The Price of a Phone Call

Monday Mar 22nd 2004 by SmallBusinessComputing.com Staff
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The cost burden of telecom services is much higher for very small businesses than for large businesses. A SBA study finds that smaller firms pay four times more per employee for local and long distance services than large businesses do.

Telecom isn't about the bottom line — making a phone call is a business necessity. Do small businesses pay more for these services than larger organizations because enterprises have an economy of scale? Or is the lack of alternative telecom services taking more from those businesses that can least afford it?

The U.S. Small Business Administration wanted to determine how telecom regulations affect small-business phone bills. The SBA set its Office of Advocacy to task. It's mission — report back with details about small business telecommunications use and spending — to help policy makers better understand how the regulations they make impact U.S. small businesses.

The report, written by TeleNomic Research and funded by the Office of Advocacy, details small business telecommunications use and spending, and offers a wide range of data previously unavailable to policy makers. Thomas M. Sullivan, Chief Counsel for Advocacy, said intense legislative and regulatory debates surround telecommunications policy, but that small businesses were essentially ignored and not a part of the equation.

"On issues like competition and broadband service the discussion has focused on individual consumers," Sullivan said. "But small businesses are major consumers of telecommunications services, too. This report will help policy makers understand how their decisions will affect innovative and job-generating small businesses."

The report, published earlier this month, shows that small businesses spend on average $543 per month on telecommunications services, 89 percent of which goes for local, long distance and wireless telephone services. The report also clearly shows that differences in business size and industry drive telecommunications spending.

The report finds that the smallest of businesses pay the most per employee for local and long distance phone service. Firms with fewer than four employees face monthly telecom costs of $82.81 per employee, while small firms with 10 to 499 employees pay four times less, just $20.99 per month per employee.

This difference in spending means that very small firms pay disproportionately more for telecom services than other firms when operating their businesses. As a result, public policies that increase business expenditures are likely to adversely affect smaller businesses more than other businesses.

America's 22.9 million small businesses use an enormous amount and variety of telecom services, including local landline, long distance, and wireless technologies. Consequently, small businesses spend a considerable amount for telecom services. The level of expenditures varies by industry and firm size. As in so many other areas of regulation, small firms are affected by telecommunication policies in a manner disproportionate to their size.

Small Business Average Monthly Telecom Spending by IndustryThe finance and insurance industry spends the most each month on telecom services among the major industries. Manufacturing, wholesale trade, transportation and warehousing, and real estate, renting and leasing spend more than $700 a month. While farming and agriculture, retail trade, and accommodation and food services spend the least. These spending habits reflect, in part, the telecommunications intensity of the business, as well as differences in firm size among industries.

Signs of competition in the small business market segment for local telephone services appear evident from the survey data. CLECs (define) now garner 22 percent of the small business market, with the remaining share belonging to incumbent local exchange carriers (define). CLECs serve 29 percent of small businesses located in metropolitan areas, while only 11 percent of small businesses located in non-metropolitan areas. Interestingly, only 3.3 percent of small businesses use VoIP (define) services — technologies that use the Internet to carry telephone-like conversations while bypassing telephone company networks and billing.

Small businesses like their telecom services bundled. Voice service bundles combine multiple services onto a single bill, usually at a price less than purchasing the services separately from different providers. For example, 79 percent of small businesses surveyed would prefer to buy telecom services in a bundle, and 85 percent of these small businesses would prefer their services combined on a single bill. From this, it appears that most small businesses want the convenience of a single bill and the savings from service bundling.

The use of wireless telecommunications by small businesses is substantial compared to other telecom services. Wireless services are now used by 73 percent of small businesses, and 25 percent of all small businesses spend more for wireless services than they do for local and long distance telephone services combined. In fact, six percent of the small businesses using wireless services report no long distance spending, while four percent report no local telecommunications spending.

Also among the reports findings, 73 percent of small businesses use Internet access services. Of these, 38 percent use dial-up, 54 percent us broadband — 26 percent opting for cable modems, 21 percent tap into DSL, four percent use satellite systems, and three percent connect with wireless broadband. Another four percent of small businesses connect to the Internet via leased lines, mainly or T-1 feeds.

The survey also provides insight into how small businesses choose telecommunications providers. When asked to rank the factors they use for selecting of a telecommunications provider, small business owners reported that quality and reliability were the most important factors to consider, followed closely by price and customer service. The name brand of the provider was the least important factor, by far, in deciding which telecom provider to select.

The study was based on responses from 458 small business owners. Based on the sample population of the study, most small businesses are very small — averaging less than nine employees. In fact, 31 percent of small business owners that participated in the study reported just one employee or less, and 47 percent of small business owners reported less than $200,000 in annual revenue during their latest year of operation.

The Office of Advocacy, the "small business watchdog" of the government, examines the role and status of small business in the economy and independently represents the views of small business to federal agencies, Congress, and the President. It is the source for small-business statistics presented in user-friendly formats and it funds research into small business issues.

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