Communications Upheaval : NEWS ANALYSIS : Despite New Freedoms, PacTel and Others Stick to Their Calling

As US West prepares to acquire Continental Cablevision in a mega-deal that signals a belief in such cross-industry alliances, Pacific Telesis is preparing to sell the one cable holding it has outside California.

US West’s planned merger is the boldest move yet among media firms since President Clinton signed the sweeping Telecommunications Reform Act earlier this month, freeing the industry from long-standing regulatory fetters.

But PacTel--and most of its other Bell brethren--has no intention of following in US West’s footsteps. PacTel Chairman Philip Quigley said Wednesday that the company will stick to its strategy of defending the lucrative California local phone market from new long-distance and cable predators.

“I’d rather have a dogfight here where we know the size of the ring and who the players are than in someplace that is foreign in a market where we think it’s better to stick to our knitting,” Quigley said.

And even if the company did want to expand beyond its borders, Quigley said, buying a cable company wouldn’t be part of its plans. In 1990, when future regulations and technology were murkier, Pacific Telesis obtained an option to purchase control of a Chicago-area Prime Cable franchise. It is planning to sell the option now, Quigley said.

A few years back, many phone companies believed cable’s thick coaxial lines, which, unlike their own copper wires, could easily carry vast quantities of video, were key to providing next-generation communications services.

But with improving compression technology that may eventually enable high-quality video to squeeze through copper, tepid consumer interest in fancy interactive services and stiff competition from high-powered satellite services, some industry observers say the phone-cable combination doesn’t make sense.

“When you get down to it, [the cable industry] is basically a video store,” Quigley said. “The tables have turned, which is why we’re not interested.”

Still, analysts said each of the Bells must tailor its tactics to fit its own strengths. PacTel has opted to cut back on its plans to build its own high-speed network throughout the state, instead opting to provide about 7 million California households with basic video services via wireless cable.

And it has chosen to dig in its heels within the state, aiming to woo its own customers’ long-distance dollars rather than break into new markets. And while that may make sense, analysts say there is some risk in eschewing a more national reach.

“The issue for PacTel is that having a concentrated market like California is a blessing and a curse,” said Julie Kennedy, an analyst at Goldman Sachs in San Francisco. “It’s a big economy and an attractive marketplace, but it also becomes very attractive for other competitors to come in. And you do live and die by what happens in California.”

Some analysts view US West’s cable strategy as a shrewd survival move of its own. While the other Baby Bells hunker down to defend themselves against competition in their local markets, US West is moving with the Continental purchase far afield of its regional boundaries, into Ameritech, Nynex, Bell Atlantic and Pacific Bell territory.

The company has favored this strategy, some analysts figure, because of the limited growth potential of its home market and the high cost of upgrading the rural areas that dominate the West.

US West serves 10 million households in 14 Western states, with the bulk of its revenue coming from cities such as Seattle, Denver, Phoenix and Minneapolis.

The trouble, analysts say, is that the amount of incoming and outgoing long-distance activity there is scant compared with major centers such as New York and Washington.

Per-household income is lower too, meaning less money to spend on discretionary items such as phone calls, home shopping, movies on demand and cruising the Internet. As a result, US West would find it hard to compete against a giant with other revenue sources, such as AT&T.;

According to court documents filed by Time Warner Inc. in the Chancery Court of Delaware, Richard McCormick, chairman and chief executive of US West, has told Time Warner executives that the Englewood, Colo.-based company’s traditional local phone business is “dead meat” in the long run.

(US West has sued its partner Time Warner to block the media company’s proposed merger with Turner Broadcasting System Inc. The phone company owns a 25% interest in a Time Warner partnership whose assets include 11.5 million cable subscribers, Home Box Office and Warner Bros. studios.)

In Continental, US West has bought into those denser markets. And some analysts say it is only a matter of time before other phone companies get religion and buy into cable. It is taking them longer, said Michael Wolf, a partner at Booz Allen Hamilton, because of their monopolistic mentality and worries over messing with the steady income streams they have enjoyed for so long.

“For phone companies to upgrade their systems to offer video is more expensive than for cable to offer phone,” Wolf said in explaining why cable acquisitions will continue.

Analysts pointed to Cox Communications Inc., Comcast Corp. and Cablevision Systems Corp. as attractive targets.

Though cable stocks hardly reacted Tuesday to news of the Continental purchase, they rallied Wednesday, with Cox and Cablevision moving up briskly.

But the real challenge for the Baby Bells as they move into the free market may simply be in being forced to make a gamble, whatever it may be.

“The hard thing about this is that there is no track record for what’s going to work,” said telecommunications analyst Gary Arlen. “Everybody has no choice but to take risks.”