Cellular phone dealer faces PUC hearing Sept. 27.

Cellular phone dealer faces PUC hearing Sept. 27

Leo's Stereo has bundle of problems with competitors

Twentieth Century Cellular Inc., whose allegedly illegal sales rebates have stirred anxiety among several dozen Los Angeles-area competitors, faces a public hearing Sept. 27 before state regulators.

California Public Utilities Commission regulators so far have not cracked down on the Long Beach cellular-telephone merchandiser, in part, because the CPUC itself authorized the controversial practice.

The $100 rebate must be applied towards equipment at one of the 42 outlets of its sister company, Leo's Stereo, or towards phone-service charges. The deal was first offered by Twentieth Century in July, and repercussions have echoed throughout L.A.'s fiercely competitive mobile-phone industry, as allegations of improper incentives and below-cost pricing are tossed about.

"Twentieth Century has just found out how to `bundle' and get away with it by calling it a rebate," said one industry source very familiar with the sales practice. So-called bundling refers to selling a package of unregulated equipment, like phones, with services whose prices are fixed by the CPUC, like air time, which costs $45 a month.

"Such conduct is clear and blatant bundling," according to its prime competitor, Cellular Dynamics Telephone Co. of Los Angeles. Those words were written by its attorney, Joshua L. Rosen. He protested the practice to CPUC regulators, who then ordered an investigation Aug. 29. A CPUC judge begins hearing testimony this week, then likely issues a ruling for review by the squabbling parties in 60 days, and finally offers the solution to CPUC board members for a final vote. Until then, Twentieth Century has permission to continue rebating, even though the CPUC has stated this may be fostering "an anticompetitive market."

Twentieth Century strongly defends its rebate. "This doesn't harm competition whatsoever. It really benefits the consumer because he's getting additional dollars," argued Alan Novodor, attorney for $83 million (sales) Leo's Industries, the parent company of both Twentieth Century and Leo's Stereo. He said a prohibition on rebating equipment "tied-in" with air time does not come into play, because the subsidiaries "are two separate companies." And "that's where the CPUC's confusion lies," he added.

Several cellular merchandizers, without pointing a finger, said their market is confusing, thanks to a dose of deception.

"Most phones today are being sold below cost," said Marc Stallings, who wholesales phones for Glendale-based Nutek Cellular Mobile Telephone Co. "The majority of money in this industry is made not on equipment, but on the phone bills," he said, referring to the small portion of payment on phone bills that is returned to the seller as a commission.

Indeed, both Stallings and one of his competitors, who asked not to be named, said they wholesale phones to dealers and resellers, who then lower the prices. "I sell a phone to my dealer for $580 and see him resell it for $477," said Stallings.

Losing money on phone sales "is just an enticement to get people into the system," he commented.

Some make up the lost money with "hidden charges" in phone bills, alleged salesman Mike Karimi of OMDX in Culver City. They can be tacked on to the strictly fixed charges of a $45 monthly fee, plus 45 cents a minute for daytime phoning and 27 cents for nights and weekends.

Selling below cost may become an issue before the CPUC judge this week. In the written protest filed against Twentieth Century, its competitor alleged that it "may well be providing air time...at a rate below cost (which is) unlawful pursuant to Public Utilities Code Section 451."

Twentieth Century was acquired by Leo's under a May 1989 agreement. By the end of March this year, it posted sales of $2.3 million and is expected to be doing much more business this year.

Most competitors are private and do not make sales figures public. Twentieth Century and Cellular Dynamics, however, are among the top-grossing concerns, said several sources.

Leo's Industries, a public company, told its shareholders in 1989 that resellers like Twentieth Century were earning gross profit margins on customers' monthly phone-usage of approximately 23 percent. It further estimated that Southern California, with more than 10 million registered vehicles, was a ripe market.