directory assistance and information search

Telephone companies operated the first network-mediated, mass-market information search service.  It’s called directory assistance. Make a telephone call, voice a query, and get back relevant information.

By some narrow metrics, U.S. telephone companies have quite successfully developed this information search business.  Prior to 1974, directory assistance in the U.S. was a freely offered ancillary service to regular telephone service.  At that time, directory assistance had significant marginal cost:  additional human operators were required for additional information lookup and query response.  Telephone company representatives and economists argued that free directory assistance is economically inefficient and unfairly advantages heavy users of directory assistance.[1] Those arguments prevailed.  Directory assistance became a pay-per-use information search business.

The price per call for directory assistance has risen substantially since the mid-1970s and the monthly allowance of free directory-assistance calls has fallen.  Most jurisdictions that established charges for directory assistance in the mid-1970s set a five-call-per-month allowance for free directory-assistance calls. Subsequent calls cost 10 cents or 20 cents per call. Current allowances for free directory-assistance calls generally are lower than five calls per month.  Allowances continue to be reduced.  Recent telephone-company petitions to state regulators successfully reduced the allowance from three calls to two in Virginia, and from three to one in Tennessee.  In 2007, the average charge for a directory-assistance call from a landline phone was $1.28. Hence, adjusting for the rise in the consumer price index, real directory-assistance prices are two to three times higher in 2007 than they were in 1975.  That increase in price is particularly impressive given the shift from human operators to automated systems.  Automated systems undoubtedly provide significant cost savings.[2]

Telephone companies have also successfully removed directory-assistance wholesale service from federal telephone service price caps.  In 1992, regional Bell Operating Companies (RBOCs) reported $209 million in federal price cap revenue for offering directory assistance to other telephone companies at a wholesale price averaging 28 cents per call. Reported directory assistance calls and revenue subsequently fell, with reported directory assistance call volumes falling 5% per year from 1992 to 1996, and  48% per year from 1996 to 2000.  Other industry data indicate that total interlata directory assistance calls were growing about 8% per year from 1992 to 1999, and total directory assistance business revenue was growing about 10% per year in 1994.  By 2009, RBOCs reported almost no directory assistance calls or revenue, while the total value of the retail directory service business for all service providers had grown to roughly $9 billion.[3]  The reported fall in RBOC regulated directory assistance calls and revenue may have come from a shift to automated provision of wholesale directory assistance service.[4] In any case, RBOCs successfully removed in practice directory assistance wholesale service from federal price caps.

Despite telephone companies successes in establishing new charges, raising prices, and escaping regulation, telephone companies failed to develop vitally important business opportunities in information search.  Information search changed from high-marginal cost operator-provided services to low-marginal-cost automated services.[5]  With low-marginal-cost, network-based services, encouraging use of free services can be a valuable way to develop businesses.  Google and others, not telephone companies, have prospered from the development of the information search business.

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Data: U.S. directory assistance service statistics, 1974 to 2009 (Excel version).

Notes:

[1] See McDonald, J., “The Use of Management Science in Making a Corporate Policy Decision — Charging for Directory Assistance Service,” Interfaces, v. 7, n. 1, pt. 2, Nov. 1976; Daly, George and Thomas Mayor, “Estimating the Value of a Missing Market: The Economics of Directory Assistance,” Journal of Law and Economics, v. 23 (1980). pp. 147-166; Zachry, Charles C. Jr, “Usage-Sensitive Pricing for Directory Assistance,” Public Utilities Fortnightly, v. 100, n. 12 (Dec. 8, 1977) p. 23. These works emphasized the value of managerial science and economic analysis.  Introducing charges for directory service reduced the volume of directory assistance calls by about two-thirds.  See Daly and Mayor (1980) p. 155; Zachry (1977) p. 23.

[2] Here are data on the directory assistance prices and free-call allowances established in the mid-1970s and those about 2008.  On June 11, 2008, the Virginia Telecommunications Industry Association petitioned the Virginia State Corporation Commission to eliminate the directory-assistance free call allowance.  The Commission established a docket, issued an order for notice and comment, considered the 21 responding parties’ comments, and issued an order on Dec. 12, 2008.  That order reduced the free-call allowance from three to two per month.  On Jan. 8, 2009, the Tennessee Regulatory Authority (TRA) approved a traiff reducing Embarq’s directory-assistance free-call allowance from three to one (reconsideration denied in TRA order on Apr. 7, 2009). TRA approved a reduction in BellSouth’s free-call allowance from three to one on Apr. 17, 2007. See Exhibit 1 in relevant Citizens Telecommunications Co. filing. In the mid-1970s, unlimited free directory-assistance calls were typically allowed for handicapped persons, users of coin-operated phones, hospitals, and hotels.  They are now typically allowed only for handicapped persons.

[3] For data and sources, see the directory assistance business statistics. The RBOCs also collected considerable revenue ($84 million in 1992) through an ” information surcharge.”  The information surcharge is a separate, wholesale per-minute charge applied to all originating and terminating interlata switched access minutes of telephone companies’ interconnecting interlata telephone traffic. According to AT&T in 1998, the information surcharge had been applied since 1985 on the basis of an interim waiver for the recovery of  “costs relating to white pages and other undefined directory assistance costs.” The CALLS access reform, enacted in 2000, eliminated the information surcharge through targeting of price reductions required under price caps (see 47 CFR 61.45 (i)(2)(ii)).

[4] Directory advertising (Yellow Pages) historically has been a highly profitable, non-regulated business of telephone companies.  In recent years, the Yellow Pages business has been under acute competitive pressure.  In an order released on Jan. 23, 2001, the FCC ruled that local telephone exchange providers must offer nondiscriminatory access to their directory listings, at nondiscriminatory and reasonable rates, to competing directory service providers. See FCC Order, Provision of Directory Listing Information under the Telecommunications Act of 1934, 16 FCC Rcd 2736 (2001) [as MS Word document].  This order cannot account for trends in directory assistance calls prior to 2001.

[5] Based on Bell information, the marginal cost of directory assistance was estimated to be 19 cents per call in 1977.  See Daly and Mayor (1980) p. 157.  Currently many companies, such as Jingle, Bing, and Google, provide free directory-assistance services.

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