Pay phones hardly pay


Don't worry about competition from cell phones, a phone executive told Mason Harris, calming him and his fellow pay phone operators at their annual gathering in Las Vegas years ago. TV didn't kill radio as predicted, he said. Wireless and pay phones would complement each other, too.

"It was a great explanation," says Harris, president of Robin Technologies Inc., a Rockville pay phone company. "Unfortunately, it wasn't correct."

Wireless phones turned out to be the rare punishment that pay phones weren't built to withstand.

The number of pay phones in the United States has fallen by 30 percent in five years, to 1.8 million from 2.6 million. Meanwhile, wireless subscribers have doubled during that time, to 137 million from 69 million, according to the Cellular Telecommunications & Internet Association.

Confronted with the fate of earlier purveyors of the buggy whip and gaslight, hundreds of pay phone providers have closed or shifted into other businesses, from Internet service to satellite-TV installation.

Atlanta-based BellSouth Corp., whose executive was the one who urged calm, plans to exit the pay phone business entirely by next year.

Signs like the one that greeted locker-room patrons at the Downtown Athletic Club in Baltimore last month - "This pay phone is being removed for lack of use" - are more common.

"No one has said anything about it," Mark Milani, a club manager, says of the phone company's decision to remove unprofitable units. "It's just the trend. They don't use them. They don't need 'em."

Cell phones haven't been the sole headache for pay phone owners. Prepaid calling cards and discounted 1-800 numbers have made it tougher to determine who owes them money because they're no longer simply emptying a coin box to get their cash.

By federal law, pay phone owners are supposed to receive 24 cents for each call placed on their equipment, regardless of which carrier transmits the call, but tracing and collecting the sums owed has become all but impossible.

If things weren't bad enough for the industry, the Federal Communications Commission shifted responsibility for collecting pay phone money to the major long-distance carriers - months before WorldCom Inc. filed the largest bankruptcy claim in U.S. history.

About $200 million in pay phone compensation is now tied up in WorldCom's Chapter 11 proceeding.

Pay phones have taken image hits as well. Many places, including Baltimore, ordered them removed or restricted from accepting calls because drug dealers used them as corner offices.

Calling-card scams cropped up, even inspiring an episode of The Sopranos in which the resident crime family tried to make an extra buck or two.

"It seemed like it happened to us overnight," says Paul Masters, whose Georgia-based Ernest Telecom is one of a handful of pay-phone equipment manufacturers still standing. "I don't think anybody's kidding themselves that this is just some anomaly."

His company, on Jimmy Carter Boulevard in Norcross, has two technicians making the circuit boards that control pay phones, down from 20 who did that job three years ago.

The 19-year-old company survives only because it moved into providing local phone service.

Its circuit boards dropped to $300 apiece from $500 three years ago, and 100 get shipped in a good month, compared with 1,000 before.

"If we had to rely on our equipment sales today to keep the doors open, I don't know how we would be able to do it," Masters says.

About three-quarters of U.S. pay phones are owned by the four large corporations, including Verizon Corp., that evolved from the breakup of the Bell System. The rest are owned by about 500 smaller independents.

The device itself remained largely unchanged from when inventor William Gray sold the first ones in Connecticut, at the turn of the 20th century, to the mid-1960s when the pay phone became sophisticated enough to digest nickels, dimes and quarters all in one slot rather than three.

Competition heated after 1984 when the FCC required the local phone companies to open the market to competitors. The needs of an increasingly mobile work force helped double the number of providers every few years.

The 1996 law that President Clinton momentously signed in the Library of Congress as the first major overhaul of U.S. telecommunications policy in six decades envisioned a proliferation of pay phones, failing to foresee what was soon to come.

By 1998, 60 million people had cell phones, but wireless communications hadn't made a real dent in the pay phone trade until that fall. AT&T; Corp. led an industrywide shift to flat-rate pricing, nationwide long distance and wider local calling zones.

Cell phone owners who previously reserved them for emergencies began using them with abandon as their average bills fell to $40, half of what they were in 1990.

Providers point to the continued need for pay phones in poor and rural communities where residents can't afford or can't get access to wireless phones. About 4 percent of U.S. homes lack any phone.

Even cell phone users occasionally rely on pay phones when they exhaust the battery, don't want to use up their "minutes" or find themselves in an area where their phone won't transmit.

But while offering such rationales for their product, pay-phone executives admit those are niche markets - not the reasons they got into the business.

"Ten years ago, we didn't consider ourselves a retail business because you didn't need to know that much about who was using your product. Everybody needed it," says Paul V. Francischetti, a vice president in the public communications unit of Verizon.

Pay phones have borrowed a page from the cell phone marketers by rolling out a variety of "plans," such as 50 cents for an unlimited local call or $1 for four or five minutes to anywhere in the United States.

Verizon recently installed 20,000 kiosks marked by yellow handsets in New York and Tampa specially for cut-rate international calling, and it has been advertising them on Spanish-language cable channels.

Phone companies have also begun adding Internet access to pay phones or turning them into wireless transmitters so that consumers, for a fee, can download e-mails on their personal handheld devices.

Jim Agliata, an AT&T; public phone executive, believes the potential to tap demand for e-mail and Internet access anywhere will ultimately cushion the pay phone's decline.

His reasoning: Americans send as many e-mails in a month - 16 billion - as they make public pay phone calls in a year.

As pay-phone revenues slide, their owners have branched into other areas. Faced with three years of declining revenue after eight years of gains, Robin Technologies in Rockville now deploys the crews that once set up pay phones to install and resell satellite TV service. It also launched an e-mail marketing strategy for restaurants. Pay phones, which produced nearly all its revenue two years ago, will provide less than half by 2005.

FCC officials are considering some relief as well. Commissioners are deciding whether to raise the amount due pay phone owners to 40 or 50 cents from 24 cents a call. They might also tap the Universal Service Fund that all phone users pay into to subsidize pay phones in poor communities.

Based on pay phones' recent history, however, both proposals would likely face controversy and court challenges.

"We are an industry in crisis," says Vince Townsend, president and chief executive officer of PayTel Communications Inc. in Greensboro, N.C., which yanked a fifth of its 1,000 pay phones in the past two years even as it scouts prime spots that BellSouth is vacating.

"It's a business model that does not have a growth curve. It has a decline curve. I don't want to say we got caught flatfooted, but we didn't anticipate how quickly the cellular market would take off."

Rise and fall of the pay phone

1878: Advent of pay telephone stations, attended by telephone company agents or hotel clerks who collect money after people make their calls.

1883: Thomas Watson, Alexander Graham Bell's associate, credited with creating the first phone booth -- wooden with a desk, pen and ink. In an earlier version, he draped blankets over furniture to create a "booth" after his landlady complained his shouting into the new phone invention was disturbing her other boarders.

1889: William Gray invents first public coin telephone at a bank in Harford, Conn. In the "postpay" model, coins were deposited after the call was placed. Gray's previous claim to fame: inventing the inflatable chest protector for baseball.

1898: Western Electric introduces first automatic "prepay" phone in Chicago.

1905: First outdoor Bell System coin telephone installed in Cincinnati. People are initially reluctant to make private calls on a public street.

1950s: Bell Laboratories replaces wooden booths with glass and aluminum outdoor design, but that becomes a problem at some national parks. During mating season, territorial bulls charge and break the booths when viewing their reflections.

1991: AT&T; introduces "Public Phone 2000" with a built-in keyboard, data port and color monitor. Users can access electronic mail and online databases, connect a portable fax machine or computer, obtain language translation services and weather forecasts. A later version, the 2000i, accesses the internet.

2001: Bellsouth becomes first regional Bell company to announce it is exiting the pay phone business, by early 2004.

SOURCES: American Public Communications Council, AT&T; Corp., Cellular Telecommunications & Internet Association.

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