A Wider Net: Local telcos start fishing for Internet subcribers.

By Bernhard Warner

Get set for a new round of phone wars. In the months ahead, the latest battle for telco loyalty will be fought over high-speed, if currently low-rent, Internet access lines. The stakes will be raised by the entry of many of the regional Bell operating companies, which are trying to transform themselves from staid, protected monopolies into nimble multimedia outfits. Another sleeping giant, GTE Corp., woke up the industry last week with its $616 million purchase of BBN Corp., an original architect of the Internet. ‘This is the way to grow this company,’ GTE chairman Charles Lee said of the deal. ‘We’re getting ready for the 21st century.’

Whether the average phone customer, already beleaguered by sales pitches for long-distance service, is ready for more confusion over phone lines is debatable. But for GTE and the Baby Bells, the desire to put a high-tech stamp on their brands is strong. They also come into the Internet field with decided advantages: virtually 100 percent penetration among local consumers, time-tested billing and switching systems, and marketing programs honed by reams of usage data.

‘They’ve been laying low to date, but they have the killer B’s: brand and bundling,’ says Joe Bartlett, a Yankee Group analyst. ‘Because of that, we’re bullish on them achieving a good deal of market share in the Internet access market.’

For long-distance powers AT&T, MCI and Sprint, selling access to the Internet to date has meant substantial investments across all media (mainly national television) and street-level promotions, along with the huge cost of building or leasing fiber-optic data lines. The regional Bells will need fewer dollars to launch their campaigns, opting for spot media buys and direct mail.

For now, the on-line subscriber business is a mere crumb in the rich telecom pie. According to most analysts, Internet access for consumers and businesses yielded $1.7 billion in revenues for providers in 1996. That’s barely 1 percent of the U.S. market for local and long-distance phone service. But the Internet is one of the fastest-growing segments of telco traffic. Subscriber revenue is expected to reach $4.2 billion by 1998, then explode upward as bandwidth and programming increases. Bartlett expects the local telcos to grab more than 30% of the access fee market.

To start their assault, the Baby Bells will target their biggest cities first. The most aggressive of the bunch, Pacific Bell and BellSouth, are also using the IBM Global Network backbone to draw subscribers from the more distant parts of their coverage areas.

GTE, which is not shackled by the territorial restrictions of the Baby Bells, has pushed ahead strongly by bundling long-distance service with Internet discounts. It will spend about $4 million this year to market GTE Internet Solutions nationally; the company expects the effort to quadruple its subscriber base, to 400,000 users. The first round of creative, by Focus GTE, Dallas, has been running in seven test markets, including Los Angeles, Tampa/St. Petersburg and Fort Wayne, Ind., since early April. Later ad executions will come from GTE’s new agency of record, Ogilvy & Mather, New York.

Borrowing a page from AT&T’s promotional playbook, GTE is offering $2 off the monthly Internet fee for the first year to new subscribers who add a second phone line or sign up for GTE long-distance service as well. AT&T has been criticized by analysts for offering five free WorldNet hours a month to its long-distance customers. Although the deal helped WorldNet reach 900,000 customers in a hurry, the discount amounted to a hefty acquisition fee, experts say.

As a result, analysts figure the local telcos will steer clear of such discounts, matching or undercutting the standard $19.95 monthly flat rate. For AOL and Microsoft Network, the two biggest on-line providers, the entry of the telcos is likely to force them to reduce subscription fees even more, in favor of an advertising-subsidized model.

Local telcos, conversely, will position themselves as regional powerhouses. They will stress enhanced customer service, a reliable backbone and local content links, all conveniently packaged in one phone bill. But that not-so-secret weapon, bundling, cannot be offered until the Federal Communications Commission grants approval in each market. For the telcos, bundled service is seen as the decisive key to winning Internet converts, especially among ‘newbies.’

In most areas, the markets are virgin territory for Internet service. SBC Communications estimates more than 85% of its original five-state turf in Texas, Kansas, Oklahoma, Missouri and Arkansas is not yet on-line. Since last fall, SBC has offered its Internet access by stressing reliability, not cheap connection. ‘Problems now in the market are not with price’ but with too many busy signals, says Steve Dimmitt, executive director for entertainment and information services marketing. Dimmitt has used mailings of software disks to PC owners, along with radio, TV and limited print buys to reach potential customers. (He has yet to spend a dime on Web advertising.) He’s also sought on-line partnerships with local media outlets, including network TV affiliates in Houston, Kansas City and San Antonio, to provide regional news updates.

The largest and most modem-ready local Bell region is the West Coast, where Pacific Bell claims 80-100,000 Internet customers. It began its marketing program a year ago, shortly after the launch of AT&T WorldNet. Unlike other telcos, it immediately focused on Net-savvy customers. Newbies, says Ed Callan, director of consumer and small business markets for Pac Bell’s Internet services, ‘are the most expensive to serve. They have the highest churn. We figured we could get them later on in life.’ Rather than dumbing down its sales rhetoric, Pac Bell, with help from Ketchum Interactive, San Francisco, created an edgy multimedia campaign that included an on-line sweepstakes.

Other telcos are taking a more wary approach. Chicago-based Ameritech is waiting to see which emerging technology, cable modems or ADSL (which can soup up ordinary copper phone lines), will become the centerpiece of the Ameritech.net service. On the East Coast, Bell Atlantic doesn’t intend to actively market its Internet service except through direct mailings. That policy could change if ‘the medium explodes,’ according to a Bell Atlantic official. In the world of the Internet, that could happen any minute.

Copyright ASM Communications, Inc. (1997) ALL RIGHTS RESERVED