The Cutting Edge: COMPUTING / TECHNOLOGY / INNOVATION : Call to Battle : Fight Looms for State’s Prize Phone Market

In office buildings a few blocks from each other here, Betsy Bernard and Lois Hedg-peth are plotting dual revolutions in the way Californians communicate.

And the changes are not necessarily compatible.

Bernard is leading Pacific Telesis Group’s first effort to provide long-distance service since it was severed from the old AT&T; 12 years ago.

Hedg-peth heads AT&T;’s first attempt to woo the state’s 20 million local phone service customers since the federal government barred it from doing so as part of the firm’s historic breakup.

Each hopes to take a chunk out of the other’s core market--at least enough to compensate for the 10% to 20% each stands to lose in its own. And in the process, both hope to get Californians spending more time and money on phone services of all sorts.

It promises to be an interesting fight.

“No one knows the California market better than we do,” says Bernard. “AT&T; is still trying to find California on the map. We know they’re coming, but they’re taking the slow boat.”

“The issue Betsy has to solve that I don’t is competition,” says Hedg-peth. “AT&T; has been in competition for 10 years, so we have a lot of people who know how to do it.”

Less than two weeks after President Clinton signed a sweeping law that eases regulatory restraints on the nation’s local, long-distance and cable television companies, the telecommunications games have begun.

Rumors of mergers between regional Bells such as Nynex and Bell Atlantic continue to circulate. AT&T; and MCI are said to be discussing an alliance. In Rochester, N.Y., Time Warner Cable is already competing with the local phone company.

But nowhere will these battles be waged more fiercely than in California. With its sheer size, its large ethnic populations (whose members make many international calls) and a Public Utility Commission that has already set the stage for competition, the Golden State appears to be moving faster than any other market.

“California is every long-distance carrier’s No. 1 objective,” says Brian Adamik, a senior analyst at Yankee Group in Cambridge, Mass. “And Pacific Bell views its market as a natural treasure that they can now finally begin to exploit.”

In going after the converse of each other’s markets, Bernard and Hedg-peth--who played golf together back when Bernard was at AT&T--may; never actually clash. But each must manage to break out of entrenched patterns in both business and corporate culture to succeed in the newly competitive, post-telecom-bill world.

How they approach their opposing missions over the next year will mean a variety of new choices for Californians, many of whom will soon be able to buy packages of local, long-distance and wireless services from the same provider. It will also be a measure of how well the Baby Bells and the long-distance companies can adapt to doing business in a relatively free market--after more than a decade of lobbying for it.

Hedg-peth, 39 and a Los Angeles native, spent her first years at AT&T; running the company’s massive switching operation for the Los Angeles Basin--essentially making sure the handoff to and from Pacific Bell’s network ran smoothly.

Now her job is to obviate the need for many of those transactions, through leasing lines from PacBell or building her own networks so that AT&T; will be able to provide local telephone service--and, most important, connect those local customers directly to its own long-distance network.

California’s $6-billion local market is huge, but analysts say PacBell may have more to gain in the swapping of market share. Almost half the long-distance calls that start in California end in the state--far more than the average 30% for most other states. Therefore, almost from the moment it enters the long-distance business--probably early next year--PacBell will be able to handle a big chunk of long-distance traffic on its existing facilities in California, saving it the cost of leasing or building a separate long-distance network.

The state generates an estimated $7 billion in long-distance calls, 10% of the nation’s total. Calls starting or ending in California represent nearly 15% of the total number of minutes Americans spend on long-distance lines, compared with 7.5% in New York, the next-largest market.

“What it says is that since so many calls start or end here, PacBell is probably very well-equipped to steal that market,” says Sharon Armbrust, an analyst with Paul Kagan & Associates, a consulting firm in San Jose.

Bernard, 39, who spent 18 years at AT&T;, says she has another advantage: “It’s another David-and-Goliath scenario--but this time I’m David.”

Both women have leased new office space in Pleasanton in the East Bay area to accommodate their rapidly expanding staffs. Bernard says her unit, a wholly owned Pacific Telesis subsidiary called Pacific Bell Communications, will soon have 500 employees.

And both women say that to succeed, they must wage a very localized battle. To that end, each organization has market researchers vacuuming up data on every demographic and geographic segment in the state. Although neither will reveal what she has found, analysts say it’s clear both will target the most lucrative customers first.

Those who make the most long-distance calls, who use the Internet, paging and cellular services can expect to be bombarded with offers of various communications packages combining a wide range of services under a single brand.

Bernard plans to offer a co-branded credit card like the AT&T; Universal card. Hedg-peth says prospective customers can expect to be approached via direct mail and telemarketing.

Analysts warn that mass confusion may well result. Says Gary Arlen of Arlen Communications in Bethesda, Md.: “It will be chaos for a while as customers try to sort out the best deal from all of this.”

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Facing Off

In the wake of the passage earlier this month of a landmark overhaul of the nation’s telecom laws, local and long-distance telephone companies are gearing up to invade each other’s markets. Many say California, by far the nation’s largest long-distance market, will be ground zero in this fight. Here’s one scenario on how the local and long-distance markets might change over the next few years:

LONG-DISTANCE

AT&T; lost about 30% of its market after the old Bell system broke up in 1984, and some analysts expect it to lose that much again as local companies enter the long-distance business:

1996

AT&T;: 60%

MCI: 20%

Sprint: 10%

Other 10%

In 3-4 years*

AT&T;: 42%

MCI: 19%

Sprint: 9%

Other/Baby Bells: 30%

LOCAL

Analysts predict that the big local telephone companies will lose perhaps 20% of their business to rivals, including cable TV and long-distance companies:

1996

Pacific Bell: 80%

GTE: 18%

Other: 2%

In 3-4 years*

Pacific Bell: 64%

GTE: 16%

Other: 20%

* Estimates

Sources: Argus Research, Public Utilities Commission, Yankee Group

Researched by JENNIFER OLDHAM / Los Angeles Times