HUGE NEWS: U S West Strikes Marketing Alliance With Qwest
U S West Strikes Marketing Alliance With Qwest in Move Skirting Rules
By JOHN J. KELLER and STEPHANIE N. MEHTA
Staff Reporters of THE WALL STREET JOURNAL
May 7, 1998
U S West Communications Group Inc., boldly sidestepping restrictions on a Bell's entry into the long-distance phone business, agreed to market the services of frisky upstart Qwest Communications International Inc. in its 14-state territory.
The unusual marketing alliance wouldn't actually pay the Bell a cut of the revenue received by Qwest for long-distance calls. Instead, it would pay U S West an undisclosed fee for each customer it lures to the Qwest service, and the Denver Bell has extracted an agreement from Qwest to give the Bell's customers low-priced long-distance service.
The pact takes advantage of a little-noticed clause in the landmark Telecommunications Act signed two years ago, which aimed to open all phone markets to competition. While the legislation bars a Bell from owning and operating a long-distance business in its territory until it opens its local-phone market to rivals, it doesn't specifically prohibit a Bell from selling the services of an unaffiliated carrier, such as Qwest in this case.
"This is about serving the customer and bringing them closer to one-stop shopping, which they are demanding," said Solomon Trujillo, president of U S West Communications Group, the phone-service unit of U S West Inc. He added that having to meet a "cumbersome" checklist for opening up the Bell's local network to rivals has only delayed his efforts to give customers one-stop services on a single monthly billing statement. "A lot of us Bells are frustrated by this," he said.
Vast Opportunity for Qwest
For Qwest, which is building a super-high-capacity fiber-optic network, the deal opens up a vast marketing opportunity to lure millions of consumers and small-business customers to its service. "This is a major validation of the Qwest network and marketing plan," said Joseph P. Nacchio, president of Qwest, also based in Denver. He estimated that the U S West marketing partnership will generate as much as $200 million in annual revenue in the first year, while it will "cut our customer acquisition costs by 50%, our customer churn by 75%, and give us access to 14 million customers in the U S West territory."
In return, U S West gets the per-customer fee. It also gets low long-distance prices for its clients: Qwest will charge U S West customers a flat fee of 10 cents a minute, anytime, on all long-distance calls, and no monthly flat fee.
But the deal is sure to draw fire from several quarters. The long-distance industry is loath to allow any Bell entry into its business until the Bell meets the conditions for opening up its network to rivals. The U S West -Qwest agreement, while it doesn't pay the Bell calling revenue, could be seen as a Trojan horse, giving U S West a fast marketing start against long-distance companies that would challenge the Bell's own long-distance service down the road. U S West said it briefed officials of the Federal Communications Commission and the Justice Department Wednesday.
"These guys major in finding loopholes," said a spokeswoman for AT&T Corp., the nation's biggest long-distance company, "and we find it inconceivable that after two years [following the passage of the telecom act] they would find a major one now. We fail to see how this would stimulate competition in U S West 's local market, and anyway, how many customers can be served on a network that isn't yet built?"
LCI International Inc., which Qwest agreed recently to buy for $4.4 billion in stock, might also find its would-be owner's Bell deal startling. LCI, McLean, Va., has been one of the staunchest opponents to early Bell entry into the long-distance market. But Qwest by late Wednesday hadn't briefed the long-distance carrier's management and directors on its marketing plan with U S West , Mr. Nacchio acknowledged. Still, he said, LCI would come around to seeing things Qwest's way. "The traditional long-distance carriers want to tie up the Bells until they get favorable terms on using their local networks," Mr. Nacchio said. "Newer carriers, such as Qwest, are looking at things in other ways."
Surprising Move by U S West
U S West is showing equally surprising moxie, given its relatively low profile in the Bells' arduous long-distance fight. For example, it was the last Bell to file an application for long-distance entry in one of its states.
But the other Bells have had little success with that strategy. While regulators in some states, such as Michigan, approved the local carriers' filing, no Bell has satisfied the Justice Department and the FCC, which must grant final approval. Bell Atlantic Corp. recently won the endorsement of state regulators and Justice's antitrust chief for a plan to offer long distance in New York. But the carrier must first meet several conditions for opening its network to competitors, a process that could take several months.
The Bells also have sought long-distance entry through the courts. U S West and SBC Communications Inc. teamed up on a lawsuit that alleged that the telecom act contained a "bill of attainder" that illegally singled out the Bells. A federal judge in Texas agreed, striking down part of the act as unconstitutional.
The Qwest agreement also underscores U S West 's emerging strategy of teaming with other carriers instead of succumbing to a possible takeover. The company recently said it would work with alternative carrier Intermedia Communications Inc., Tampa, Fla., to deliver telecommunications services to business customers outside its 14-state region. |
