Posted: 12/1998

Payphone Providers Need to Get Smart

By Peter Meade and Jennifer Knapp

Here’s one call that the payphone industry better answer: Improve your products and
marketing strategies or the next–and many of the subsequent–calls will be made using
wireless telephones.

By 2004, more than one-third of the U.S. population will be carrying wireless
telephones, according to Frost & Sullivan Inc., Mountain View, Calif., and this does
not bode well for makers of pay telephone equipment or payphone service providers (PSPs).

Issues surrounding deregulation, technological advances and payment alternatives, as
well as acquisitions and mergers, are forcing payphone makers to reassess their market
strategies, according to the market research house.

It’s not all bad news, however, says Frost & Sullivan telecommunications industry
analyst Erica Henkel. The total market for all types of payphone equipment last year was
$115 million, and some industry segments actually are experiencing medium-to-high growth.

Even if one out of every three people carries a wireless phone, the optimist sees that
this still leaves two-thirds of the population as good candidates for a well-placed
payphone.

"For example, when my pager went off today, I went and found a payphone, even
though I have a cell phone in my purse," says Nortel Networks spokeswoman Laura
Powers. "I prefer a payphone because I know we are going to be able to communicate
without the possibility of static or a dropped call [both of which are more frequent with
wireless calls]."

John Bain, a Dallas-based telecommunications analyst with investment bank Hoak
Breedlove Wesneski & Co., strongly believes that every wireless telephone call is not
another pin in the heart of an imaginary payphone voodoo doll. "So much of the
wireless traffic is new call demand," he says. "Perhaps when everyone’s cellular
calls get to 10 cents a minute everywhere at every time, there may be a serious push to
cave in the payphone market." But with wireless per-minute call rates currently
hovering at 35 cents, "we’re nowhere near there," Bain adds.

Yet, it is hard to escape the irony of the recurring panorama seen at the American
Public Communi-cations Council’s (APCC’s) October gathering in Miami. On the show floor,
where dozens of payphone companies gathered to display the latest wares and innovations
that are designed to keep the public communications market alive, scores of attendees
continually lined the outskirts of the show floor and associated hallways talking on their
cell phones. While the payphone industry meets to strut its best stuff, it seems like
blasphemy that the lines at the banks of payphones are shorter than a call to your
mother-in-law.

A Better Cointrap

For payphones to emerge victorious from the wireless challenge, they must become more
than vending machines dealing dial tone.

"I don’t think you’ll ever see the payphone go away," says Nortel’s Powers.
"There is competition, but innovative new features and new services will increase the
use of payphones."

Toward this end, in the APCC product exhibition spotlight were new smart phones, ones
sport- ing microprocessors to provide enhanced services such as onsite billing, station
management detail reporting (SMDR), voice messaging, rate change flexibility, improved
call routing and usage-based pricing. In a serious dash to ensure the future of their
industry, most payphone manufacturers already are moving forward with the smart phone
concept, says analyst Henkel.

One equally thorny issue for PSPs will be their ability to handle data transport from
their phones. "As the U.S. population grows more dependent on convenient access to
data, payphone equipment that can trans- mit data will become a consumer
requirement," Henkel says.

Payphone makers that do not capitalize on adding e-mail or data transfer capabilities
to their wares are missing a big bet, according to analyst Bain. "People check their
e-mail [many times] a day," he says. "So, 35 cents a call to get on the Internet
adds up. I’d rather do that at a payphone than call the office [and have the information
relayed]."

Bain suggests one way that PSPs could take further advantage of an e-mail connection
would be to offer a frequent caller plan similar to those that have become so popular in
the airline and retail industries. Callers would be given a personal identification number
(PIN) and would work toward a reward for frequent use. "PSPs must build customer
loyalty," he says. "There isn’t much now. But with plans such as this, we will
see it slowly, painfully emerge."

Vendors also are tapping the growing data market with Internet access terminals–such
as Internet kiosks–to draw payphone customers. While kiosks with Internet, e-mail,
printing and Windows capabilities are available from companies such as America’s Internet
Machine (AIM), Bethesda, Md., and PayNet Communications Inc., Bryan, Texas, Ernest
Telecom, Norcross, Ga. and Nortel have incorporated the Internet option right into their
payphone terminals.

"The best thing is, Nortel’s Millennium Kiosk is customizable," Powers says.
"If they want the telephony feature, they can have it."

The Millennium Kiosks feature a networked multimedia computer, touch-screen monitor,
stereo speakers, keyboard, handset and up to three printers.

PSPs must take care, however, not to treat these Internet access terminals as
traditional payphones, says AIM’s General Manager James Firkser. "The place for an
Internet kiosk is not necessarily the same place you might put a payphone," he says.
"For instance, a bar is a great place for a payphone [but not necessarily an Internet
kiosk]. An airport is a great place for a kiosk."

There is little market research on the best places for such installations, he adds, so
AIM is experimenting to find the best locations to engender customer loyalty.

A Fresh Approach

Taking a new look at the scene will open PSPs to the new technologies that will affect
the payphone industry positively in all market segments. "New payphone installations
have decreased in recent years because of alternative technologies," Henkel says.
"Many hotels have in-house telephone systems and many travelers carry cellular phones
and laptops. In the past, these segments were the most lucrative end-user markets for the
payphone industry."

PSPs must support new ways of doing business, including new ways of accepting payment
for services. But the good news, according to Henkel, is that pay telephone makers are not
reacting passively to this challenge to their business. In fact, in a recent report, Frost
& Sullivan singled out several manufacturers for keeping ahead of the curve in this
changing market.

Elcotel Inc., Sarasota, Fla., was mentioned for its engineering prowess. According to
Henkel, the company has delivered continuous product improvements, acquired key
competitive product lines, upgraded services and increased strategic marketing efforts.
One of Elcotel’s newest product enhancements is the GemCell System, a wireless payphone
that fits the niche for remote areas that can provide a strong customer base. With
optional power supply features such as solar, AC and DC, these wireless phones accept
smart cards and credit cards, can be remotely programmed and interface with global
wireless networks.

Henkel also praises Intellicall Inc., Carrollton, Texas, for the product innovation
shown in the wide-scale improvement of its AstraTel line. "Intellicall has done a
phenomenal job of improving [its] product line, introducing new features, integrating data
transmission abilities and offering customers quality products at competitive
prices," Henkel says. "Having remote polling capabilities and remote management
are key."

In addition to deploying smarter phones, PSPs need to be smarter about where they put
their wares, say industry experts. Some places are more payphone-friendly than others.

"Unless there is some major economic miracle, there always will be people in
low-income areas," says Bob Lane, a Farmington, Conn.-based industry consultant and
owner of Payphones-USA and telefone.com. "They have always favored the payphone. In
many instances it is their ‘home’ phone. Cell phones are not an issue here, either. We
need to make sure there is a high concentration of payphones in those areas."

APCC’s trade floor featured manufacturers displaying specially designed payphones that
would be accessible for areas where they previously would not be able to be installed. For
example, 4Fortec Inc. displayed a portable payphone enclosure. The versatile boxes can be
solar-powered, or, in a befriend-the-enemy fashion, cellular payphones can be hooked into
them, according to Jody Marzello, spokeswoman for the Waukesha, Wis.-based payphone
enclosure manufacturer.

The next five years will be pivotal to the payphone industry as this period of
transition continues. "A shake-out is happening in the competitive structure and
industry consolidation is inevitable," Henkel says. "In order to survive,
equipment manufacturers will have to adopt end-game strategies. Everyone wants to be the
last player in the market."

Peter Meade is Executive Editor and Jennifer Knapp is News Editor for PHONE+
Magazine.