Morale: The U.S. Navy Beats AT&T in a Telephone Price War


March 14, 2006: AT&T is taking heat for high prices on a long distance call service they provide in Iraq and Afghanistan. In 2004, AT&T was asked to set up pay phones throughout American bases in Iraq and Afghanistan. AT&T set up 64 calling centers, with nearly 2,000 pay phones. The phones were connected, via a satellite link, to AT&T's international fiber optic network. The fiber optic part of the system is cheap to operate, costing a penny or two per minute for phone calls. The satellite part is more expensive, as was the cost of building the call centers and installing the phones. To cover the costs, AT&T was given an exclusive deal. You could only use AT&T calling cards on the AT&T phones. It cost about 21 cents a minute to call someone back in the United States on this system. When first installed, this was a good deal, because the phone systems in Iraq and Afghanistan were still in a shambles, with many people using satellite phones (which cost 50 cents to a dollar a minute.)

But a year later, the telephone systems, particularly in Iraq, were largely rebuilt, and international calls were a lot cheaper. But even as the Iraqi phone system was being rebuilt, the U.S. Navy got a contract to build several hundred Internet Cafes in Iraq and Afghanistan. These would have fast enough Internet connections to allow the use of VOIP (Voice Over Internet Protocol) phone calls. These cost 4-5 cents a minute. But the PCs at the Internet Cafes were in heavy use, and many troops were stuck with the AT&T phones.

AT&T has got itself a major public relations problem here. They are grossing over $40 million a year on the pay phones. For a company the size of AT&T it would seem, in retrospect, that it would have been better to arrange a deal that, in effect, provided free phone calls (so many minutes per person per month) for troops in Iraq and Afghanistan. The Department of Defense would pay a flat fee. AT&T would be a hero, instead of dealing, as it is now, with an unwinnable PR disaster.

And this isn't the first time AT&T got caught in a situation like this. The U.S. Navy recently negotiated a lower rate, with AT&T, for satellite phone service for sailors at sea. It used to be a dollar a minute, now it's fifty cents. Most phone calls these days travel via fiber optic cables (underground or under water). This is cheaper than satellite, and gives a better quality call. But at sea, all ships rely on more expensive satellite phone service. Another chance to win lots of favorable coverage lost. Someone at AT&T was asleep years ago during Marketing 101. not to mention basic human decency.




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