Long distance could become indistinguishable from local: Lemay

While the dropping of the $5-a-month long-distance plan by Bell Canada, and subsequently Rogers Communications Inc. and Vidéotron ltée, potentially signaled that the steady decline of long-distance calling was subsiding, it should be taken more as a delay of the inevitable. "The long-distance market is evolving to the point that the distinction between local and long distance is becoming irrelevant," says Johanne Lemay, co-president of communications research and consulting firm Lemay-Yates Associates. "Eventually, carriers will offer them together as one part of their service." Although Lemay foresees a continued decline in the long-distance market, she feels it will be more than a few years before a total phase-out is complete. In the meantime, Voice over Internet Protocol (VoIP), niche segments and public awareness of the changing market place will slowly determine where carriers earn their profits. It’s clear Bell launched its $5-a-month long-distance plan over a year ago in an attempt to combat the upcoming VoIP offerings, like the unlimited long-distance option from Vonage Canada but opinions vary on why Bell dropped the offer and what it says about the market. "We thought the removal of the $5-a-month was a ridiculous strategy," says Brian Sharwood, an analyst for the SeaBoard Group. "It was converting regular wireline customers into contract customers." Indeed, the Bell plan was only available in a bundle, requiring customers to also subscribe to two of Bell’s other services (Internet, wireless and satellite TV) and locking them into a two-year contract. "The $5 plan was taking the wind out of the sails of other providers," he continues. "Bell is giving back to Primus (Telecommunications Canada Inc.) and Vonage (Canada) by taking it away. The champagne corks must have been popping at Rogers." Once Bell had dropped its plan, Rogers and Vidéotron dropped their competing $5-a-month plans too, just as they introduced them after the incumbent had initially announced the option. Bell’s reason for dropping the plan was it had served its purpose, while Rogers and Vidéotron likely dropped theirs because it was no longer necessary to compete with Bell. Lemay says that more than anything Bell’s move and the reaction to it demonstrates that incumbents still hold a substantial amount of power in a forborne market. Says Sharwood: "The long distance market is getting to the point where customers are just arguing over pennies. It’s not worth the effort for a customer to take a call from a carrier to argue about having their long distance at $5 a month instead of $8. It’s easier to just pay the $3 and not have the hassle." Rodney Franklin, president of long-distance provider Phonetime International Inc. disagrees. "The long-distance market has stabilized quite substantially," he says. "We knew those offers for $5 a month don’t work because people will take advantage of it and make lots of phone calls. My guess as to why Bell dropped their plan is it was costing them money. Five dollars a month is not a market we intend to compete in." Mississauga-based Phonetime offers long-distance service over an international network of carriers through their Dial ‘N’ Save service and a variety of long-distance calling cards sold online and at stores such as Staples. Unlike many analysts, Franklin feels there is lots of potential in the long-distance market, for now. "Eventually there won’t be wireline long distance, VoIP is taking care of that," he says. "But we don’t see it happening in three or four years. More like 10 or 12 years." Phonetime saw increases in sales of its phone cards last year, and is not yet seeing the impact of VoIP. It’s only a matter of time until they do. Says analyst Iain Grant, also of the SeaBoard Group: "Will long-distance contribute to telecommunications service provider revenues for some time to come? Sure. Will there be any money, any profit in it? We doubt it. Why? In two letters, ‘IP’." Once voice starts being moved on an Internet Protocol network, which it already is, long-distance all but ceases to exist. "Service providers who still only offer long-distance are not in the best position overall at the moment and I do not see this improving over the next few years," says Lemay. "There can be special cases of small firms addressing niche markets in long distance." Although companies like Vonage already offer zero-cost long-distance through their IP service, wireline long-distance carriers can still accrue revenue. One reason for this is the limited reach of the IP network. "We do have a need, or many do, of communicating beyond the bounds of the local, metro, regional or national networks – there is a need for the IP network to interface with the old circuit switched network. Somewhere you need to ring a phone. The transition of IP to telephone networks still needs to be made. There are costs associated with that. When you look at Primus, or Sprint long-distance rates it is the cost of delivery of those calls to Botswana, to Grenada, to Bhutan, that make up the variations. Those costs will remain until the march of the Internet reaches those places too," says Grant. Phonetime recognizes this niche segment, and markets its phone cards and services to new Canadians, both because they are the ones making a lot of international long-distance calls, and because they could be calling areas that don’t have VoIP connections. They also market to students, who do lots of long distance calling within Canada and may not be able to choose their own phone service because of restrictions within their dormitories. Another segment that could be considered niche is wireless long distance service. "There has been a large migration of the long distance market to the mobile market," says Lemay. "While carriers are losing revenue for standard long-distance service, they are gaining in mobile long distance service." Pre-paid phone cards will continue to be used heavily in cell phones, and the wireless market shouldn’t be too affected by VoIP. "VoIP is portable, but it isn’t mobile," she adds. Advertising key to keeping long distance customersRegardless of the inroads made by VoIP offerings, or the competitive prices offered by carriers, the direction of the market will be determined by how aware the general public is about the services and rates they could be receiving. Although Franklin says "the public is very, very aware of long-distance pricing," Phonetime deals with international callers who need to be aware. However, the public that does most of their calling within one province and has been locked into a $20-a-month plan since the mid-90s, might not know about the rates they could be getting. Aggressive advertising campaigns like the one Vonage Canada is currently running for its VoIP service on all of Alliance Atlantis’ specialty channels will help increase awareness. If other providers create similar awareness, it could quickly become a buyers’ market. Says Grant: "Most people are creatures of habit. Just pay their bills when they are due without much thought as long as the total looks right. Advertising will spread the word. That is when the industry will feel the impact. When a couple of million people stop spending $20 a month, someone will notice that $500 million a year isn’t flowing into the cash registers."

Long distance could become indistinguishable from local: Lemay

News | 08/04/2005 4:00 am EDT

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