Paving the Way for New Services : Pac Bell Must Win FCC Approval Before Implementing Its Plan to Provide Cable, Interactive Video

Pacific Bell’s announcement last November that it planned to spend $16 billion over seven years resurfacing its network in California for information highway services was hailed by many as one of the most ambitious and farsighted plans by any local phone company.

Nine months later, Pac Bell is busy implementing that plan with its technology partner, AT&T.; It includes upgrading its old twisted copper wire network to a hybrid system of high-speed fiber-optic and coaxial lines, the latter being the kind used by cable companies to deliver video. The Reseda area is one of four hubs throughout the state that are starting points for this new network.

Pac Bell hopes that by October it can offer the first Reseda residents cable television, to be followed by a host of interactive services including movies on demand, home shopping, video research libraries and video games. “There’s a lot of excitement in our business,” said Patrick McChesney, who is heading up installation of Pac Bell’s network in Los Angeles. “We’ve got crews out in the field today actually building the network.”

And on Thursday, Pac Bell and its San Francisco-based parent, Pacific Telesis Group, announced its first deal with a video programming provider. Texas cable executive Ron Dorchester and his Anchor Pacific Corp. have agreed to secure programming for 35 Pac Bell cable TV channels, and for another 12 to 15 channels to be reserved for broadcasters.

There’s just one hitch--and it’s a big one. The Federal Communications Commission has yet to approve Pac Bell’s request to provide these video services throughout its phone service franchise. Pac Bell admits that the decision has already taken longer than it had expected. Originally Pac Bell intended to have 45,000 homes in the Reseda area switched on to the new network by the end of the year; now it says that won’t happen until March 31. Without the FCC’s go-ahead, Pac Bell remains what it has always been--a local phone company.

The FCC has made it clear that it supports the principle of phone companies entering the video delivery business. What’s more, a year ago, Philadelphia-based Bell Atlantic Corp. won a federal court case overturning a provision in the 1984 Cable Act that prevented phone companies from selling video programming to subscribers in their telephone service areas. And legislation is wending its way through Congress that would clear the way for phone companies to deliver video.

But each phone company’s plan to provide these new services is different. And Pac Bell’s application is particularly controversial--in part because the sheer scope of it dwarfs most other phone company requests to provide video in small markets.

When Pac Bell announced its $16 billion spending plan, it was called the most extensive and costliest such investment by a phone company. Since then, other phone companies have announced similar plans, but all these big projects include money that the companies would spend anyway upgrading their phone networks. Pac Bell normally spends about $1 billion a year improving its phone network. Still, the company’s plans to spend $9 million over seven years to set up an interactive system is considered one of the biggest such projects by a phone company.

Although Pac Bell is now hoping for an FCC decision in the next month or two, the agency is not tipping its hand about the timing. “The FCC has made resolution of these applications a very high priority,” is all that FCC senior policy adviser Donna Lampert would say.

Not surprisingly, Pac Bell is encountering fierce opposition from the cable television industry. Cable system operators argue that phone companies will boost phone bills to subsidize the costs of providing these new video services.

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Glenn Semow, director of state regulatory affairs for the Oakland-based California Cable Television Assn., contended that Pac Bell phone customers would pay for 95% of the cost of wiring the network for video services. Pac Bell would then charge video programming suppliers artificially low prices for using the network, he said. And when phone companies themselves are one day allowed to produce their own video content--as is expected--cable companies fear they won’t be able to match phone companies’ low video prices.

“We know they’re going to be in our business,” Semow said. “What we want to make sure is that when they do come into our business we compete on the same terms.”

Phone companies hotly contest the cable industry’s arguments. “The cable industry is working very hard to preserve its monopoly position,” said Pac Bell Vice President of External Affairs Steve Harris. “They are throwing everything they can into stopping this, and nowhere is the battle more fierce than in California.”

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Harris said that phone customers’ rates will not increase to pay for installing the network. The cost of wiring the network will be paid with money Pac Bell would spend anyway modernizing its phone system, and through its cost savings from using the more efficient fiber and coaxial wires, he said. What’s more, Harris said, the FCC must approve the tariff rates that Pac Bell would charge program suppliers.

Pac Bell’s wiring plan is “brilliant,” said Jonathan Seybold, the Malibu-based publisher of Seybold Reports newsletters on publishing and digital media. While Bell Atlantic has been the trailblazer for other phone companies in winning approval to deliver information and entertainment services, he said, Pac Bell has been looked to as the trendsetter on the wiring side.

Nonetheless, Seybold warned that a crucial issue for regulators is Pac Bell’s proposed method of accounting for the cost of building its system.

The stakes for Pac Bell loom large because phone companies are facing a new world in which they’ll have competition in their local markets for the first time. As long-distance telephone, cable and wireless communications companies vie for local phone business, the local phone companies are convinced they must provide new information and entertainment products to keep the customers they have long taken for granted.

In the meantime, Pac Bell is forging ahead with those parts of its new network that it says are allowed under current regulations. Although the phone company cannot install or even buy equipment now that would be used to deliver video, it is upgrading those parts of its network that it says will provide superior phone service. When it’s completed, the capacity of the new system will be so great that McChesney sees no limit to the voice, video and data signals that could flow through these fiber-optic lines.

In May, crews in northern Reseda began to hang on phone poles the equipment for holding the new cables in place, and are now beginning to hang the cables themselves. The fiber-optic lines will run from Pac Bell’s central office in Reseda out to 103 “nodes” in the community that are something like electronic way stations for the transmission of signals. Each node will then feed coaxial cable to about 450 homes.

A second Los Angeles beachhead for Pac Bell’s new network will begin in Inglewood in October. Installation is also under way in Orange County, San Diego and San Jose.

From Reseda, construction of the network will move to Canoga Park, followed by Calabasas, Agoura Hills, Van Nuys, Sherman Oaks and North Hollywood by 1996. Pac Bell is still formulating its deployment plans beyond those areas and remains optimistic that approval of its current plan is imminent.

The Clinton Administration has said it supports development of the information highway, Harris noted. “This is how you make it happen.”