Longform

Smooth Operator

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"Today I'm speaking from our computer room. I can change the rate on any of our 700 phones in an instant. Every night our computers call every phone we own to collect information on how much money we took in and whether the phone is working. We usually know a phone is broken before the location owner does, and we can send a technician out immediately. We need to know these things, because a broken phone isn't earning any money."

The way pay phones earn money for their owners has changed dramatically, too. Pay phones cost about $2,000 each to buy and install, and they can be a constant headache to maintain. "A pay phone is an emotional thing to somebody who uses them a lot, and they need to work," Semone says. But with some attention to service and a little luck, the machines can also bring in cash very quickly.

The most obvious way is through coins. People shove quarters into pay phones for local calls (recent court decisions and deregulation efforts may soon boost the cost of a local call to 35 cents) and also pony up fistfuls of silver for what can be huge markups on long-distance calls. The small change adds up: A reliable phone in a good location can take in $300 a month.

The more lucrative way for pay phones to produce profits, though, is through long-distance calls charged to credit cards. Pay-phone companies, or intermediaries, buy long-distance time wholesale and then sell it retail. Until last year, when Colorado regulators moved in, pay-phone operators billed huge markups on interstate long-distance credit-card calls. Now the rates are capped, but pay-phone companies still enjoy a reasonable profit margin on calls within Colorado and a large one on calls between states.

Generally, recent legislation, legal decisions and deregulation efforts have benefited private pay-phone operators. For example, long-distance carriers such as AT&T, MCI and Sprint had long circumvented local pay-phone companies by issuing calling cards that accessed their lines through 800 numbers. Because the calls were toll-free, the pay-phone companies didn't collect any money.

But that will change. Beginning in 1997 the giant long-distance companies will have to pay private pay-phone operators an average of $46 per phone per month for what were once toll-free calls. The result will be an estimated $200 million bonanza for the pay-phone industry (and probably higher rates passed on to the customer). On the other side of the balance sheet, a recent Colorado court decision will soon reduce the cost of doing business with US West, which private pay-phone companies must pay for access to phone lines.

"If done right, owning pay phones is like owning an annuity," says one lawyer familiar with the business. "Oh, yeah, oh, yeah, it's profitable," adds Bill Bailey Jr., owner of the Texas-based Cherokee Communications, which has about 14,000 phones in a dozen states, including Colorado. Bailey ought to know. Two weeks ago he sold his company for an estimated $50 million.

Despite such success stories, margins can be thin, and the number of good pay-phone locations is limited. So the industry has become intensely competitive.

Having lots of pay phones in heavily traveled spots is the surest way to make a profit, and pay-phone companies are constantly battling to convince the owners of such sites to place their own equipment there. Most large pay-phone companies boast an aggressive sales force that scrambles to secure desirable locations. Using high commissions--up to 25 percent of a phone's revenue--and outright cash bonuses, salesmen wheedle, cajole and persuade the owner of, say, a popular Conoco store to install their company's telephones rather than a competitor's.

The intensity of the competition was demonstrated in a lawsuit filed early this year in Denver District Court, in which Peak Phone Service accused Cherokee of swiping its good pay-phone locations. The suit claimed one of Cherokee's salesmen had approached several Western Slope convenience stores and persuaded them to switch their pay phones from Peak to Cherokee by slandering Peak. The salesman did this, the suit alleged, "by making statements that Peak Phone Service was 'ripping off' its clients." The lawsuit eventually was dismissed.

The huge amount of money at stake in the pay-phone industry has inspired some owners to operate in the margins of the law. The most questionable practices seem to have occurred in the mass financing of start-up pay-phone companies, during which investors are purportedly sold phones (see sidebar) or pieces of solid companies. Frequently, the ones who get hustled are the elderly.

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Eric Dexheimer
Contact: Eric Dexheimer