Making sense of the new long-distance marketplace.

The breakup of AT&T in 1984 created many opportunities for competition in the telecommunications industry. Voice, data and video can be carried inexpensively across the city or around the world. Businesses with offices in many cities can now link them into transparent private networks, improving the efficiency of communications and reducing costs.

The unfortunate by-product of this increased competition is the difficulty in sorting out the various options. It seems as if everyone from college students to bartenders are offering long distance service. In order to make an informed decision on managing telecommunications costs, let's first look at how those costs are arrived at, then who the players are. In doing this, we'll define some of the new acronyms and abbreviations being used by people vying for long-distance business.

The ultimate decision should be made based on a combination of network, longevity, value-added services and, of course, cost. Elaborate "proposals" should be looked at with skepticism as they can always be manipulated to make the numbers seem attractive. The key factor is the cost per minute that the provider will charge you for each call, based on distance and time of day. Once you have the unit price, you can determine your savings regardless of how your calling patterns change from month to month.

In the pre-deregulation era, all telephone service was provided by the Bell System. Any phone call placed on a phone line provided by Pacific Bell would appear on a single bill. The revenue from this phone call was distributed proportionately within the Bell System to cover the total cost of completing a phone call. These costs include the cost of installing and maintaining the phone line, the cost of connecting your call to the long-distance network, and the cost of connecting the call to the distant party.

After deregulation, several things occurred. Pacific Bell and six other regional operating companies were established to handle the installation of the telephone lines to subscribers. These companies, called Local Exchange Carriers (LEC's), provide the local dial tone and handle phone calls beginning and ending within their territories. These territories were further separated into Service Areas, called Local Access and Transport Areas (LATA's). These LATA's were outlined based on calling patterns and call volume, not necessarily by geographic boundaries. There are 11 Service Areas in California alone and Los Angeles sits in the largest; Service Area 5. Service Area 5 includes the area codes 310, 213, 818, 714, 909, most of 619, and the lower half of 805. It also includes a few prefixes in the 602 area code of Arizona. Remember, calling patterns determined LATA boundaries, not geographic and political boundaries.

AT&T, as an Inter Exchange Carrier (IXC) was limited to providing the long-distance connections between these Service Areas. A call within one Service Area was processed and billed by Pacific Bell (or GTE in some areas.) A call between Service Areas was billed by AT&T. The result or deregulation was that Local Exchange Carriers were no longer subsidized by the revenue from these Inter Exchange calls.

The first opportunities for competition came for Inter Exchange Carriers. MCI was the first to compete with AT&T. Now, there are over 200 Inter Exchange Carriers. Equal Access was established to allow subscribers to select their preferred carrier and Pacific Bell will automatically hand off a call between Service Areas to your Equal Access carrier of choice, without the need to dial any additional codes. You may override this predetermined choice by dialing a five digit access code, 10XXX, before dialing a number. You may also access your Inter Exchange Carrier with a dedicated access line. WATS lines used to be the primary method of dedicated access. Now, with digital technology, service called T-1 offers 24 lines on a digital circuit. Dedicated access generally offers lower costs because the carrier does not have to pay the LEC a charge on each call for connecting to the carrier's network.

For a call within a Service Area, your billing is separated into two distinct areas; Zone calls and Service Area (or Local Long Distance) calls. These boundaries are based on mileage from the local central office serving your company.

The Service Area calls are typically the most expensive, often costing twice as much per minute as the cost of a call to the East coast. This is because this revenue is helping to support the very reasonable price we pay in California for phone lines, typically less than $20 per month.

While many other states have opened up competition for calls within Service Areas, currently competition for these Service Area calls is not allowed in California. This is scheduled to change in January 1994. When this happens, the monthly cost for phone lines will probably increase, but rates in California will still probably be lower than in New York, for example.

Let's identify those companies which are competing for your business.

Inter Exchange Carriers

Carriers provide the actual connections between service areas. Many of these carriers sell their services directly to subscribers. Some are wholesale carriers who sell to other carriers. Some, like AT&T, MCI and Sprint, are both wholesale and retail. While all carriers install their own switching systems and construct their own long distance connections using fiber optics, microwave, satellites, and good old copper wire, most also buy from each other. AT&T uses circuits provided by MCI; MCI buys from AT&T and so on.

Carriers are regulated by the FCC, and by the Public Utilities Commission (PUC). They must meet stringent requirements for financial stability and management expertise.

Aggregators

Aggregators combine the long distance calling volume of a number of end users to achieve buying power. Some aggregators are trade associations who use the buying power of a single industry. Others use products from carriers such as AT&T's Software Defined Network (SDN) or Sprint's VPN which are designed to handle many locations. Generally, a customer using an aggregator receives a bill directly from the carrier and you pay the carrier directly. This bill will usually reflect the discount based on the total group's volume. In this case, the aggregator makes its profit by billing you directly for a monthly fee.

Resellers

Resellers take the process a step further by using the services of wholesale carriers to service their customers. A reseller may install its own switching centers in key areas, or they may operate entirely as a "switchless reseller". A wholesale carrier may sell to a number of resellers. Resellers provide customized billing solutions and are financially responsible for collecting the revenues from their customers, and for paying their carriers for the calls they process. Resellers are regulated by the PUC and, like carriers, must also meet stringent requirements for financial stability and management expertise.

Shared Service Providers

These companies, such as Centex, BTI and Access America, operate under a program called a Joint User Tariff and are a variant of resellers. Rather than installing their own switching networks, they use the Centrex services of the Local Exchange Carrier's central office as a switching center. Then the shared Service Provider purchases long distance services from one or more resellers or carriers to handle the calls. Instead of using Equal Access, a customer must pay to have Centrex lines from the LEC to connect to the central office. Only calls placed over these lines are billed by the Shared Service Provider at lower cost. Shared Service Providers use a unique marketing approach which makes it seem as if they are not the same as the other companies who want your business. First, they claim that they are not carriers and second, that they don't have rates. They typically charge a fixed percentage, generally 20-25%, below direct dial rates. Shared Service Providers are regulated by the PUC under the joint user tariff.

Sales Agents

Many carriers, resellers, and Shared Service Providers use Sales agents to expand their sales force. AT&T has used sales agents for years to gain more marketing presence without hiring additional staff. Sales agents typically represent one or more companies as an independent marketing arm. A good sales agent can offer a customer a broad comparison of services.

The informed business owner or manager can truly benefit from the many choices available. As the market matures, less viable companies will disappear, leaving customers with a select group of quality service providers. Deregulation of Service Area calls will provide further opportunities to businesses. In the end, the customer wins with better service, more manageable billing, and reduced cost.

Douglas Denoff is President of FiberNet Telemanagement Inc., a carrier based in Santa Monica.