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The old guard: Telcos

Brief goes here

Tele-TV, the Baby Bells' ill-fated foray into television, is lasting proof that the promises of deregulation have yet to pan out since President Clinton made history by signing the Telecommunications Act a year ago tomorrow.

The law cleared the way for telephone companies to get into the cable business, and Tele-TV was formed to create competitive programming. In a rare display of solidarity, Bell Atlantic, Nynex, and Pacific Telesis agreed to invest $300 million in the start-up and hired Hollywood superagent Michael Ovitz and former CBS broadcasting chief Howard Stringer to run the show.

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But the plan fell apart, leaving Stringer to joke that he now feels like the lead in Agatha Christie's And Then There Were None, in which the characters disappear one by one.

Bell Atlantic and Nynex proposed a merger, and Pac Tel is about to be swallowed by Southwestern Bell--two mega-deals that preempted Tele-TV and other adventurous expansion. Ovitz quit, and Stringer has been left alone at the helm of this telco Titanic.

And that may just be the tip of the iceberg.

Most people praise the law's intent, to reform 60-year-old telecommunications regulations and inspire market competition. As Lee Bauman, vice president of Pac Tel subsidiary Pacific Bell, puts it: "The Telecom Act is based on some fundamental concepts we think are good for the country: opening all telecommunications to competition."

But despite the promises, many benefits of deregulation--competition in local and long distance phone calling, lower rates, and new, improved technologies--have yet to materialize, according to consumer groups, analysts, and industry executives.

Hanging in the balance are hundreds of billions of dollars and the very future of modern-day communications. Whatever course is taken by the telephone companies will likely shape what technologies and services are available to the public into the next century, from television programming to Internet access.

Yet, appropriately enough, the obstacles to this new generation of telecommunications are some decidedly old-fashioned problems: cost cutting, turf wars, and regulatory gridlock.

"We are not as far along as we ought to be," said Brian Adamik, an analyst for the Yankee Group, an industry consulting firm. "On the one-year anniversary, we're not at the cusp of competition, and you're not going to see any large-scale competition this year, either."

Added AT&T vice president Lee Blitch: "We're moving in inches."

Today, with the

stroke of a pen,

our laws

will catch up

with our future.

We will help

to create

an open



competition and

innovation can

move as quick

as light.

-- President Clinton


Such hesitancy is no small statement, coming from the largest telecommunications company in the world. AT&T's annual revenues exceed those of the entire cable television industry combined. Barring any major cable mergers, the local phone companies are in the best strategic position to win the new communications wars.

By many accounts, the combined local and long distance phone markets amount to $170 billion a year in revenues, dwarfing the cable industry's estimated $28 billion in annual earnings. As with many large and established corporations, however, the telephone companies are not accustomed to moving quickly, especially when it comes to brand-new businesses.

Consumer groups blame both lawmakers and the phone industry for the law's shortcomings. "We got promised a bill of goods that nobody's delivered," said Audrie Krause, cofounder of NetAction, an online activist group that launched a protest on the Internet this week over the effects of the Telecommunications Act. "What we got instead was mega-mergers; little, if any, new competition; and Internet censorship."

Krause rattled off the list of buyouts that have occurred in the wake of telco reform, including international deals like British Telecom's planned $20 billion buyout of MCI and mergers that cut across business lines, such as MFS Communications and global Internet service provider UUNet Technologies.

Although the phone companies argue that the mergers are strengthening them for this new era of competition, the consolidation also is expected to lead to thousands of layoffs and increased debt. Moreover, Consumer groups point out that in many cases newly merged companies are scaling back their grandiose plans to offer new technologies. Pac Tel and Bell Atlantic both cut back on plans to lay so-called broadband networks that can carry voice, television, and Internet transmissions on the same line.

And then there is the highly volatile issue of rates. Some phone companies recently have been raising their prices--just the opposite of what was supposed to happen with deregulation. The phone companies call these "strategic price increases," but consumers aren't impressed.

In November, for example, AT&T raised long distance rates for its 80 million residential customers by nearly six percent, the single biggest increase in almost three years. The company also announced a nearly five percent price hike for small-business customers.

Baby Bells such as Pac Tel and Bell South also are running into criticism over plans to charge more for high-speed ISDN Internet access, drawing the wrath of consumers as well as computer giants such as Intel, which complain that the higher prices will dampen demand for online connections.

Internet users also worry they may be charged higher rates for Net access because the Baby Bells are lobbying the Federal Communications Commission to make ISPs and online services pay more to help upgrade their networks, and a ruling is expected this year. The worst-case scenario: The networks won't be improved, leading to phone gridlock and more dropped calls and Net connections.

That's not to say there has been no progress since the law was signed.

Competition is slowly beginning to appear. Bell Atlantic executives told CNET this week that they plan to file for regulatory approval to enter the long distance business in their own East Coast territory in the next two weeks. The company expects to win approval by year's end. (Bell Atlantic now offers limited long distance phone calling in Texas, Michigan, and North Carolina.)

Ameritech, the Midwestern Bell, recently filed its own request to offer long distance calling in its home turf of Michigan. And even the hapless Tele-TV will be around to help Pac Bell roll out wireless cable in Southern California later this year.

Long distance carriers MCI and AT&T both have entered the local phone business in California, the nation's biggest state. This week, for instance, MCI launched local phone service for businesses and customers in San Francisco, seeking a share of the state's $10.5 billion local phone market.

Local Access and Transport Areas are regional areas, similar to area codes, that divided the local and long distance telephone markets after the AT&T monopoly was dismantled.

Pac Bell's Bauman said the company's share of the "intraLATA" market of toll calls among businesses within California has dropped to less than 50 percent. "Competition in California is significant today," he contends.

But analysts warn that all-out price wars still are not imminent. "The consumer won't see any significant impact until 1998," Adamik said.

In addition, those savings are likely to be measured only in tens of dollars per year for consumers. That's because the price of a one-minute phone call averages less than 17 cents, and the typical monthly phone bill is about $50.

Still, consumers could stand to benefit from so-called "one-stop shopping," a dream service where one company offers local and long distance calling, cellular telephony, Internet access, and cable TV in a discounted package all on the same monthly bill. And if the concept is a winner with consumers, it will be equally popular with the companies that serve them.

Such programs already are starting to surface. MCI, for example, offers a bundled package called MCI One. On the local side, Pac Bell has begun to bundle Internet access with the installation of fast ISDN lines.

"All market research indicates that one-stop shopping is popular with consumers," said Eric Rabe, assistant vice president with Bell Atlantic. "If you're a company that can only offer some of these, you're at a disadvantage."

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