Bell Atlantic: Leading, but with a limp

In the last three years, Bell Atlantic has merged, invested, and negotiated its way to the forefront of the local phone giants.

The company has led its Baby Bell brethren in entering new markets, jumping with both feet into the high-risk world of high tech. It is now poised to be the first Bell to enter the long distance market, taking advantage of the 1996 Telecommunication Act's biggest prize.

But whatever its advantages, company executives say that elements of this same law have been a bitter hindrance over the last several years, dampening the Bell's entrepreneurial ambitions.

"The act gave us incentive to speed up our [expansion plans], and gave us the opportunity to get into long distance, we thought," said Eric Rabe, Bell Atlantic's vice president of media relations.

"But here we are three years later trying to prove to regulators what is happening in fact," Rabe added. "The regulatory environment has been extremely crippling for Bell Atlantic."

The company is now making its final preparations before asking federal regulators to approve the most significant market expansion in its history. If the Federal Communications Commission approves its long distance entry, Bell Atlantic will be well equipped to compete head to head with the likes of AT&T and MCI WorldCom.

If not, it's back to the drawing board for the Baby Bell.

Litany of ambition
The lack of long distance service has been a glaring hole in the portfolio of a company that plans soon to offer consumers a full spectrum of telecom services. Like other Baby Bells, Bell Atlantic has forged ahead with other data and voice services, while trying to persuade regulators to allow it into long distance.

As the country marks the third anniversary of the Telecommunications Act this week, Bell Atlantic is expected to be the first Bell company to get the green light from the FCC to enter that lucrative market.

It is merging with GTE in a deal originally valued at $53 billion, just a few years after swallowing Nynex, another of the original seven Baby Bells. Its proposed deal with AirTouch Communications would have made it the first local phone company to achieve a national footprint in the mobile phone market. That deal, however, fell through.

Meanwhile, its high-tech efforts separate it from its peers. It is well along in its rollout of high-speed DSL technology, and recently announced an agreement to sell the service through America Online.

Last week, it added to its wired credibility by announcing a home networking pact with IBM, looking down the road to when consumers link their PCs with TVs and other appliances.

"Bell Atlantic is ahead of the curve, vis-á-vis the other RBOCs [regional bell operating companies], because it has a very rich and lucrative market," said Abhi Chaki, senior telecommunications analyst for Jupiter Communications.

Trying to be ahead of the curve, however, has its pitfalls. In the early 1990s, the company invested considerable time and resources in developing an interactive TV program, which many observers pointed to as the future of the "information highway."

Bell Atlantic even agreed to a high-profile merger with Tele-Communications Incorporated--the company now slated to merge with AT&T--in a bid to create an interactive TV superpower. That deal fell apart in early 1994.

Bell Atlantic's TV efforts were trimmed sharply back shortly afterwards as the company refocused its energies on traditional telephone service and a merger with fellow Baby Bell Nynex.

Driven by necessity

Bell Atlantic's goal this time around is the same as the other big telephone companies: create a service that can offer the most profitable telecommunications services--including voice, data, and Internet--in a single package that shuts out competitors.

But the other Bells are on Bell Atlantic's heels this time. SBC Communications in particular has used a string of mergers to boost its size to rival its East Coast sibling. If all its pending mergers are approved, SBC will control about two thirds of local phone lines in the United States by the end of this year.

SBC also has moved aggressively into the wireless, data, and Internet businesses. Its DSL rollout and price cuts earlier this year prompted other Internet providers around the country to drop their high-speed Net prices just to stay competitive.

The Baby Bells are driven by survival, as new companies slowly encroach on their once-protected local markets. But Bell Atlantic has a leg up over most. It started the competitive game before its Baby Bell brethren, as other telephone companies moved into the New York market even before the passage of the Act.

"Bell Atlantic has been involved in a competitive market since the beginning," said Boyd Peterson, a telecommunications analyst with the Yankee Group. "They have had both the incentive from a competitive perspective and more experience [than the other Bells]."

The company has used this experience to negotiate with New York and federal regulators, setting up a reasonably clear path to winning approval to enter the long distance market. While other Bells have tried, no company has yet convinced federal regulators they have completed all the items needed to prove their markets are open to rivals.

In New York, the company is in the last stages of testing its electronic interface with rival companies--an event which is being closely watched by state regulators. "Essentially, they said they would endorse our [long distance] application once we complete this test," said Rabe. "I think you'll see us applying to the FCC within six weeks or two months."

The company also expects to file applications to enter long distance markets in Massachusetts, Pennsylvania, and possibly New Jersey by the end of the year, Rabe said.

Some analysts remain skeptical of this timetable, however. "It could happen. It's been this rolling 'about six months away' period for quite some time," Peterson said. "But without a doubt, Bell Atlantic will be much closer to understanding what it needs to do by the end of the year."

New ball game
The entry into long distance markets is the last piece needed before Bell Atlantic--and the rest of the Baby Bells--can finally jump squarely onto the national telecommunications stage.

The one-time local monopoly will be in a position to go head-to-head with the big companies--AT&T, MCI WorldCom, and Sprint--for long distance, local, wireless, and data customers, particularly if regulators approve its merger with GTE.

But the competition will be steep, even for a company that now posts profits of more than $4.3 billion a year.

The Bell will have to face AT&T's new move into local service though cable telephony, as well as the growing consumer demand for cable Internet services--a market in which it still has no foothold.

Bell Atlantic and the other Bells, meanwhile, will retain many of the regulated aspects of the local phone business, such as a requirement to serve the often-unprofitable residential market. Its new competitors have no such mandates.

"They will be left with some degree of social responsibility to fund local residential service," Peterson said. "The question is, 'Who pays for that?'"

The company clearly sees its future profit streams coming from the combination of data, wireless, and other advanced applications--such as IBM's home networking drive--and in gains from its series of mergers. But these goals too have potential stumbling blocks, analysts say.

Chaki said Bell Atlantic's data plans will need to be even more aggressive, as smaller competitive companies snatch up DSL customers, and AT&T makes waves with Time Warner and its recent telephony partnership.

The company's proposed purchase of GTE will add purchasing power and a larger regional customer base, Chaki said. But corporate differences could strain the two companies with regard to their data strategies, Chaki said.

"There is corporate in-fighting between Bell Atlantic and GTE because the DSL guys will profit at the expense of the T1 business," he said. "A combination of issues could delay their [DSL] deployments."

The FCC is slated to rule on the company's merger with GTE by this spring.

On the issue of long distance service, federal regulators will have 90 days to accept or deny the Bell Atlantic's New York bid once the company files its application.  

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