Calling out the cable guy

Telephone companies are muscling their way into the turf of cable companies.

Terry Denson and Dan York are not exactly boldface names in entertainment industry circles, but perhaps they should be.

After all, nearly $30 billion and the future of two Baby Bells hang in part on whether these two refugees from the television-programming world find success in their new jobs.

Denson, who works for Verizon Communications, and York, his counterpart at AT&T, are playing starring roles in their companies' risky forays into the TV business. In the latest twist in an accelerating technological free-for-all, the Baby Bells are trying to shore up their flagging fortunes by muscling their way into what was until just a decade ago the bailiwick of cable companies. Rarely competitors in the past, cable operators and telephone companies are now scrambling to be the one-stop shop that will gladly accept your monthly payments to watch television, use the phone and have high-speed Internet access.

Executives at both Verizon and AT&T, which last week officially changed its name from SBC, hope that the extensive selection of channels, whiz-bang features and low pricing of their video offerings will sway television viewers around the country to switch. Although cable and satellite have spent billions of dollars upgrading their delivery systems to accommodate a future in which all forms of entertainment are digital and perhaps interactive, the Baby Bells contend that bandwidth is destiny.

When they're done spending their billions, the phone companies say, they will surpass their rivals. They promise a seemingly infinite number of channels, many in crisp high definition, and plenty of interactive tie-ins, like the ability to check e-mail messages or screen incoming telephone calls on the TV set.

But as the Baby Bells know better than most, talk is cheap, and the challenge is daunting. The capital expenditures are staggering. Holding little leverage with the content creators, they also end up paying more for programming than cable companies and satellite operators, who already hold the accounts of 92 million consumers and are rapidly making inroads into the telephone companies' own business of phone service.

What's more, the Baby Bells aren't expected to reach consumers in meaningful numbers anytime soon. Verizon began its Fios service in its first town, Keller, Texas, only two months ago, and AT&T will not roll out a service until later this year or next year. That means that the cable operators will have had years to solidify their relationships with customers for all their television and telecommunications needs.

"It's awfully difficult to see how a late entrant operating at a dramatic cost disadvantage and employing a strategy of charging less for more has any shot at earning acceptable returns," said Craig Moffett, a cable and satellite analyst at Sanford C. Bernstein.

The phone companies, of course, cannot be discounted. The newly combined AT&T, with $90 billion in revenue, and Verizon, with $71 billion, dwarf the biggest cable operator, Comcast, with $20 billion. The phone giants have about 50 million local phone lines each, and their service representatives communicate with many customers each day, offering prime opportunities to sweet-talk them into buying their television services.

The Baby Bells are not strangers to television, either, but that history is one that they would just as soon forget. During the mid-1990s, when the cable companies had the playing field to themselves, telephone companies formed two groups that tried--and failed--to establish TV-programming services. Bell Atlantic, Nynex and Pacific Telesis, whose names have mostly been lost to the industry's mania for mergers, worked on Tele-TV, but that consortium's reliance on wireless technology proved its undoing. The other group, called Americast and made up of Ameritech, BellSouth and SBC, never got off the ground.

But the Baby Bells could be forgiven for acting distracted. The landmark Telecommunications Act of 1996, which deregulated the industry and enabled the Baby Bells to jump into the long-distance phone market, offered what seemed like a far cheaper and potentially more lucrative alternative to taking on the cable industry.

Things haven't worked out so swimmingly, however. Nearly 10 years later, the core business of the Baby Bells--renting phone lines--is under attack as never before, shrinking by an average of 4 percent each year over the last three years. Nearly 13 million people are forgoing landlines, relying entirely on cell phones instead, according to CTIA, a wireless-industry trade group. While the erosion has been minimized by the ownership stakes that Verizon, AT&T and BellSouth have in Verizon Wireless and Cingular Wireless, the cable companies and small independent concerns like Vonage and SunRocket are picking off thousands of customers a day with their Internet-based phone lines.

In just two years, the cable industry alone has persuaded about 2 million households or businesses to forsake the phone company. Cablevision has signed up more than 600,000 customers. Time Warner Cable is nearing a million accounts. And Comcast, the country's largest cable operator, with 21.5 million customers, has finally turned its marketing machine on the phone business, meaning that the pace of defections is likely to quicken.

The Baby Bells "see their landline business as an ice cube melting in the sun right now, so they need to become a purveyor of content," said Todd Dagres, a partner at Spark Capital, a venture firm focused on media and technology.

The formidable task of acquiring that content and taking on the cable operators and satellite companies has fallen to Denson and York. The two men share more than a job description. Denson, 39, and York, 42, have both worked in midlevel

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