Smart Money Betting Big on 'Dumb' Phone Cards

They are phone cards, yes, but they carry none of the familiar magnetic stripes of ordinary telephone calling cards, or the computer chips of smart cards. No bill for long-distance calls arrives in the mail each month. In the shorthand of high-tech wizards, they are "dumb cards," merely giving people a prepaid way to make calls for a set amount of time.

But their simplicity is their appeal. They are so low-tech, telephone industry experts say, that they will undoubtedly become part of the future of just about every shopper or traveler in America.

"They're easy to use, and there's no surprise when you get the phone bill," said Wendy Brand, a preschool teacher in Houston who paid $5 for eight minutes of calling time on the first card she purchased, at a supermarket a month ago.

Mrs. Brand simply called an "800" telephone number on the back of her card and, after a signal, punched in a personal identification number, also imprinted on the card. Then she punched in the telephone number she wanted to call. Whether she called Dallas or Denver, her $5 card entitled her to the same amount of time on the phone.

"It's easier than hunting for change at a pay phone at the airport, especially with the kids," said Mrs. Brand, who has two young children. "A lot of people are putting them in their handbags for an emergency. It gives you a sense of security."

Use of prepaid 800-number telephone cards has grown exponentially in the last year from novel promotional gimmicks (including one offered by McDonald's to induce sales of burgers and fries) to an entire industry of entrepreneurs who are scrambling to get in one of the latest, and most lucrative, phone services.

Next week, Hallmark Cards Inc., in association with the Sprint Corporation, will offer what trade magazines say are more than a million phone cards attached to traditional greeting cards. The phone cards are even showing up in pregnancy testing kits so customers can "share the news."

"In the last year there has been an explosion of interest in these cards," said Harris Shapiro, an investment banker for Whale Securities in New York and one of the first analysts to study the fledgling industry. Uses Are Growing

Every day companies come up with new uses for the cards, and more and more are selling them as convenience cards for those whose credit rating does not allow them to qualify for telephone credit cards.

The use of high-tech smart phone cards is also likely to increase, analysts say, but the advantage of the 800-number cards is that nothing more than a touch-tone phone is needed. The prohibitive cost of new, expensive telephone gear for reading magnetic stripes is likely to delay the spread of more high-tech cards in the United States, phone industry executives say.

There are other advantages, too. Phone cards do not leave a paper trail of phone calls. Corporate offices can give them to traveling employees as a way to limit expenses on the road. And parents can give them to children when they are away at camp as a less costly alternative to phoning home collect. Last year, an estimated $75 million worth of time was sold on phone cards in the United States, said Marc Ostrofsky, publisher of Telecard World, a Houston-based trade publication. He said more than 350 companies were vying to offer phone-card services, compared with fewer than 100 a year ago.

Mr. Shapiro projects that the 1994 revenues for phone time sold in this way will be $100 million to $300 million, "and I can easily see a billion-dollar market in 1995," he said. Larry Brilliant, the chief executive of Brilliant Color Cards in San Rafael, Calif., the largest American printer of telephone cards, has prepared them for more than 100 companies. He is currently negotiating with some of the regional Baby Bell companies, as well as with nearly every Hollywood entertainment conglomerate and many Fortune 500 companies to design promotional tie-ins and other uses for 800-number cards.

"This business came out of nowhere, and is now one of the hottest things in the selling and marketing environment," said Bruce Bolger, director of the Selling and Marketing Megashow, a trade show in New York earlier this month. A Billboard in a Pocket "Most of these are small businesses and young entrepreneurs," Mr. Bolger said, "not just AT&T and MCI," although AT&T, Sprint and the MCI Communications Corporation all offer 800-number cards. Many phone companies are also making money from selling minutes of telephone time to 800-card providers. As an advertising medium, the cards offer at least three opportunities to pitch to consumers. The face of the card is a "billboard" for ads for services, causes or charities. The reverse side provides space for another promotional message. Callers may also hear a brief advertisement when they activate the 800 number.

"From a business standpoint, that's worth a lot," Mr. Ostrofsky said.

The 800-number cards have been called the "poor people's calling card," because they are an easily available substitute for people who do not qualify for credit. With that in mind, Greyhound Lines Inc. has offered the cards in vending machines in bus stations.

Mr. Shapiro, the analyst, said that 25 million Americans do not have telephones and 37 million do not have credit cards or long-distance capability on their phones. The phone card sellers typically buy bulk time from long-distance companies for 15 to 25 cents a minute. The companies sell the cards for 35 to 60 cents a minute.

For calls of as little as three to five minutes, the cards may be cheaper than conventional phone company credit cards because of the initial surcharge, averaging 75 cents, for using a credit card, Mr. Shapiro said.

But he said that for a call lasting longer than a few minutes, it might be less expensive to use a conventional calling card because the per-minute costs declined over time. Concern About Forgeries

Those in the phone-card industry worry about cards with forged 800 numbers or personal identification codes. Other fraud possibilities include "short-timing" -- selling a five-minute card that provides only three minutes of time, or no time at all.

And just as telephone credit card numbers are stolen, both the 800 number and the identification number can be noted by "shoulder surfers" lurking around pay phones. And the 800-number card can be used by anyone if it is stolen, because the identification number is printed on it.

While the immediate outlook for the cards is rosy, some phone card executives worry that America is a creditor nation and fear that some consumers may resent paying up front for phone calls. Also, there is no refund if the cards are lost.

Others in the industry see a shakeout soon in the number of phone card companies. As a result, many are specializing, aiming at college students, say, or the Hispanic or Asian-American market.

Either way, the cards "will change the entire way we think about telephone service," said Mr. Brilliant, the card maker. "Phone service is thought of as a utility like electric power or water, one that we take for granted. Phone cards make it a quantifiable commodity with a price -- one that you can barter, buy or sell."