TRISTATE Telephone – A case

John Godwin, chief executive of Tri-state Telephone, leaned back in his chair and looked at the ceilings. How was he ever going to get out of this mess? At last night’s public hearing, 150 angry customers had marched in to protest Tri-State’s latest rate request. After the rancorous shouting was over and the acrimonious signs put away, the protesters had presented state regulators with some sophisticated economic analyses in support of their case. Additionally, there were a number of emotional appeals from elderly customers who regarded phone service as their lifeline to the outside world.

Tri-State Telephone operated in three states and had sales of over $3 billion. During the last five years, the company had experienced a tremendous amount of change. In 1984, the AT&T divestiture sent shock waves throughout the industry, and Tri-State Telephone had felt the effects, as pricing for long distance telephone service changed dramatically. The Federal Communication Commission instituted a charge to the effect that customers should have “access” to long distance companies whether or not they were in the habit of making long distance calls. Consumer groups, including the Consumer Federation of America and the Congress of Consumer Organizations, had joined the protest, increasing their attention on the industry and intervening in regulatory proceedings wherever possible. The FCC was considering deregulating as much of the industry as possible and Congress was looking over the commissioner’s shoulder. Meanwhile, the Department of Justice and Judge Harold Greene (both of whom were responsible for monitoring the AT&T divestiture) continued to argue about what business companies like Tri-state should be engaged in.

In addition, technology was changing rapidly. Cellular telephones, primarily used in cars, were now hand held and could be substituted for standard phones. Digital technology was going forward, leading to lower costs and requiring companies like Tri-State to invest to keep up with the state of the art. Meanwhile, rate increases negotiated during inflationary 1970s were keeping earnings higher than regulators would authorize. New “Intelligent” terminals and software developments gave rise to new uses for the phone network (such as using the phone for an alarm system), but as long as customers paid one flat fee, the phone company could not benefit from these new services.

Godwin’s company has recently proposed a new pricing system whereby users of local telephone services would simply pay for what they used rather than a monthly flat fee. All of the senior managers were convinced that the plan was fairer even though some groups who used the phone with notable frequency (like real estate agents) would pay more. It would give the company an incentive to bring new services to their customers, and customers would be able to choose which ones to buy. None of them had anticipated the hue and cry from the very customers who would save money under the new plan. For instance, Godwin’s studies showed that the elderly were very light users of local service and could save as much as 20 percent under the new plan.

After the debacle at the hearing the previous night, Godwin was unsure how to proceed. If he backed off the new pricing plan, he would have to find a different way to meet the challenges of the future – maybe even different businesses to augment company income. Alternatively, the company could not stand the negative press from a protracted battle, even though Godwin thought that the regulators were favorably disposed toward his plan. In fact, Godwin himself believed the company should help its customer rather than fight with them.

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