THE TELECOM REFORM BILL : THE PLAYERS : Once It’s Law, the Action Begins

Like restless children waiting for the final bell at the end of a school day, companies ranging from broadcasters to Baby Bells are itching for the ink to dry on telecommunications reform legislation that would allow them to compete in new businesses and create multimedia empires.

The industries touched by the sweeping measure make up nearly a fifth of the U.S. economy. And, unleashed from many government regulations, their share could grow even bigger. Capital investment by phone and cable firms also would probably spur growth in computer and other related industries.

But the most immediate effect of the legislation would probably be a tidal wave of mergers, acquisitions and partnership deals as companies seek economies of scale and quick entry into new markets. Wall Street investment bankers are poised for a string of multibillion-dollar transactions that could make this year’s entertainment industry mergers look like small potatoes.

Telephone Industry

In the highly regulated phone industry, the legislation would allow the regional Bell operating companies to go up against AT&T;, MCI and Sprint in the long-distance market, while the long-distance operators plunge into local service.

Pacific Telesis, for example, plans to invest several hundred million dollars to snag a piece of California’s $10-billion long-distance market.

A frenzy of deal making by the Baby Bells is expected as they seek long-distance cable partners and greater size. For example, Bell Atlantic and Nynex--already partners in the cellular business--are reportedly discussing a merger.

When all is said and done, some analysts expect the number of Baby Bells to drop from seven to as few as two or three--including Pacific Telesis, the parent company of Pacific Bell.

Pacific Bell has already partnered with Bell Atlantic and Nynex to deliver video over wireless cable networks, and the company has spent nearly $700 million on personal communications services, or PCS, licenses in government auctions.

Pacific Telesis could look to acquire GTE California, “a complementary set of properties for PacBell,” one analyst said. About 20% of GTE’s phone lines are in California, he said.

Like other Baby Bells, PacBell would probably form an alliance with a long-distance company, either through a joint venture or an acquisition. One analyst said PacBell could afford an outright acquisition of a long-distance company, either alone or in partnership with another buyer.

Long-distance companies for their part would be competing with the Baby Bells on their own turf. Such competition must exist before the Baby Bells would be permitted to enter the long-distance arena.

If the Baby Bells get permission to enter the long-distance business within about a year, AT&T; and MCI would feel extra pressure to “build up their local business very quickly” through direct acquisitions rather than through strategic partnerships and alliances with smaller local providers, said Anna-Maria Kovacs, vice president of research for Janney Montgomery Scott in Philadelphia.

“MCI might very well end up in partnership with [regional Bell operating company],” Kovacs said. “Sprint has already chosen to partner with several cable companies and that makes it less likely they would partner with RBOCs.”

Wireless companies that already offer cellular services are also expected to compete for local telephone business, said Susan Passoni, an industry analyst for Cowen & Co. in Boston.

Cable

Cable companies are expected to join in the fray by offering up their cable lines and fiber-optic networks for local telephone service--and to bring high-speed links to the Internet computer network into American homes.

Among the companies poised for major capital investments are cable giants like Tele-Communications Inc. and Comcast Corp.

“Cable companies could be a very interesting conduit for World Wide Web and Internet services,” said John Reidy, a cable analyst with Smith Barney in New York. For that to happen, the companies must invest capital to make their infrastructure capable of handling two-way transmissions, he said.

Time Warner’s cable group, for example, would probably focus on upgrading its system, and the company is considering becoming a partner in Sprint Spectrum, a joint venture with TCI, Comcast and Cox Cable Communications based on a digital wireless-communication technology.

But with the acquisition of Turner Broadcasting Systems, Time Warner is turning its attention more toward the content side of the business, said Kukowsi, who doesn’t expect the New York media giant to make any more strategic acquisitions in the near future.

“The key issue for Time Warner is going to be consolidate and operate,” said Michael Kupinski, a media and entertainment analyst with A.G. Edwards & Sons in St. Louis.

Jessica Reif, a New York-based media analyst with Merrill Lynch, expects cable companies to make a big push in the phone business. The telecommunications reform legislation would make it easier for cable companies to enter bigger and competitive markets by giving them federal permission to operate in any state, she said.

“It gives them more flexibility, and that’s very positive,” she said.

Media

The bill would permit television broadcasters to own stations reaching 35% of the country--up from a current limit of 25%--and that in itself would trigger numerous acquisitions.

“If the bill passes, all the broadcasters will buy more TV stations--Capital Cities, Tribune, Chris-Craft, Fox,” Reif said. “Anyone who can buy stations, any big station group, will buy. I’m convinced of that.”

Loosening of restrictions on radio station ownership would have a similar effect: “Infinity (Broadcasting Crop.) is clearly poised to make a major acquisition,” she said. Harold Vogel, a New York-based entertainment analyst with Cowen & Co., also expects to see a buying frenzy among radio broadcasters like New York-based Infinity and Westwood One Inc. of Culver City.

“Radio is fairly simple to acquire and manage over many units,” he said. “Television requires more of an effort in terms of programming, whereas programming in radio is already premanufactured, so to speak.”

Technology

Much of the investment by telecommunications and media firms would be channeled to vendors of powerful computers, database software, switches and fiber optic cables. Firms such as Oracle Corp., Silicon Graphics Inc., 3Com and Sun Microsystems Inc. and Microsoft Corp. are expected to benefit.

“If they pass it, that’s good news, said Microsoft Chairman Bill Gates in a recent interview with the Times. “All we care about is that the communications companies really start investing in infrastructure and compete with each other like mad. The growth of our business, the opportunities for software in the years ahead, is totally dependent on the price of communications coming down. Having mid-band connections, ISDN and cable modems so we can try to deliver on the promise of Internet with that kind of speed is very important.”

Tim Regan, a lobbyist for Corning Inc., which holds the patent on fiber-optic technology said competition has always spurred growth in the technology business. “When we tried to sell AT&T; fiber optics in the 1970s they said ‘we’re not ripping out this copper till it decays,’ ” Regan said. “Now, AT&T; is all fiber. Why? Because MCI came along and gave them competition. The same thing is true here. Competition will speed the upgrade of the infrastructure.”