Ruling May Spur Phone-Cable Competition

In a potentially huge step toward competition in cable television, a federal judge Tuesday cleared the way for the nation’s phone companies to begin offering video programming in their home territories.

The ruling by U.S. District Judge T. S. Ellis III in Alexandria, Va., struck down as unconstitutional a provision in the 1984 Cable Act banning the phone companies from providing video services in areas where they own the monopoly phone system.

Although the ruling came on a challenge brought by Bell Atlantic Corp., the owner of telephone companies in the Mid-Atlantic states, it is widely believed to apply equally to the rest of the nation’s phone companies.

Several telephone companies said that, if the decision survives a possible appeal by the federal government and cable operators, the Baby Bells will begin competing directly with their local cable systems within the next two years.

“Within our five-state telephone territory, we look forward to the possibility of offering new options in video services,” said Jim Kahan, a senior vice president with Southwestern Bell Corp. in St. Louis.

If the ruling stands, it will accelerate the convergence of telephone, television and other telecommunications technologies in the marketplace. The resulting face-off between communications giants could give consumers more options for less money than ever before.

“There is no question but that there are going to be more choices available to the consumer,” said Sharon Armbrust, a telecommunications analyst at Paul Kagan Associates in Carmel, Calif. “And we have to hope that this will translate into lower prices.”

However, some analysts worry that the telephone companies’ entry into cable will have the opposite effect. They argue that the phone companies may use their new freedom to purchase existing cable operators, reducing competition rather than increasing it.

“I foresee a dance of the dinosaurs, not a clash of the titans,” warns Berge Avazian, of the Yankee Group, a Boston telecommunications research firm. “It will be one monopoly operator buying another monopoly.”

Regardless of the effect on consumers, Tuesday’s ruling is a major victory for the phone companies in their fight against cable operators for control of the new telecommunications networks that are rolling out across the nation.

Telephone stocks jumped on the news. Bell Atlantic was up $2.625 to close at $59.375, Pacific Telesis was up 87.5 cents to $52.75, US West was up $1.25 to $45.75 and Bell South rose $1 to $55.125.

“The decision is going to be bullish for the whole industry,” predicted Michael Balhoff of Legg Mason Wood Walker.

Some cable stocks also rose, evidently on the notion that phone companies might want to buy them. Viacom, for example, rose $2.75 to $65.50. Comcast Corp. rose $1 to $28.75. But giant Tele-Communications Inc. was unchanged at $23.625.

The cable industry nevertheless criticized the ruling.

“Telephone companies . . . have powerful financial incentives to pad customers’ bills with expenses that should be paid by shareholders--not telephone ratepayers,” said Decker Anstrom, acting president of the National Cable Television Assn.

The ruling comes against an accelerating rush of technology that is blurring the line between telephone and cable services. As the signals that carry each are translated--or digitized--into electronic blips, telephone and cable television networks become interchangeable.

These developments are giving rise to a host of new services that combine video images with two-way telephone calling through the TV set. These services include at-home shopping, video-on-demand entertainment and paperless bill paying.

But while technology may permit the telephone and video services to converge, the web of monopoly restricting regulations enveloping telephone and cable operators has prevented it.

The Cable Act provision challenged by Philadelphia-based Bell Atlantic was originally designed to prevent phone companies from using their vast ratepayer resources to muscle aside smaller cable operators attempting to do business in their territories. (Phone companies are allowed to own video services outside their service areas.)

Phone company executives have long argued that cable companies no longer need this protection. In December, Bell Atlantic Video Services Inc. and the Chesapeake & Potomac Telephone Co. of Va., both subsidiaries of Bell Atlantic, filed suit in December challenging the constitutionality of the provision on free-speech grounds.

Bell Atlantic plans to offer video entertainment and information services to about 60,000 customers in Alexandria, using the network that Chesapeake and Potomac Telephone expects to build during the next couple of years.

“Local subscribers used to have only one choice. They had to take it or leave it,” said Jim Young, general counsel for Bell Atlantic Corp. “Now consumers will have additional choices.”

The Justice Department, which argued for keeping the ban in place, has not decided whether to appeal, spokesman Joe Krovisky said.

“This decision will undoubtedly be appealed,” insisted interim FCC Chairman James Quello. “One way or the other we’ll appeal it because we have to defend the law.”

Quello said he and other commissioners have recommended that Congress let phone companies into the cable business with safeguards to prevent them from using funds from local phone units to subsidize new ventures.

Lawmakers also expressed wariness over the ruling.

“Telephone consumers could find themselves unwittingly subsidizing cable TV operations even if they do not subscribe,” said Rep. Edward Markey, who chairs the House telecommunications subcommittee. “If the telephone companies avoid competing with cable simply by buying the existing systems, we will simply have substituted one cable monopoly for another.”