Tumbling telecom rates give customers leverage

While prices for voice, IP and traditional data services such as frame relay have been in free-fall for three years, the largest service providers continue to slash rates.

This means that if you haven't recently reviewed and renegotiated your telecom contract, chances are you're paying more than is necessary for voice and data services.

"Users can expect to get 25% to 30% price reductions when negotiating a new contract for the same services as their old [expired] contract," says Mark Winther, group vice president of worldwide telecommunications at IDC. "That seems pretty typical and consistent" for most users across the board.

The expectation early this year was that continued pricing pressure was bad for the industry and that it was going to dissipate. "But now it's clear it is not," he says.

MCI may or may not have fired the first shot, but the carrier clearly added to further price declines with a direct mail campaign it sent out late in the first quarter.

In March and April MCI sent AT&T customers a letter that guaranteed rate reductions. The letter said, "Any new business that you select to migrate to MCI, MCI offers you up to 40% savings with a minimum savings guarantee of 25% from rates that you are currently paying."

MCI offered specific savings on a variety of services from audio conferencing to IP VPN services. The company would not say how many AT&T customers received the letter, but one report in The Wall Street Journal said about 500 letters were sent out.

"Our objective was not to fuel a price war but to promote MCI services to AT&T customers," an MCI spokeswoman says. MCI says the promotion was devised after AT&T CEO David Dorman proclaimed during a press conference in January that AT&T "will not be beat on price."

AT&T says Dorman's comments merely reflected the company's commitment to stem losses it attributed to its failure to fight fire with fire.

No matter which carrier started the war, analysts agree that MCI's letter is a valuable negotiating tool for customers.

"This is an important development," says David Rohde, analyst at TechCaliber Consulting.

Rohde says the letter indicates that there are savings to be had for customers who revised their contracts as recently as 12 months ago. Although this particular promotion is over, the rates and savings MCI promises can be used as a starting point for negotiations, he says.

"Savings users can get on these services are quite substantial when you factor in the idea that [any carrier] would not publish and send out in a direct mail piece their best offer," he says.

MCI is offering these rates and better, and AT&T, Sprint and others have responded, he says.

"There has clearly been competitive pricing and we have been talking to our providers," says Larry Quinlan, CIO at Deloitte Consulting in New York. "One of the best practices we have been doing is building a clause in our contract where we can annually renegotiate rates so we can ride the curve down."

But as Quinlan notes, lower rates don't automatically translate into lower costs. "Yes, we have been getting lower per-unit rates, but at the same time our bandwidth requirements have continued to skyrocket," he says.