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September 28, 1997

Europe Offering Free Calls, But First, a Word From . . .
By JOHN TAGLIABUE

VIAREGGIO, Italy -- Filippo Simonelli lifts the receiver of his phone and punches some buttons. A voice barks into his ear: "Fresh pizza? Ristorante Buon Amico. Via dei Campi, 24." No, he did not call a pizza parlor. He is part of a curious experiment in which some Europeans are being offered free calls if they will also listen to commercials.

Simonelli, who runs an insurance business on the main boulevard of this Mediterranean resort, listens to the ad with the same aplomb shown by local pedestrians when sidestepping careering Vespas.

Is nothing safe from advertising clutter? Apparently not, judging from the response of those who have tried it. "I'm not only satisfied; I'm telling everyone about it," Simonelli said, as gleeful as a child getting free ice cream.

The only drawback, he said, is that at peak hours the phone system becomes overloaded. And that, said Paolo Balestri, the advertising and television executive who introduced the service to Viareggio, is because "we have not been able to get equipment fast enough to meet demand" after announcing the free service in local newspapers this summer.

Balestri's company, Promotional System Phone, has 12,000 subscribers in Viareggio and two neighboring communities on the west coast of Italy north of Pisa. By next year, it expects to spread to more than 100 cities and to sign up 700,000 customers.

And Italians are not the only ones toying with phone ads. In Sweden, a company called Gratistelefon, which says it invented the idea, has 30,000 subscribers, with more signing up every day. In Norway, the national phone company, Telenor, is testing the idea.

In Germany, O.Tel.O, a joint venture by two large utilities, Veba AG and RWE AG, plans to start a pilot project in October in Berlin, where, after signing up 5,000 users, it had to turn thousands more away.

To be sure, the concept is in its infancy. Yet leading ad agencies and their corporate clients are watching baby's first steps closely. And the big national phone companies, which provide the phone lines, are waiting to see whether free calls increase their volume.

"Sounds like a nightmare" -- that was the first reaction of Marina Marchetti, a spokeswoman for Telecom Italia, Italy's national phone company. But Telecom is "following attentively what kind of impact" the new service has on its traffic volume, she added. If it catches on, Telecom will not rule out starting a system of its own, she said.

Some big corporations, with huge advertising budgets, are taking a wait-and-see approach.

Procter & Gamble's large German unit, for example, agreed at first to take part in the Berlin experiment. But even though a company spokeswoman, Christina Jacob, described the new phone service as "for sure, a very interesting tool" for advertising, Procter & Gamble withdrew, preferring to await the results of the Berlin test before deciding whether to buy ad time.

The executives of some ad agencies are also cautious.

Marco Testa, the president of Armando Testa SpA in Milan, a leading Italian agency, said he feared that primarily low-income families would be interested, offering an unpromising population sample to potential advertisers. Moreover, he said, the phone ads' lack of visual images poses creative limitations, as does their brevity. Most ads average three to 10 seconds.

"From an advertising point of view, it's in a very experimental phase," he said. "At best they are useful for very local businesses, for the moment at least."

Could such phone ads come to the United States? David Frail, a spokesman for Bell Atlantic in New York, speculated that the Federal Communications Commission might not approve them, given its past reluctance to allow broadcasting over phone lines.

But in Washington, a spokeswoman for the FCC's common carrier office said she knew of no ruling that would apply. And if such service was restricted to local calls, she said, as it generally is in Europe, regulation would be up to the states.

Few people in the phone business in the United States have even heard of the system. David Hoover, a telecommunications analyst at Legg Mason Precursor Group in Washington, said he was not aware of it, though he noted that Internet access providers in the United States sometimes offered free service paid for by commercials.

Kevin Doyle, a spokesman for BellSouth in Atlanta, said that he had read recently about free phone systems but that they "might take some getting used to." But he was definitely interested, saying, "Certainly, as a going business, we would look at anything that would prove to be a money maker."

The advertising world, however, has gotten wind of it. Mitch Burg, executive vice president of the Media Edge, a unit of Young & Rubicam in New York, said the group had been approached about possibly producing such ads and was intrigued by the idea. It remains to be seen, he said, whether it will prove feasible for advertisers, but "if it pays off, we'll try anything once."

Meanwhile, the companies that pioneered the system are not discouraged by the naysayers. They are pushing ahead with fresh investment to expand service and are aggressively seeking to sell their systems abroad.

The Swedish Gratistelefon has sold its software in Australia and the Philippines and is talking with potential partners in the United States. Balestri said he was negotiating with a potential partner in Washington.

Europe's free phone systems differ from country to country, but in Viareggio, subscribers pay 35,000 lire, about $20, for a three-year contract for the service. After providing Balestri's company with personal data, like age, sex, size of family, type of automobile and living quarters, customers are then issued personal identification numbers.

To make a call, subscribers dial a toll-free number and are welcomed by a five-second commercial. After punching in their identification number, callers hear a second commercial, after which they make their calls. Calls can last only 15 minutes, but the subscribers pay nothing, with the cost covered by advertisers' fees.

For out-of-city calls, subscribers in Italy pay 70 percent of the usual rate; international calls are not included. At the end of 15 minutes, there is a warning signal, and 10 seconds later the caller is disconnected but can phone again immediately.

Balestri acknowledges that he was inspired, at least in part, by Gratistelefon and its founder, Carl Ander, who says he hatched his brainchild about two years ago while working for Ericsson, the Swedish telecommunications group.

"I always thought that somehow, in the future, telecommunications and the media would be increasingly closely linked," said Ander, 32. "So I thought that if people call in and hear a message, maybe they could get, say, 10 minutes for free."

In 1996, Ander started Gratistelefon, which offers its service in Sweden under the name Free Phone. Though it functions much the way the one in Viareggio does, there are significant differences.

For one thing, Swedish subscribers can make calls of up to one hour. As in Italy, international calls are not permitted, but in Sweden both local calls and calls to other cities are free.

To bring in the extra revenue, Gratistelefon delivers its advertisers' messages not only to the caller but also to the person being called. And while the conversation is uninterrupted in Italy, callers in Sweden hear a 10-second commercial after the first minute and a different one every three minutes until the end of the call.

And in Sweden, the system is interactive. After listening to a 10-second ad for, say, the fall collection of Hennes & Mauritz, the big Swedish clothing chain, a caller will be told, "If you want our fall catalog, press 'one."'

Gratistelefon's computer then provides Hennes & Mauritz with the address of the caller, who is mailed the catalog. Ander sees possibilities for further interactivity, like the actual ordering by phone of products or services.

In Italy, a commercial cannot be played to the person being called, a limit imposed after the government's privacy ombudsman objected. Italian authorities also banned ads for tobacco and alcohol, to prevent children from hearing them.

Ander said Swedish authorities raised no such objections, though Gratistelefon imposed some rules of its own, agreeing, for instance, not to accept tobacco or alcohol ads or religious or political announcements.

Explaining how he got started, Balestri said his experience with telephone marketing convinced him that consumers were not reaping the benefits of the changes sweeping European phone companies as national monopolies crumbled.

While corporate customers saw new services push their costs down, he said, "no one thought of ordinary families." Thus, Balestri limited his company's service to families and small businesses with two or three lines.

Subscribers say the savings are striking. Simonelli, for instance, said his phone bill for July and August, the first two months he used the system, was the equivalent of $613, down from $1,037 in the corresponding period last year.

"If I paid more attention, I could save even more," he said. When in a hurry, he often dials a number directly to avoid the delay. He is also embarrassed to use the service if a client is in the office, he said.

Advertisers say people follow up on the ads.

Fulvio Passaglia runs a tire store on the edge of Viareggio. For July and August, he paid the equivalent of $635 to advertise his products to Balestri's subscribers. "It's working," he said, though he could not say how many new customers the ads brought in. "I'd say I'm very satisfied."

In selling the system to skeptical advertisers, the free-phone companies emphasize that the detailed information they have about their subscribers allows them to aim ads effectively.

"We can target certain groups very accurately," said Guenter Schamel, the project director for O.Tel.O in Berlin. "If you want to reach only male subscribers, living in Berlin, who drive BMWs, we can do that."

That feature, he said, will enable O.Tel.O to charge ad rates higher than those for radio ads in Berlin, which cost $365 to $560 for a 30-second spot. In Sweden, advertisers are billed according to the number of ads broadcast.

For the big phone companies whose lines are leased by the free-phone agencies, the question is whether phone traffic will increase if commercial sponsors, and not consumers, pay the bill. "Is this a substitute service," Schamel asked, "or will it generate new volume?"

But Balestri said he had little encouraging news for the phone companies.

Almost two months of service in Italy showed that calling free did not make people phone more, he said. The average call remained about 123 seconds, he said, and the greatest frequency remained on Friday night, when Italians traditionally phone friends to make weekend plans.

"It doesn't change people's habits," he said.



 
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