Disney Joins 3 Baby Bells in Innovative TV Venture : Hollywood: Partnership plans to send programs over phone lines. Funding of $500 million is pledged.

It’s a battle that’s likely to change the face of television, pitting giant phone companies against cable TV firms and satellite operators in an epic struggle for the electronic allegiance of the American consumer. And the heaviest hitters in Hollywood are now choosing up sides.

On Tuesday, Walt Disney Co. and three Baby Bell telephone companies announced plans to invest $500 million over the next five years in a new type of television programming venture. The partnership is very similar to one formed late last year among Creative Artists Agency and three other Baby Bells.

Both entities aim to do nothing less than revolutionize the way that Americans receive television programs--and possibly change the nature of those programs as well. Newly freed from regulatory constraints, the telephone companies are racing to convert their old-fashioned voice communications networks into lightning-fast information highways carrying hundreds of television channels and new interactive services.

But they need partners steeped in the ways of the entertainment world if they are to offer programs worth watching.

The Disney deal, which has been in the works for two years, joins the Burbank firm with Ameritech Corp., BellSouth Corp. and SBC Communications Inc. Sources said GTE Corp. is in talks to be involved as well, though the company declined to comment.

The new venture “better positions us to bring a new generation of entertainment to a vast new audience,” Disney Chairman Michael D. Eisner said Tuesday.

Creative Artists Agency and its powerful chairman, Michael Ovitz, are aligned with Bell Atlantic Corp., Nynex Corp. and Pacific Telesis Group. The seventh Baby Bell, US West, has an equity stake in Time Warner Inc.’s entertainment businesses.

For all of these entities, though, forming the ventures was the easy part. Now, they must show that they can deliver television better than battle-hardened cable television operators, better than Hughes’ new but highly successful DirecTV service, better even than the local video store--or at least more cheaply.

And analysts note that the phone companies, born and bred as stodgy, regulated utilities, have never shown the ability to compete effectively in anything other than the phone business.

“Becoming part of the entertainment industry is a difficult challenge for us as a set of telcos,” said William Reddersen, senior vice president of BellSouth. “Even little things like terminology. When someone uses the word ‘network’ with us, we think of a physical electronic network. Disney thinks of NBC and ABC. We don’t even talk the same language.”

Navigating the closed culture of the entertainment industry can be a lot like the title of the upcoming inside-Hollywood movie “Swimming With Sharks.” The phone companies plan to locate their respective new ventures in Los Angeles, and they are hoping that their Hollywood partners will ease the way.

And Disney, with its legendary brand-name, marketing ability and ownership of characters such as Mickey Mouse, is supposed to be in a good position to help invent that elusive new medium known as interactive television.

The Disney venture’s first task will be to design a navigator, a souped-up program guide that will help viewers figure out what they want to watch and when. It is expected to bear the Disney creative imprint and possibly utilize some of its most familiar characters.

“The Walt Disney Co. has been from the time I was a child a legend,” said James Adams, group president of SBC, formerly known as Southwestern Bell. “In many ways, they are the fathers of things I hold dear as you hold dear.”

Some industry observers question whether Disney is a good match, given that it competes with many of the programming entities from which the phone companies hope to acquire programming. CAA, by contrast, has no allegiances to any particular producer of programming. The talent agency has no stake in the Baby Bell venture, but serves as an adviser.

And the CAA group, which plans to create a “navigator” and other new technologies as well as buy programming, is a bit ahead at this point. Howard Stringer, the highly regarded former head of the CBS Broadcast Group, has been hired to head the venture, and former Fox Television programmer Sandy Grushow has been tapped for the No. 2 spot.

Disney and its partners have not yet named a management team.

The current scramble for positioning in this new world of television began last summer, when a series of court rulings and Federal Communications Commission decisions ended a ban on phone companies sending video over their networks. And rapid advances in digital technology now make it possible to squeeze far more information through telephone and cable TV wires--and also open up the possibility of viewers “talking back” to their TV, expressing their preferences and even buying things using a remote control.

Analysts estimate that cable and phone providers are pouring $100 billion into upgrading their networks to handle a nearly infinite number of channels, plus movies on demand, home shopping, on-line games, and long-distance educational programs.

Within a year or two, a limited number of people in larger cities are likely to get cable delivered by telephone companies.

The FCC has so far given Bell Atlantic Corp., Ameritech and Nynex Corp. permission to build video networks that would reach about 1.7 million people. Requests by US West, PacTel, Bell Atlantic and GTE Corp. to offer “video dial-tone” systems to their phone customers are pending. The FCC is expected to act on those applications by the end of May.

All three Baby Bells in the venture with Disney are building telecommunications networks to pipe interactive video to consumers. Ameritech is building a two-way video communications network for customers across the Midwest that is expected to reach 1.2 million customers by the end of 1996.

BellSouth won approval last year to provide video programming in nine southeastern states where it provides local telephone service, and plans to launch an interactive television trial later this year. And SBC Communications is building a network that will bring video-on-demand and other interactive services to 47,000 households in Dallas.

As the various networks finish construction in certain areas, the venture could reach more than 1 million customers by the end of 1996, Reddersen estimated. Once the technology is all in place, the programming will be able to reach about 50 million customers in 19 states, including major markets such as Chicago, Atlanta, Houston, Cleveland, Miami and St. Louis. The phone companies in the other venture reach about 30 million customers in six of the top 10 markets in the country--New York, Los Angeles, Philadelphia, Boston, San Francisco and Washington-Baltimore.

Both groups have a long way to go before they have any programming to send along those networks. Neither have signed programming deals. And some cable operators long familiar with the programming world pooh-pooh both of the new ventures: “From a cable operator’s viewpoint, I greet both announcements with a big yawn,” said Mark Nathanson, chairman of Los Angeles-based Falcon Cable. “I wish I could set up a company that would advise a whole bunch of phone companies for the next 10 years. It would be a very lucrative business. The only real issue for us is a level playing field.”

And there are still many technology--and cost--questions that need to be answered. Consumers will probably have to purchase or rent new set-top boxes to have access to the new forms of programming, and price estimates range from $300 to far more.

“We’re talking about rebuilding pretty much the whole phone network in the country,” said John Aronsohn, a senior analyst at the Yankee Group, a Boston consulting firm. “The Disney deal is significant because without Disney, these (phone companies) have very little direction in terms of how to go once they’re networked. But getting to effective competition nationwide is going to take us into the next century.”