Phone Companies See Their Future in Flat-Rate Plans

Fifteen years ago, Arthur C. Clarke in the science-fiction novel "2061: Odyssey Three" predicted a future as follows: "With the historic abolition of long-distance charges on 31 December 2000, every telephone call became a local one, and the human race greeted the new millennium by transforming itself into one huge, gossiping family."

By NICHOLAS THOMPSON NY Times

That future may be at hand, only a few years behind schedule, as a result of the telephone industry’s declining economic fortunes, increasing competition and recent technological advances. Starting with MCI, which introduced its Neighborhood plan in April 2002, most leading phone companies — AT&T, BellSouth, Qwest Communications, SBC Communications and Verizon — have rolled out programs that allow customers in some states to make unlimited local and national calls for one flat monthly price.

These unlimited-use plans offer callers the advantage of predictability and less time spent checking monthly bills. They commonly cost $50 to $60 a month with services like voice mail and caller ID bundled in, making the price only slightly higher than the $48 that American households typically spend on local and long-distance calling, according to the Federal Communications Commission.

The introduction of the flat-rate plan at MCI, formerly WorldCom, a company currently going through bankruptcy proceedings, is "exceeding expectations," according to a spokeswoman, Claire Hassett.

A spokesman for Verizon, Jim Smith, calls his company’s program a "ripping success."

Such positive responses from customers are good news for an industry that faces a number of incipient threats, including the loss of market share to calls made over the Internet, cellphone-addicted young customers who spurn land lines, and families who swap their second telephone lines for high-speed Internet connections.

In its last quarterly statement, Verizon, for example, reported that its total telecommunications revenue was down 3 percent but that its bundled plans had helped prevent a greater loss.

Jeffrey Kagan, an Atlanta-based telecommunications analyst, calls the unlimited plans "the defibrillator for the industry."

The move toward unlimited access plans stems from the Telecommunications Act of 1996, which created a regulatory process that allowed local phone companies to enter the long-distance market.

It has taken years for these companies, the so-called Baby Bells, to win federal approval in many areas, and they can now offer long-distance service in 41 states and the District of Columbia.

Over all, the Bell companies provide about 16 percent of residential long-distance service, according to the F.C.C.

In the meantime, the long-distance carriers — which hold about 9 percent of the local service market, according to the New Paradigm Resources Group, a Chicago-based research firm — are hoping that unlimited bundled programs will enhance their business. MCI, for example, provides 3.5 million customers with local service, but 2 million of those are signed up with its Neighborhood plan.

The Bells and the long-distance companies both see growth in bundled plans, made possible by technology and changing consumer habits, as a way to secure market share.

Most calls now travel most of their journey over fiber optic lines that connect the whole country. A company’s expense in routing a call depends very little on the distance the call travels, but largely on whether a call needs to travel across lines owned by other phone companies and the access fees charged for that use. In most cases, calling a friend across the country now costs your phone company about as much as calling your next-door neighbor.

New customer habits also make selling unlimited plans easier. Consumers have become accustomed to paying a flat fee for other services like cable television, regardless of whether they watch it 3 or 30 hours a week.

For generations, telephone companies have billed calls individually, taking into account both the geographical distance between those talking and the length of the call. But with the wireless phone industry selling plans with unlimited access, customers have become used to flexible plans and have started to demand them from their land-line providers.

"Wireless plans started to tear down the thinking of distance-dependent calling," says Charles Golvin, a senior analyst with Forrester Research.

For phone companies, bundled plans create a predictable revenue flow and decrease the paperwork involved in separate billing systems and itemized phone bills. The plans have not been around long enough to show how they affect the churn rate, the percentage of a company’s clients who leave for a competitor during a given period. Still, managers of most companies think that customers who buy these packages are more loyal.

"It’s human nature," said Eileen Connolly, a spokeswoman for AT&T. "People have less desire to move away from you if you have all their business."

The companies are also hoping that these customers will be more likely to buy other bundled services — like cellular, digital subscriber lines for connecting to the Internet, and other future services.

The bundling strategy is particularly important as cable companies start to offer phone service along with high-speed Internet access. Mr. Smith of Verizon said he did not worry about customers who may end up paying less under unlimited-use plans than under standard plans. "We’ll end up selling them more sooner or later," he said.

No one is certain how customer use will change as people switch to these plans. But evidence from other industries suggests that it will increase significantly. "Usage more than doubles on unlimited wireless-calling plans," said Berge Ayvazian, a senior research fellow at The Yankee Group, a market research firm, "and if broadband is always on, the Internet is always in use."

But there will be a limit, of course. There are only 24 hours in a day and unlimited-use plans for cellphones, land lines and broadband Internet access will all be competing for consumer time.