Edited from THE WALL STREET JOURNAL
JULY 2, 2002


Even as its parent company, WorldCom, struggles to survive, MCI has successfully launched a radical experiment in phone service that is cutting prices in many parts of the country.

Since April, more than 777,000 customers have signed up for MCI's Neighborhood plan, the first in the industry that lets customers make as many local and long-distance calls as they like for a single price. By wrapping long distance into the cost of basic service, the MCI plan represents the broadest assault in years on the regional Bell companies, which dominate the local phone business.

The service, which now operates in 34 states, works just like a cellphone plan. Customers pay a flat fee of between $49.99 and $59.99 a month (depending on the state) for unlimited local and long-distance calls. Also included in the package are six add-on features, from Call Waiting to Voicemail to Caller ID, that typically cost about $5 a month each on other plans.

The MCI service goes well beyond what competitors are offering in combined local and long-distance service. The closest plan Verizon offers is one that provides unlimited local and regional calling, plus four add-on features. In New York City, for example, that plan costs $49.95, the same as MCI's base rate. But it charges eight cents a minute for any long-distance calls. To get a similar plan with AT&T, you'd have to cobble together two different plans: a $28.95 local service plan and $19.95 for AT&T Unlimited, a long-distance option. On top of that, you would have to pay another $12.50 a month for three add-on features. The total: $61.40 a month, and that includes only long-distance calls to other AT&T customers. Calls to anyone else cost seven-cents-a-minute.

"For anybody calling more than $20 to $25 of domestic long-distance, this thing [the MCI plan] really makes sense," says Imran Khan, a senior analyst with the technology consulting firm Yankee Group.

But with WorldCom reeling, consumer advocates worry that the MCI plan, and the competitive spirit it has engendered, could be in jeopardy. They urge current customers -- and those considering the plan -- not to be scared off. If WorldCom winds up in bankruptcy or sells off some of its assets, the carrier would most likely continue operations.

Even people who don't subscribe to the new MCI plan are beginning to reap some benefits. The Baby Bells are just now starting to fight back in some states, and the result has been lower prices. SBC Ameritech, for example, last month began offering unlimited local calls to its customers in Michigan, and cut the flat rate by a third.

MCI and other long-distance carriers are having to think more creatively these days because of "wireless substitution." With more people able to make unlimited out-of-state calls on nights and weekends on their cellphones, they are using their regular phones less. Long-distance carriers as a group are losing about 12% of their revenues a year to cellphone operators.

The Neighborhood plan is also an effort to counter the regional Bells, which have snapped up a healthy share of the long-distance market in many states by offering a single bill for local and long-distance. In New York, half of all consumers get both services through one company, suggesting that combined plans could be the future.

MCI's aggressive push -- AT&T operates in only six states -- has been made possible by recent regulatory changes. Long-distance companies must effectively rent space on the local phone lines from the Baby Bells. Only recently have states required the Bells to make those lines available at a low price.

In Ohio, for example, regulators in October slashed from $111 to 74 cents the "switching fee" SBC Ameritech could charge competitors per customer. The long-distance carriers have made the most of this opening. MCI has won tens of thousands of new customers in Ohio, and AT&T has grabbed some new business as well.

In New York, because of the government-mandated fee cuts, consumers are paying 15% to 20% less for local and long-distance services than they did several years ago, says Gene Kimmelman, a director of Consumers Union.

MCI says it plans to have more than two million subscribers for its Neighborhood plan by the end of the year. But first it must overcome doubts about its survival. Some prospective customers worry that switching to MCI for local service might endanger their dial tone because of its parent company's financial problems. A more-immediate concern is whether MCI can continue to provide quality service after laying off thousands of employees. An MCI spokesman says the cuts won't affect customer service.

Mr. Khan's opinion: "It won't hurt to hang on." Because MCI doesn't prebill for service, there's no danger of customers being out money. And customers can keep their same phone numbers if they are forced to switch carriers.