The Baby Bells have struggled for years to convince the online industry and Wall Street that they have as much Internet know-how as any Silicon Valley start-up. Few have listened, pointing to the phone companies' vast bureaucracies, slow turnaround times and marginally successful Net divisions.
But the downturn on Wall Street last week prompted some investors to begin looking for Net-related companies without the roller-coaster instability of many new technology stocks. The local telephone companies could fit that role perfectly, analysts say--if they can prove to investors that they've finally grounded themselves in Net technology.
In fact, a growing number of analysts say this could be the year the so-called Baby Bells finally get their Net act together, as they wrap up a dizzying wave of corporate mergers and push their high-speed data services towards the mainstream.
"I think they'll be able to do it," says Banc of America financial analyst Rex Mitchell. "They've got to reach their projections--but I think this is the year it happens."
That kind of optimism has led to a few startling predictions for stocks best known as stable, long-term havens. Credit Suisse First Boston last week raised its 12-month to 18-month price target for Bell Atlantic to reflect a 70 percent gain, along with a 56 percent gain for US West in the same time period.
That's slow by Internet standards, but would be a considerable jump for the Bells.
To be sure, the Bells will be fighting a strong and lasting perception that they are technological mastodons: powerful, slow and incredibly hard to budge.
Once touted as the logical AOL-killers, with a connection to nearly every home in America, the Bells failed to win anything more than a small share of the dial-up Internet market. Their first forays into the high-speed Net, with the then-speedy Integrated Services Digital Network (ISDN) services, were almost universally flops.
"They were positioned to be the dominant Internet service providers, but they missed that opportunity," says Mel Marten, an Edward Jones analyst. "But they realize that, and don't want to miss the next wave."
Phone companies have now bet on their new high-speed digital subscriber line (DSL) technology, which allows regular phone lines to receive voice calls and high-speed Net transmissions simultaneously.
DSL isn't a sure thing. The technology is still young and requires enormous capital expenditures to deploy on a wide basis. It's also competing in the "broadband" market with cable Net access.
As of the end of September, the big local phone companies all together had installed just 220,000 DSL lines, compared to Excite@Home's 1 million cable subscribers, or America Online's 18 million dial-up users (the online giant now counts some 20 million users).
Nevertheless, the companies have dedicated billions of dollars to improving the reach and quality of their high-speed Net services, and are also developing creative new ways to bring people online.
US West has taken the lead in this regard, investing in scaled-down Net access devices, creating a WebTV-like service that accesses the Net through the TV set, and allowing customers to access email over the phone. All of these services are also being tied to the company's traditional telephone services as well, says vice president Ophyll D'Costa.
The other Bells are also moving down this path, offering such things as dedicated email devices and home networking services that distribute DSL services to different machines throughout a house.
All of this is not a guarantee that the Bells will be able to succeed in transforming themselves into something like a Net company, with the consequent boost that Internet infrastructure companies have seen on Wall Street. After all, the companies will still have entrenched bureaucracies, face tight regulations and contend with large and small competitors who have a history of moving much more quickly, critics note.
But this year, the stars are aligning for the companies much more than they ever have before, some analysts say. After several years of concentrating on consolidation, the companies can now refocus on new markets. Advances in technology will also help them bring the high-speed Net to consumers more quickly.
"There are better systems being developed for installing DSL, better DSL capabilities from manufacturers that are more user-friendly--all of these things are going to come down this year," Mitchell said. "They're not getting any credit for it now, but if they can prove they're a player in the Net, their stock will get a boost."
At the same time, the stability of the Bells' stocks may prove more attractive to investors burned by recent drops in technology shares, but who still want a piece of the Net infrastructure business, analysts said.
Not all analysts are convinced, however.
"I don't think they have the expertise or the mind-set to become Net savvy," said Mark Winther, vice president of worldwide telecommunications for research firm International Data Corp.
Others in the financial community said the Bells' stocks might be slightly undervalued, but were unlikely to jump out of their historic patterns of strong but stable growth. That decision has to be left to still-skeptical investors, however.
"You can't predict when investors will take these factors into account," Marten said. "But it seems like now would be a perfect time for investors to put dollars into these stocks."