By Ralph Nader and Frank Warner
(Ralph Nader is the author of Unsafe at Any Speed and co-author of Whistle-Blowing and the recent You and Your Pension (all Grossman Publishers). He is the founder and director of the Public Interest Research Group, with offices in Washington, D.C. Frank Warner is a researcher at the Corporate Accountability Research Group, a Ralph Nader activity.)
The Nation magazine
Washington -- What with political payoffs, wiretapping, rate increases, service breakdowns and a big antitrust suit, AT&T gets a lot of attention these days. However the Bell System’s most profitable business generates neither news copy nor consumer attention and deserves both.
Yellow Pages service is as old as telephone service. In the 1880s, classified telephone directories were published by private printers. But Bell companies, quick to see what easy profits the service could realize, soon exploited special market advantages to finish off all the private directory publishers except those that agreed to act as Bell agents. By the turn of the century, AT&T had monopolized the sale of classified directory advertising. (At the same time, more and more classified listings were printed on yellow paper; hence the “Yellow Pages.”)
Today, the twenty-three Bell operating companies publish 2,166 different classified directories. Though independent printers publish small neighborhood directories, in most area there is no real competition to Yellow Pages service. Ostensibly designed to let our fingers do the walking, the Yellow Pages is one of those quiet monopolies, hiding its anti-competitive, anti-consumer activities behind a façade of good public relations. Rather than a mere Ma Bell side show, it has become a billion-dollar business.
The Yellow Pages may be unusual for its lack of notoriety, but its prices, practices and profits are what one would expect from a dominant business. Consider its rates. Regardless of directory circulation, each telephone company charges what it sees fit for directory advertising. In Brooklyn, N.Y. (population 2.6 million), a quarter-page ad costs $2,496 a year, or 94 cents for each 1,000 people it reaches. In Kansas City, Mo. (population 1.3 million), the same ad costs $2,928 a year, or $2.21 per 1,000.
Even in cities of similar size, the rates vary widely. A survey of all Yellow Pages directories serving areas of 25,000 inhabitants (plus or minus 2,000) shows annual quarter-page rates from an average of $292 in West Virginia to an average of $627 in Southwestern Bell territory. Rates seem more closely related to the size of each telephone company’s greed than to the size of the population it serves. Perhaps that is what the Chesapeake and Potomac Telephone Co. meant when it declared in a 1967 court case that “classified advertising charges are necessarily based upon a value concept rather than cost.”
According to Yellow Pages advertising contracts, rates are to be paid on a monthly basis “for a minimum of one issue,” but the advertiser is not told how long one issue will last. Most advertisers assume that the life of a classified directory is one year, but if a telephone company decides to extend it for a few months, the advertisers are obligated to continue monthly payments. Thirteen- or fourteen-month issues are common, but last year Pittsburgh advertisers were taken by surprise when Bell of Pennsylvania elected to keep its directory going for eighteen months. Noted one specialist in Yellow Pages advertising, “This can be very damaging to a new business,” especially one that had planned to decrease its advertising in the second year.
The structure of the classified directory hits some advertisers even harder than the basic rates. Yellow Pages ads can be listed in almost any form combining the “bold listings,” “anchor listings,” “space listings,” “trade items” and “display ads.” Every added detail means a higher rate. To compound the fun (and the profits), the Bell companies offer their Yellow Pages advertisers more than 2,000 headings under which to advertise. A furniture rental company, for instance, has available no fewer than nine headings – from “Bedding” to “Tables.”
Such practices snowball into the kind of profits most companies only dream about. Bell System officials hesitate to talk about them. While they’re quite willing to divulge their revenues from directory advertising ($936 million in 1974), they contend that they are unable to calculate their profits because they don’t know what the expenses are. “It isn’t a kind of figure that we need in the business,” explained Chuck Dynes, AT&T’s information director in Washington, D.C. He said he could not even estimate.
But this is nonsense, since AT&T had to have a shrewd idea of its directory expenses in order to set its rates, so we looked at the annual reports filed by Bell’s operating companies with the Federal Communications Commission. There it was: in each company’s report for 1974, a line labeled “Directory Expenses.” The expenses added up to $486 million, meaning the Yellow Pages had netted $450 million (before taxes) in 1974, for an impressive 48.1 per cent return on sales. Advertisers passed on their expenses in inflated prices for their goods and services. Consumers, thinking they were getting their Yellow Pages free, paid an invisible price for them, plus a $500-million tip for AT&T.
Does the Yellow Pages performance, at least, match its profits? Edward Hancharik, AT&T’s director of Directory Operations, thinks so. Asked if the output of Yellow Pages were restricted, as might be predicted in a monopoly, he proudly replied, “The customers can receive as many books as he wants.” But Hancharik hadn’t answered the question, for Yellow Pages output is not measured in numbers of directories. The Yellow Pages product is a service: the dissemination of information, including telephone numbers, that consumers want and need. Output can be measured only in terms of efficiency, reliability and convenience. While it is difficult to quantify these qualities, it is not hard for consumers to feel the effect of deteriorating directory service. The current experience in Washington and suburbs is an example of this deterioration, in an area where fewer directories would actually be better.
For decades, the Chesapeake and Potomac Telephone Co. published a Washington Yellow Pages book serving the District of Columbia and its suburbs. Area consumers had in one volume a listing of practically all the area’s competitors in any business. The book encouraged comparison shopping at home, and stimulated competition in the marketplace. Meanwhile, C&P Telphone circulated two other Yellow Pages books, one to suburban Maryland and one to suburban Virginia. But because the area-wide Yellow Pages fulfilled the metropolitan area’s needs, the two suburban books were virtually ignored.
In September 1974, C&P Telephone executives, apparently not satisfied with the patronage of the suburban directories, announced a plan to end the overlapping of the Washington Yellow Pages into suburban areas. Effective this month, there will be three completely separate classified directories where only one is needed. Customers in the suburbs will no longer get a D.C. Yellow Pages, except on request. In announcing the plan, the telephone company failed to publicize its projections, based on the experience of other Bell companies, that no more than 10 percent of its customers will bother to request the other two directories of the metropolitan area. Nor did the company tell the public that the new arrangement will force regional businesses to advertise in three directories instead of one – at 2.6 times the cost.
Washington businessmen are appalled. “What a gimmick to get more revenue,” groans the president of Theodore’s, a D.C. furniture store. “I think they’re taking advantage of us,” says the district manager for Bekins Moving and Storage. The general manager at Jerry’s Ford, a car dealership, wonders whether the elimination of the area-wide Yellow Pages directory might have an effect on competition. Area consumers, having fewer or less informative classified listings at their fingertips, will be increasingly be subject to the few big advertisers who can afford to command their attention. The D.C.-area businessmen draw a picture of one monopoly, the Yellow Pages, extending its anti-competitive grip to all the people it touches.
Leonard Kolodny, head of the Retail Bureau of the Washington Board of Trade, does not look at it that way. About the potential anti-competitive effect, he says, “I don’t think that enters into the picture at all.” He claims the three distinct directories will allow businesses to choose which of the local areas they want to reach, whereas the old scheme had forced everyone to advertise everywhere. (He does not mention the fact that every new ad for just one of the new local books will cost almost as much as an ad in the old area-wide book.) AT&T’s Chuck Dynes agrees with Kolodny, and sees convenience in the C&P Yellow Pages plan. In his view, “If you split the book in three, I only have to go a third as far to find a number, which makes it easier for me.” Yet to assume that reducing the number of classified listings in the Washington Yellow Pages would not also reduce competition is to assume that no firms want business from the whole metropolitan area, whereas businesses and consumers do not operate within political boundaries. Indeed, the telephone company recognizes this reality by continuing to distribute all three white pages directories to all three parts of the Washington area. Why would consumers want alphabetical directories for all three parts, but a classified directory for only one? C&P does not have an answer.
The Washington area Yellow Pages’ realignment is not unique. Orange County, California, which was satisfied with only one classified directory three years ago, now has two directories serving smaller markets. The same is true in Southern Alameda County, California, whose book was split last year. And in Minneapolis, a directory sales manager for Northwestern Bell reveals, “We have given some thought to breaking up our directories, but that’s still in the planning stages.”
What seems to be a better system for classified directory distribution is offered in Philadelphia, where advertisers can reach all or part of the metropolitan area in one book. Just as Time magazine accepts national and regional advertising, the Philadelphia Yellow Pages accepts regional and local advertising. Regional advertising appears in all copies of the Philadelphia Yellow Pages; local advertising, costing 35 per cent less, appears in one of four local areas. Each consumer gets a directory with all the listings he or she needs. The arrangement is simple and efficient. And it is offered in no other city.
Another practice revealing the Yellow Pages disdain for consumer welfare has been its policy against the “interconnects,” Western Electric’s competitors in the production of telephone equipment. Interconnects, from the start, are faced with overwhelming inertia on the part of telephone users and, in the Yellow Pages, they compete for attention in a book filled with free advertising for Bell subsidiaries. As if that weren’t enough, Bell officials have decided to hide the interconnects in the Yellow Pages under “Telephone Apparatus” or “Telephone Equipment” headings. The telephone manufacturers want to advertise under the heading “Telephone Companies,” where they feel most customers naturally look for their telephone needs. But Bell has refused.
A flagrant abuse of the interconnects is a quarter-page “General Information” notice appearing in the Manhattan, Chicago, St. Louis, Phoenix and New Orleans Yellow Pages. Displayed with the interconnect ads, the notice warns that all telephone equipment not supplied by Bell must meet Bell’s tariff requirements. It states, “A customer’s service is subject to suspension or termination when customer-provided equipment or systems are used in violation of the tariffs,” and notes, for instance, that “The tariffs do not permit wall jacks, plugs, extension cords, etc., not provided by the Company to be connected directly to Telephone Company lines.” The information provided is not untrue but, according to Ron Harlow, president of the Pritec Corp., a Chicago interconnect company, “Anybody who looks at the notice says, ‘My God, what are we getting into?’ They might very well be scared off.”
Harlow adds that Yellow Pages income can be used to subsidize Bell’s equipment offerings, making the competition of Bell’s Western Electric all the more unfair. “They can lower the cost of telephone equipment and increase the cost of Yellow Pages advertising.” This is possible, he says, because directory service has escaped the attention of state regulatory bodies.
Incredibly, if not mysteriously, only California regulates the rates and practices of the Yellow Pages. In 1958, when the New York Supreme Court gave its Public Services Commission “limited jurisdiction” over the use of the telephone directories, it did so only to affirm the PSC’s order prohibiting an independent company from attaching plastic covers to the New York Telephone Company’s directories. Other states that have commented on the subject have decided that publication of the Yellow Pages is neither a public service nor a public utility, and cannot be regulated.
Though California seems to be steps ahead of other states in its capacity to oversee the service provided by the Yellow Pages, it has done nothing for the state’s directory advertisers. Pacific Telephone’s Yellow Pages profits are actually higher than those of most companies in the Bell System. The Public Utilities Commission does not mind Yellow Pages overcharges, saying that the monopoly profits, figured into Pacific’s allowable rate of return, help keep telephone rates down. But because the PUC’s success has always been measured by its ability to hold down telephone rates, it has not even considered the possible economic benefits of lower Yellow Pages rates.
Bell spokesmen argue that no regulation is really needed, since the Yellow Pages is one advertising medium competing with other advertising media. The argument is unpersuasive; directory advertising is not just another advertising medium. As AT&T points out in its own literature, the Yellow Pages “is as available as the telephone itself” and, according to a 1969 survey, is used by 92 million people an averages of forty times a year. Bell claims these people follow up their references 89 per cent of the time with a phone call, a visit, or a letter. A nice small ad in the local paper or on the local radio is hardly competition.
Nevertheless, the federal government has also refused to regulate the Yellow Pages. Nor has it sought remedial action. When the Department of Justice filed its antitrust suit against AT&T last November, there was no talk of the Yellow Pages. The proposal was to separate Western Electric and at least part of Long Lines from the Bell System. Western Electric, to be sure, is eight times larger than AT&T’s director operations. But it accounts for only one and a half times the profits, which is a further indication of the Yellow Pages’ not insubstantial importance.
The Justice Department would have a plausible antitrust case against the Yellow Pages. The irregular rate structure, the anti-competitive redistribution of the directories and the abuse of the interconnects – when combined with the monopoly itself – might be ground for action. In a case for divestiture, the Justice Department could easily show that Yellow Pages service is by no means a natural monopoly, and that any telephone company’s control of the service is inherently anti-competitive. The large and expensive paperwork that any competitor would have to undertake to compile numbers and names has been a central reason for considering the publication of classified telephone directories a monopoly. Today, however, lists are easily compiled. The names and numbers of an entire city can be recorded on a few computer tapes. Yet telephone companies, in and out of the Bell System, continue to monopolize the Yellow Pages service, for the following reasons:
(1) A telephone company’s salesmen have first access to service orders for new directory business. A competitor can ask a new firm to advertise only after the telephone company has done so.
(2) A telephone company selling advertising in a telephone directory has the psychological advantage of being considered “official,” which a competitor would too often be considered less accurate, less dependable in its distribution, or less likely to be used by telephone customers.
(3) A telephone company already has a vast network of trucks for telephone maintenance. Maintenance employees can and do deliver telephone directories in making their rounds, and are not required to deliver a competitor’s book as well. A competitor must pay high postage costs.
(4) A telephone company can use its existing billing machinery to bill for advertising in its classified directory, but will not do this for a competitor in directory advertising (no one would expect it). A competitor would have to set up a completely new billing department.
These are the reasons that Manhattan Blue Books, an independent publisher of neighborhood directories, is alarmed by the recent decision of New York Telephone to begin publishing its own neighborhood directories. None of those just announced will compete with Blue Books, but it is suspected that New York Telephone is getting ready to move into Blue Books’ territory. Against a telephone company, Blue Books would not have a chance.
The Bell System could use its advantages in the publication of Yellow Pages to save businesses, and ultimately consumers, a lot of money. But it does not; instead, its advantages are used to everyone else’s disadvantage. In fact, Justice Department attorneys have begun studying the Yellow Pages, and staff lawyers reportedly lean toward the divestiture remedy. Regulation would be futile, merely perpetuating the monopoly. Antitrust action is already seventy-five years late but, until it does come, the Yellow Pages will remain what it is, a monopolist’s dream, sustained by manipulated demand, faced with no possibility of competition and, except nominally in California, totally unregulated.
* * *
Yellow Pages: The Quiet Monopoly, The Nation, May 31, 1975
There's more. There is a reason why he
believes it was Christmas eve. He said he had
to sneak into Cuba and smuggle the potatoes
out. He remembers the Cubans celebrating
Christmas.
But those crazy Cubans -- they could have
been celebrating Christmas on Ground Hog's Day
or even Palm Sunday. You never know what
they're going to do.
And, on one of his surreptitious trips into
Cuba, a sympathetic Cuban gave him a special
potato peeler -- the one he set the 600
potatoes-per-hour record with. He has carried
that magic potato peeler in his jacket
pocket every day since until the airlines
began disallowing such items on flights.
Posted by: George | August 27, 2004 at 09:41 AM
What is this? Scrappleface?
Posted by: jj | August 28, 2004 at 01:15 PM