That century-old role is just about over. In a stunning series of transactions over the past year, the seven regional holding companies spun off by AT&T have sought to position themselves as Anything But the Phone Company. Buying into cable television systems, entertainment programmers and overseas ventures will fundamentally reshape the Baby Bells, forcing major changes in government regulation. In the process, the stable local phone utility will become a thing of the past, replaced by companies with fewer traditional loyalties and far more competitive pressures. Says Bruce Egan, a Wyoming telecommunications consultant, “The trauma for the consumer is just around the comer.”
If the regional Bells seem eager to escape their roots, no wonder. POTS–the techies’ acronym for Plain Old Telephone Service–is a slow-growth business with uninspiring prospects. Collectively, the seven regional holding companies took in $82 billion last year, up a scant 7 percent since 1989. Competitors are horning in on the most profitable segments. In New York City, only half the corporations installing high-speed computer circuits buy from Nynex, the company estimates; the rest deal with fast-moving upstarts such as Teleport and MFS Communications. AT&T, MCI, Sprint and a host of others have muscled into the market for the 25-mile toll calls that used to be the Bells’ bread and butter, while the 1982 court order bars the Bells from slugging back by carrying longer-range calls. “They’re increasingly in a situation where they get stuck with the worst parts of the market and they’re being prohibited from getting into the best parts of the market,” says economist Thomas Hazlett of the University of California, Davis.
Competition in basic phone service is coming, too. But for the moment, local service is still a monopoly throwing off considerable cash–and while it lasts, the Bells are making the most of it. All seven companies have invested heavily in cellular phones, aided by a Federal Communications Commission decision giving each local phone company one of the two cellular franchises in its territory. BellSouth, US West and Nynex are making big investments in companies that run cable TV systems, while Southwestern Bell owns cable systems outright. And all the companies have been scrambling to find a role in the development of software, information services and television programs that could boost the traffic over their phone lines. “Anything our customers might find of value and want, we’d be interested in providing,” says vice chairman Louis Rutigliano of Chicago-based Ameritech, the slowest of the Baby Bells to enter new fields. To see the lure of diversification, consider this statistic: Southwestern Bell’s revenue from local phone service is about $150,000 per worker. Its other businesses take in more than twice as much'
But these sexy lines of business may not be the gold mines the Bells hope for. There’s no proven market for videophone NG ROBERTS calls and long-distance computer games. And will consumers really favor pay-per-view movies over $1.99 rentals at the video store? The Bells’ sorry history of diversification efforts gives pause. Even as it ponies up $22 billion or more for cable TV giant Tele-Communications Inc., Bell Atlantic is trying to peddle a finance company it started in the 1980s. Nynex, which is pumping $1.2 billion into cable programmer Viacom, lost a bundle trying to sell computers. “It’s been a total disgrace how little the phone companies have invested in plant and equipment and how much they’ve been fascinated by things they have no knowledge of,” gibes Harry Newton, an industry gadfly who publishes the monthly journal Teleconnect. Agrees one state regulator aghast at the rush to buy cable systems: “it looks like another viral disease that’s hit the telephone companies.”
This time, the Bells say, things are different. Instead of buying into fields they don’t know anything about, they are investing in companies that complement their expertise in communications networks–and instead of running the acquisitions, they are leaving management in the hands of people like TCI chief executive John Malone. But that commitment to keep their hands off begs the question. For the deals to make sense, the new businesses and the old ones have to be tied together. The Bells, still dominated by people accustomed to running stodgy regulated utilities, are plodding marketers; whether Pennsylvanians can be persuaded to drop their cable TV company and sign up with Bell Atlantic instead is an open question.
While the Bells steadfastly deny it, customers of their local phone monopolies are also paying part of the cost of the new ventures. Take New Jersey, where Bell Atlantic promised last year to speed up installation of a fiber-optic network in return for a new system of rate regulation, coupled with a pledge to hold household phone rates steady. That statewide fiber network, financed by ratepayers, will give the company an edge over cable systems that might seek to offer phone service. And while a rate freeze sounds good to customers used to prices rising, it’s no bargain at a time when phone-industry costs are falling sharply. In addition, Bell Atlantic’s new ventures have led Standard & Poor’s to downgrade its bonds; in some states, its higher borrowing costs could lead to higher phone rates.
In the long run, some consumers may benefit from the telecommunications industry’s shake-up. If the Bells finally win legal approval to sell video programming over their phone lines, competition is likely to force cable rates down. If cable operators can muster the capital to offer local phone service in competition with the Bells, families who are heavy users may find bargains that they can’t get today. And if regulators insist that both phone and cable companies make their wires available to all who would rent space, there’s the potential for an unlimited array of programs and services, tailored to each customer’s personal tastes.
The prospects are enticing, but don’t hold your breath. Most of the Bells are doing their best to keep cable companies out of the phone business. Even if they fail, local phone competition won’t save most families much money and may lead to higher rates for some, especially in rural areas. The cable companies, in turn, are still trying to block the Bells from carrying television. And while their fibers have ample capacity, cable operators strongly resist the notion that they should have to rent space to others; restricting access to their cable lets them block competition wherever the phone company doesn’t carry TV. Of course, such skirmishing is all in the interest of creating a level playing field. But while the leveling proceeds, consumers may find that the brave new era of communications competition is a while in coming.
