Technological changes and new legislation arm pay telephone programs with greater possibilities for revenue generation.

Charged with generating extra revenue in their centers' common areas, shopping center managers have long been familiar with the ins and outs of negotiating pay telephone service. The concept is not complicated: By providing space for public telephones in exchange for commission, shopping centers are able to reach out and touch a few extra dollars while, at the same time, providing their patrons with a service they have come to expect.

Vendors report that changes within the telecommunications industry -- including the availability of "smart board" technology and the enactment of the 1996 Telecommunications Act -- will affect the cost and efficiency of services provided by vendors. Center managers who understand these changes will be better prepared to negotiate their pay phone agreements.

Making the right connection Typically, pay telephones are regarded as an obligation more than a value-added service to shopping center patrons. Centers are built to accommodate phone banks, and placement usually is determined during the design phase. Therefore, the question for shopping center managers is not whether to install pay phones; rather, their focus is on finding a provider that can offer high-quality service at the best negotiated commission.

Since 1985, the number of pay telephone vendors has grown enormously, reports Myles O'Reilly, president of O'Reilly & Associates, a St. Louis-based telecommunications consulting and management firm. "The pay phone industry deregulated in 1985, and the independents came out of the woodwork," he explains. "Almost everybody has the same story, quite frankly, because they've all been around forever."

The result, he says, is that vendors are difficult to differentiate. A premier company can offer A-to-Z service from installation and call completion (through local line access and long distance providers) to maintenance, coin box collection, accounting and commission payment.

"Normally, a pay phone provider would enter into an agreement for some length of time -- normally from one to three to five years," explains Law-rence Ellman, president of national accounts for Miami-based Peoples Telephone Co. Inc. "Most contracts call for exclusivity, and most involve completing all calls, maintenance, collection of the phones, and paying a commission."

There is no initial capital outlay required of the shopping center, notes Glenda Quinn, account manager in the Atlanta office of Birmingham, Ala.-based BellSouth Public Communications Inc. "There are no expenses incurred whatsoever by the [shopping center] unless [they relate to] renovating the property. For instance, if they decide they want a fully recessed can phone in a cement wall, they will have to go to the expense of cutting that hole in the wall."

Service makes the difference What appears to be a "slam dunk" transaction at first glance -- "You give us wall space; we'll give you money" -- is deceptive in its simplicity, says O'Reilly. Although many vendors are equipped to provide uniform services to centers, there are nuances.

For example, how are the telephones maintained? How often are the coin boxes collected? When are they collected? Is there a readily accessible audit trail for accounting? How often are commissions paid? Do commission reports illustrate revenues by phone? by center? at all?

Service, including but not limited to maintenance, is the one factor that differentiates a high-quality provider from trouble, says Anthony Palermo, vice president of sales and marketing for Atlanta-based Communications Central Inc. "Most everybody is paying about the same commissions; most everybody is using the same equipment on the customer's site," he notes. "The difference is the management of the company, the service mentality, and the systems [available] to perform a higher level of service."

Of course, maintenance capabilities are a high-profile concern. "Managers don't want to have someone walk into their office and say, "Hey. I just lost a quarter in the phone," Palermo says. "If they never hear anything about their pay phones until they get their checks every month, that's probably the best relationship."

Quinn agrees, noting, "Quality is the biggest issue -- quality of the phone, whether or not it works and whether or not it causes problems for the management office."

"Phones are mechanical devices. Phones do break," notes Ellman. "The question [for center managers] is, 'How fast can you fix it.'"

Palermo and Ellman both note that the availability of "smart boards" can enhance maintenance efficiency and response time. Using automated back-office technology, each of a vendor's pay telephones is dialed nightly, and a microprocessor downloads the telephone's self-diagnostic data (including maintenance information, number of calls made, coin amounts, etc.). Based upon the data provided by the telephone, a trouble ticket is generated, and a technician is dispatched.

In some cases, the smart board technology flags an existing problem, while, in other instances, it may notify the vendor of a problem before it happens. For example, "A pay phone box will hold about $200 in coins [before it jams]," says Palermo. "When it gets to $150, we create our own trouble ticket." The ticket is downloaded onto a technician's schedule, and collection of the box is added to his normal maintenance route.

Doing the math It has to be said: Pay phones, by their very nature, are all about money. Vendors and center managers are negotiating over the same small change, it might seem, but the outcomes can be significant.

O'Reilly notes that, although commissions are typically based upon a percentage of revenue generated by a particular phone or group of phones, the center manager has to be specific in its negotiations. "The real question is 'Percentage of what,'" he notes.

"The definition of 'phone revenue' is very ambiguous," he continues. For example, revenue can include coin calls, non-coin calls and dial-around calls (i.e., the customer dials a non-toll number to access long distance service). According to the vendors, commissions can be based upon any or all of these revenue sources, and the choice to be paid on a gross or net basis also is negotiable.

Pay phone revenue should not evoke images of a slot machine payoff, O'Reilly adds. "When you look at a shopping center -- whether it's a 10,000 sq. ft. strip center or a 1 million sq. ft. regional mall -- [the center's income] from a pay phone will probably average -- in their wildest dreams -- $100 per month per phone."

Once managers tally the monetary possibilities of their pay phones, the temptation is to install more than are needed, says Palermo. "That always becomes a tricky balancing act because [the vendor has] all the capital costs, as well as recurring costs associated with a phone. [Site owners] see it purely as a service and revenue generator to their customers and to themselves.

"You can't afford to put in 500 pay phones just because you have enough wall space for 500 pay phones," he continues. "There's a proper economic balance [to be had]."

What is that balance? According to O'Reilly, commissions will be affected by the number of phones involved; the cost of the equipment (e.g., line usage fees, or whether the center is requesting a $1,000 enclosure as opposed to a standard $250 enclosure); and the length of the agreement (i.e., how long the vendor has to recover its costs).

As a general rule, he notes, site owners should not be making less than 25 percent of the gross revenue on their pay phones. "For regional malls, I would think they should be making over 25 percent," he adds.

Commission ranges will likely vary according to property type, says Palermo. "Prime, A-type, enclosed malls command the most dollars just by design and by their investment and their demographics. They're going to have a lot of foot traffic, and the phones are going to do quite well," he explains.

"I would say that a top-tier mall can command 30 or 40 percent of gross or net, depending on the property," he adds. "Most properties would base it on gross because it's easier to account for."

Finally, notes Palermo, "For your second-tier, enclosed malls and strip centers, a lot of times you're rolling the dice as to whether you're going to make any money at all. So you have to be very careful as to how much commission you offer and how many phones you put on those properties."

Ultimately, says O'Reilly, managers should be knowledgeable and be specific in defining the center's commissions. Just as important, they need to weigh the commissions along with the services they are receiving.

"Service is taken for granted," he says. "If you want to roll the dice and go for the higher money, you're going to sacrifice something in service.

"If somebody's paying you exorbitant commissions, they can't be giving you the same quality service of somebody who's going to offer less," he notes. "It may be the difference between somebody servicing the phones once a week and somebody coming out every three weeks."

Changes ahead In addition to understanding how revenue sources and vendor costs can affect their commissions, center managers may need to familiarize themselves with the 1996 Telecommunications Act, much of which goes into effect this month. According to vendors, there are immediate changes that can have some effect on commissions.

For example, says Ellman, call rates, which have historically been tariffed, will now be market-driven. He speculates that most vendors will continue to meet the rates set by the regional Bell companies, but, if Bell raises its rates, other vendors will follow, thereby affecting gross revenues upon which commissions are based.

Additionally, pay phone vendors will receive compensation for dial-around calls. According to the Federal Communications Commission, when a caller dials an 800 number to access a long distance service, the recipient of that call must now pay a fee to the pay phone vendor. According to O'Reilly, this revenue will need to be specified in pay phone agreements. Shopping center managers will need to know the amount of the fee being paid, how it is accounted for and whether it is included in the totals upon which their commissions are based.

Finally, says O'Reilly, the Telecommunications Act makes it possible for the Bell companies to enter into long distance business (a formerly protected venue) as long as it can show that it is offering competition within its local territories. In order to show competition, he explains, Bell will have to offer exchange lines at a tariffed rate of 20 percent off to competitive local exchange carriers.

When that happens, pay phone vendors will be able to lease their lines from alternative providers and possibly lower their operations costs. If the vendor's margins are increasing, he says, it is a factor to consider when negotiating commissions.

"The Telecom Act of 1996 and the FCC Pay Phone Report and Order that was issued pursuant to that act really levels the playing field [for pay phone service providers]," says David Storey, media relations manager in the Birmingham office of BellSouth Public Communications Inc.

That could be good news for the astute shopping center manager. As competition among vendors becomes even more fierce, and if call rates and alternative providers do improve margins, there will be greater opportunity for the knowledgeable negotiator to maximize pay phone revenues.