Regional Phone Firms to End Joint TV Venture

After promising nothing less than a revolution in the way Americans watch television and spending close to a half a billion dollars in the attempt, three regional telephone companies are disbanding the joint venture they formed last year to deliver new forms of television programming.

The partners, Bell Atlantic, Pacific Telesis, and Nynex, are negotiating multimillion-dollar severance agreements with the top management of the venture, called Tele-TV, according to sources close to the talks.

With classic Hollywood hype, the venture grabbed headlines last year with promises of lower rates and higher-quality television for millions of consumers, including all of PacBell’s customers in California. It had the imprimatur of super-agent Michael Ovitz, now president of the Walt Disney Co., who earned a handsome fee for putting together the partners and recruiting former CBS President Howard Stringer as chairman and chief executive and Sandy Grushow, the former Fox Entertainment chief, as president.

In a joint statement Friday the three partners said only that they were discussing the future of Tele-TV. But sources expect the venture to be shut down early next year, making it easier for the partners to pursue other alternatives. Pacific Telesis contends that it will still offer wireless television in competition with cable in Los Angeles beginning in March.

But some sources said it is much more likely that the phone companies would shift their strategy toward digital satellite television, a market dominated by Direct-TV, a subsidiary of Hughes Electronics. Several phone companies, along with Disney, are in negotiations with Rupert Murdoch’s News Corp. to partner in a competing service, according to sources.

The overblown promises and abrupt end of Tele-TV underscore the fast-changing landscape of the telecommunications business as phone companies merged in the wake of federal regulatory reform. Its troubles are the latest detour in the telecommunication industry’s bid to provide business and consumers with a plethora of advanced services such as interactive video games, high-speed data services, home shopping and movies on demand.

The venture’s failure also suggests that it may be some time before cable television operators face stiff price competition.

In February, Congress passed massive regulatory reforms that put an end to long-standing monopolies by allowing telephone and cable companies into each others’ businesses in hopes of lowering consumer rates.

But competition has remained elusive as cable companies lack the capital to upgrade their systems for telephone service. Regional phone companies, worried about defending their territories against each other and against encroaching long-distance carriers, have put television programming on the back burner.

“It’s not surprising that this organization is being disbanded,” said John Aronsohn, an analyst at the Yankee Group, a market research firm in Boston. “Tele-TV was beholden to too many companies with different interests, there were too many egos involved and no one really bothered to take a close look at what it would take to get these video services up and running.”

Tele-TV employs 200 people in Los Angeles, New York and Reston, Va. One or all of the phone companies may absorb the employees and assets of the venture.

Earlier this year, the Tele-TV phone partners scaled back the venture’s budget and its plans for interactive video services that would have required a rewiring of their networks.

Sources say the partners already have severely cut Tele-TV’s budget for next year, when all three partners are scheduled to roll out wireless video offerings, starting with Pacific Telesis. The new budget of $62 million is less than half this year’s $159 million.

While Pacific Telesis says its roll-out is on schedule, those planned for Boston and Norfolk, Va., by the other two partners are expected to be scrapped. The radiowave technology adopted by the partners works adequately in flat regions like Southern California but performs poorly in the hilly terrain of the East, where Bell Atlantic and Nynex customers are based.

The partners originally planned to spend $500 million over five years, but many industry analysts believe they’ve already spent more than that. Sources say Bell Atlantic alone spent close to $300 million on interactive trials that were abandoned and that the partners invested heavily trying to make the radiowave equipment sufficiently powerful to reach enough homes for it to be financially successful.

The partners also will incur a steep penalty if they cancel a $1-billion order for set-top boxes with Thompson Consumer Electronics.

News of the probable shutdown of Tele-TV, first reported in the Wall Street Journal on Friday, could put a small equipment supplier, CAI Wireless Systems Inc., which is supplying the venture, on the ropes. Its shares fell $1.1875, to $1.5625, after reaching $7.50 in September.

At an elaborately staged presentation in May 1995 the top executives of Tele-TV, along with Ovitz and the chairmen of the phone companies, promised a revolution in television. Ovitz declared that Tele-TV would become “one of the great future marketplaces of our community” and Stringer, introducing a glitzy new video logo, said, “Get used to it, it’s going to be around a long time.”

Philip J. Quigley, CEO of Pacific Telesis, described the relationship with Ovitz as “one in which we are learning daily about businesses, about new services and ways to make money that we never imagined before.”

But almost from the day Tele-TV was first announced skeptics doubted whether the venture could deliver on its promise of interactive television to a mass audience. The technical difficulties were overwhelming and the market shifted rapidly as the Internet suddenly emerged as a much more effective interactive medium.

Tele-TV’s troubles mounted this spring, after Southwestern Bell agreed to buy Pacific Telesis and Bell Atlantic and Nynex paired up in a defensive move to fend off the long-distance carriers. Speculation immediately surfaced that Pacific Telesis would drop out of Tele-TV to join Americast, the video venture of its parent that also includes Disney and five regional telephone companies.

Americast said Friday that the failure of Tele-TV will not affect its partnership. “We don’t think this has any impact on Americast or our plans,” said Robert Rene, chief marketing officer of Americast. “We believe partners in that venture remain committed to video as well, but are just going to get there in a different way.”

Sources say Nynex and Bell Atlantic are in discussions with Murdoch’s News Corp. to take an equity stake in the company’s digital satellite venture, American Sky Broadcasting. ASKYB is looking for partners to replace MCI Telecommunications Corp., which plans to reduce its stake in the satellite venture from 50% to about 15% as a result of its merger with British Telecommunication.

Sources say Disney, as well as Ameritech, the most aggressive partner of Americast, has joined those discussions, making it possible that all eight regional Bell companies could come together to offer a nationwide digital service with Murdoch in competition with Direct-TV.

Sources say the shortcomings of Tele-TV’s wireless strategy soured Bell Atlantic and Nynex on the venture. They had apparently favored purchasing a stake in Direct-TV before AT&T; stepped up to invest early this year.

On Friday MCI, which acquired the direct broadcast satellite license last January for $682.5 million, won approval from the Federal Communications Commission to transmit video programming to consumers. The venture still has to acquire and launch a satellite, but FCC International Bureau Chief Don Gips called the license grant “another win for consumers, who will soon be offered a variety of new choices in the video marketplace.”

But consumers shouldn’t hold their breath, experts say.

Telephone companies like Bell Atlantic and MCI are currently preoccupied with what they believe is a more important battle to establish market share in the $65 billion long distance and $90 billion local telephone industries. Those markets dwarf the estimated $22 billion a year cable TV market.

And even if the regional Bells enter the satellite business, cable prices are not likely to be forced downward. Satellite TV, while far more successful than expected to be by many analysts, is more expensive than cable.

Hofmeister reported from Los Angeles, Shiver from Washington