partners.”
Z-Tel also needed a single repository for marketing and promotions information, customer segmentation, billing information, provisioning, the rating rules and taxation for each of the products. “We have a product engine that has workflow built into it that says if I am ordering this local service in New York, I need to go to Verizon to get the local loop. If I’m doing it in Texas, I need to go to SBC to get the local loop. We’ve worked with Launch-Now, to do the interconnection pieces, to automate that flow-through provisioning to all the different RBOCs, and we put the business rules in our order management framework to be able to allow a CSR to look like it’s the same product, and then the rules of the when and the how are embedded into our order management framework,” Steffen says.
“The billing engine just references that repository data, and so does fulfillment and collections and a lot of the other pieces of the customer maintenance,” he says.
Shanahan at TMNG believes MCI was smart to outsource The Neighborhood to Z-Tel. MCI is rolling out its new package slowly, probably to ensure that Z-Tel can scale to the volume that MCI will likely drive through its systems.
“MCI overnight could put a few million people into this plan,” Shanahan says. “The number of customers MCI can drive into this with a dollar’s worth of advertising, versus what Z-Tel does, is infinitely more powerful.”
“I would suspect that if this pans out the way MCI would like it, you will see a larger and larger ownership of Z-Tel, and maybe even an acquisition,” he says.
Measuring the Success
Although most providers will not talk about their customer data, AT&T says its plan has attracted a lot of new subscribers. Delery says AT&T has actually surpassed its predictions in the number of customers switching from competitors.
“We’ve seen customers who had very large wireless buckets now questioning how big a bucket they need if they could make calls with a flat rate and not have to worry about time of day and day of week,” he says. AT&T had looked very closely at the number of minutes that had migrated from wireline to wireless, Delery says, and it had even asked customers whether they would switch back to wireline if offered a flat-rate plan. While AT&T long distance doesn’t plan to replace wireless phone usage entirely, the company is certainly interested in at least being a serious contender for those LD minutes.
Telution’s Steffen says the MCI plan will shape the competitive market dramatically. “It’s something that’s got huge scale, and for people to compete with it, they are going to have to do it on a huge scale and try to drive what customers are looking for,” he says. “In the systems world it’s not always easy to bring all these pieces together quickly. There are different facets of the marketing side and how it fits into their overall strategy, so it will be interesting to see the impact. I think it’s going to be accepted by the market pretty well, and grow up pretty quickly.”
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