Wake-Up Call : Baby Bells Get Cracking in the Information Revolution

It was a remarkable about-face. Pacific Bell announced Wednesday that it will team up with cable TV companies in an effort bring the next generation of entertainment and information services into California homes and businesses over the next two decades.

But it wasn’t an isolated event. Once a collection of sleepy utilities that divided the nation’s phone business into a collection of monopoly fiefdoms, the Baby Bells are now fighting to exploit their $85-billion-a-year pipeline into America’s homes and offices with an arsenal of increasingly unconventional weapons.

Wires that once carried only conversations are now beginning to transmit news, entertainment and information. Throughout the country, no fewer than six dozen experiments--many in groundbreaking partnerships with traditional phone company competitors--are probing consumer interest in services ranging from dial-up movies to paperless bill paying to elementary school tutoring.

At stake is an emerging multibillion-dollar industry that combines telephone, computer and television technology to deliver a broad array of entertainment, information and services to homes and businesses. The Baby Bells are hardly alone in chasing this new market: cable operators, newspaper publishers, computer manufacturers, Hollywood studios and software publishers are all scrambling for a piece of what is expected to be the largest new business opportunity of the decade.

But the race is most urgent for the Bell companies, which know that if they lose, they stand to hand over a large piece of their local telephone franchise to the cable companies.

Tele-Communications Inc., for example, the Denver-based cable giant, is set to announce next Monday plans to wire nearly all of its 10 million customers with fiber-optic cable, giving the company an opportunity to deliver huge quantities of programming, data and services.

Pacific Bell’s decision to openly court the cable companies represents the strongest indication yet that the phone companies realize that they cannot beat the cable companies and shouldn’t try.

“It’s not a winner-take-all game anymore,” said Lee Camp, Pacific Bell’s president for information services.

The Baby Bells aren’t just going after consumers. They’re trying to push back legal barriers as well.

Bell Atlantic broke with polite tradition and took the government to court to win some regulatory slack. Chicago-based Ameritech has petitioned the Federal Communications Commission to rewrite the rules entirely for the country’s telecommunications industry. And Southwestern Bell in February bought itself a cable TV operation to become an official player in what most telephone companies consider the mother lode of the emerging Information Age: home video entertainment.

“The worst thing that could happen is to keep the status quo,” says Richard H. Brown, Ameritech’s vice chairman.

To that end, all the Baby Bells are looking at a wide range of new services that can be delivered over the phone network that reaches into virtually every home and office in America.

Pacific Bell has teamed with Dow Jones & Co. to offer subscribers to its voice mail service an optional, personalized news service. With a few touches on the keypad, subscribers can listen to the latest scores from their favorite sports teams, check on their stock portfolio and get a quick dose of headline news.

Pacific Bell has also developed software that allows students at six schools throughout the state, including Brea-Olinda High in Fullerton, to tap into the National Science Foundation’s InterNet computer network to gather research materials for their studies.

Many of the new developments are happening behind the scenes. Little change is apparent to the average consumer, who, for the most part, still gets only a dial tone from the phone company and such familiar TV fare as HBO from a cable operator.

One reason is the regulatory obstacles confronting the Baby Bells in their efforts to take part in the ongoing information revolution. Federal law bars telephone companies from owning cable TV systems in their service territories.

Further, many state and federal telephone regulations are still rooted in the phone companies’ monopoly status, which is fast eroding. Business customers increasingly can bypass the Baby Bells to access long-distance networks, for example, via competing companies that are owned, in some cases, by cable concerns.

The Baby Bells also have to contend with U.S. District Judge Harold H. Greene, whose ruling set them free from AT&T; in 1984 but remains one of the biggest obstacles to their entry into the emerging Information Age. Over the last nine years, the 70-year-old jurist has refused to ease many of the restrictions imposed by the historic breakup agreement for fear of unleashing seven behemoths where once there was one.

Although the courts forced him to allow the Baby Bells to offer news and other information over their networks 18 months ago, Greene has consistently reaffirmed the ban on their entry into the long-distance phone business. This restriction, the Bell companies complain, prevents them from offering cable entertainment programming even outside their service territory, because carrying video signals bounced off a satellite is considered a long-distance service.

“We try hard not to personalize this, but Judge Greene’s restrictions are keeping us out of markets that we want to be in,” says Ron Stowe, a Pacific Telesis vice president in Washington, D.C. “There’s no justification for it.”

The Baby Bells are feeling some optimism from the Clinton Administration’s intense interest in telecommunications technology and the information and services it can bring to America’s doorsteps. In addition, new rumblings on Capitol Hill indicate that Congress may be ready to address the complex legal and economic issues generated by the new information technologies.

However, long-standing opposition to any significant changes from newspaper publishers and long-distance telephone carriers, both of which fear business loss to the Baby Bells, is likely to remain unchanged.

Whatever the outcome, several telephone companies are moving wherever they can find room. In just the last few months, several Baby Bells have struck groundbreaking deals, including some with their archrivals, the cable companies.

Southwestern Bell agreed to pay $650 million for two cable franchises in suburban Washington; pending Judge Greene’s approval, Southwestern would become the first of the Baby Bells to own a cable TV system.

NYNEX’s New York Telephone signed with Liberty Cable to bring television and other video services over its network to about 2,000 Manhattan customers.

Bell Atlantic’s New Jersey Bell telephone unit announced two similar deals. In one, Sammons Communications, the nation’s 15th-largest cable operator, will use the Bell Atlantic phone network to deliver its cable programming to 12,000 customers. In the other, FutureVision will use the phone company’s wires to serve about 38,000 customers. The Bell Atlantic deals are considered noteworthy because they are set to run for a minimum of 10 years.

Says Arthur Bushkin, Bell Atlantic’s president of information services: “We’re going to be a leader, but this is too big a market to go it alone.”

For How Much the Bells Toll

The regional phone companies are known as Baby Bells, but that doesn’t mean they’re small. As the chart shows, their average revenue exceeds $10 million each.

1992 revenue (billions) Ameritech: $11.2 Bell Atlantic: $12.6 Bell South: $15.2 NYNEX: $13.1 Pacific Telesis: $9.9 Southwestern Bell: $9.3 U.S.West: $13.3

Source: Regional Bell Operating Companies

Ringing in the Future

Here’s a sampler of new initiatives undertaken by the Baby Bells.

* Ameritech: “Project Homeroom” allows students, parents and teachers at seven Chicago-area schools to gather news and information from personal computers over ordinary telephone lines. Parents can communicate with teachers via electronic mail. Partners include IBM, Prodigy, AT&T.;

* Bell Atlantic: Two New Jersey cable companies will be using Bell Atlantic’s phone network to carry programming to customers. Bell Atlantic is also testing ways to bring video and other services into local classrooms. Partners include two AT&T; divisions.

* NYNEX: About 2,000 Manhattan residents will be able to get cable television over their phone lines in an experiment underway with Liberty Cable. A separate experiment with Northern Telecom is evaluating videophone technology for possible use in business video-conferencing and at-home education programs.

* Pacific Telesis: Voice mail subscribers can get personalized news, sports and financial updates from Dow Jones & Co. PacTel is also evaluating desktop, PC-to-PC video-conferencing technology with IBM and Northern Telecom.

* Southwestern Bell: In a pair of at-home learning tests, students in selected rural areas of Oklahoma and Kansas are using two-way voice and video technology for their schooling.

* U.S. West: A test of dial-up movies with Tele-Communications Inc. and AT&T; is nearing completion. In a separate test with AT&T;, the company looked at customer interest in voice recognition to control such features as voice mail, call waiting and call forwarding.

Source: Salomon Bros., New York