PacTel to Cut $1 Billion From Telecom Project : Multimedia: Move is a major retreat from info superhighway. Firm will also focus on more competitive Bay Area.


In a major retreat from its grandiose plan to wire California with a state-of-the-art interactive communications network, Pacific Telesis Group announced Wednesday that it will cut $1 billion over five years from its much-vaunted information superhighway program.

The parent company of phone service provider Pacific Bell also said it plans to divert resources from the Southland to the Bay Area, where it anticipates stiffer competition from cable companies as telecommunications services are deregulated.

“I think it’s a shift in emphasis,” said PacTel Vice President Steve Harris. “We’re still going to be building the network in Los Angeles and San Diego, but the emphasis will shift primarily to the Bay Area. We’re not abandoning L.A., but it’s not the top priority for video issues in the new network.”

PacBell’s move is the most dramatic illustration yet of the difficulties that telephone and cable TV companies around the country have encountered in constructing the much-hyped information superhighway. The company announced with great fanfare last year that it would spend $16 billion creating a high-speed, high-capacity network in California, though much of that money would have been spent anyway in the course of routine investment in the telephone network.


PacBell’s original plan had been to provide “video dial tone” to 1.5 million homes in California by 1997, with about a quarter of that in the Los Angeles area. Now, Harris says, the number by late 1997 will be just over a million, with a far smaller proportion in Los Angeles.

Here, instead of the fancy interactive network, the company will focus on a far less ambitious plan to offer conventional television service via so-called wireless cable technology. Using wireless licenses it purchased this summer, PacTel plans to erect an antenna on Mt. Wilson and broadcast microwave video signals to homes in the Los Angeles area, where they can be received with an antenna resembling a barbecue grill.

The system will eventually be replaced by a cable combining phone and video service, Pacific Telesis said. The company still plans to build its interactive fiber-optic-based network in San Diego, Orange County, the Bay Area and other areas.

In the Bay Area, PacTel will confront the powerful Tele-Communications Inc., whose purchase of Viacom Inc.'s cable operations will enable TCI to provide cable service to nearly 90% of the region’s homes.

In San Diego, where the phone company will focus next, Time Warner Cable and Cox Cable, the No. 2 and No. 3 cable operators, also pose a significant competitive threat.

But cable franchises in Los Angeles are fairly fragmented and thus don’t pose such direct competition. With deregulation at the federal and state levels, cable companies are expected to dive into the local telephone business.

While nearly all the major phone companies had developed elaborate plans to upgrade their networks to carry television programming and a plethora of advanced interactive services such as home shopping and multiplayer games, nearly all are now pulling back in the face of technical challenges, high costs and uncertain markets.

“A wave of realism has come over the entire telecommunications industry,” said John Aronsohn, a telecommunications analyst with the Yankee Group in Boston. “Three years ago, the phone companies were talking about interactive multimedia riding on the most advanced networks with voice, data and video on one pipeline. Now they’re talking about a one-way digital wireless network. It’s a huge about-face.”


It now appears that at least for the near future, communications companies will be using newfound regulatory freedoms and financial muscle not to offer new and innovative services, but simply to poach territory in established businesses.

US West announced in 1993 that it would have 100,000 customers using an interactive television system by 1994 and that it would add 500,000 customers a year after that. Today there are six to 12 houses in Omaha testing the technology, while another 50,000 customers have access to plain-vanilla cable.

Bell Atlantic expected to have more than 1 million interactive television customers this year. Now the company says it won’t have its first wired customer until 1997. Even GTE, which insisted that interactive television was a center point of its strategy as recently as a year ago, is now saying such services won’t be commercially feasible for some time.

With the high cost of laying optical fiber, the high price of computers required to store and send programming and the need for a box with the power of an advanced personal computer to sit on each television, Cambridge, Mass.-based Forrester Research pegs the year 2000 as “the earliest possible date for the emergence of interactive television.”


That’s a big reversal from just two years ago, when the regional Bell phone companies jointly funded a study that suggested that a loosening in regulations would unleash billions of dollars in new investments in information highways, creating nearly a million jobs by 2003 and slashing cable TV rates.

Instead, most companies are looking at far more modest, short-term options.

Bell Atlantic and Nynex are promoting a more limited strategy, similar to PacTel’s, of offering cable services over wireless.

Although these services may include some pay TV, it won’t be the video-on-demand services once promised.


“They [phone companies] are going up the learning curve,” said John Mansell, analyst with Paul Kagan & Associates, a Carmel research firm. “They’re discovering it’s a hits-driven business and you don’t need 100 channels. With a dozen or so channels carrying the big hits, you capture most of the market.”

But if they are cutting back for the short term, all the companies insist they are keeping their eyes on the long-term opportunities.

Ameritech will invest $4.4 billion over five years in its interactive cable system.

“Is it on track? No, there have been delays. But the thrust of building a broad-band interactive system is building steam,” said Pat Campbell, executive vice president for corporate strategy at Chicago-based Ameritech.


The cable companies, which were the first to talk about the potential for 500 channels of television, say they are pushing ahead. But where they once saw big potential near term, today their focus remains on market tests.

Time Warner says it will have 4,000 homes connected by the end of the year in an interactive trial that will continue until the company has enough information to push ahead with a broader rollout.

“This is new territory,” said Michael Luftman, a spokesman for Time Warner. “Making predictions about when to roll out is not prudent.”

The company said it doesn’t expect widespread deployment before 1997 at the earliest.