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Can video relieve Baby Bell ills?

A string of deals between Baby Bells and satellite TV companies signals that local phone companies are scrambling to add video services in a bid to fend off cable rivals.

A string of deals between Baby Bells and satellite TV companies offers a clear signal that local phone companies are scrambling to add video services in a bid to fend off cable rivals.

Facing stiff competition from cable companies that can bundle television programming with broadband Internet service and phone calls, the Bells' recent satellite deals underscore an urgency to revisit video, after years of dabbling in the area.

"Phone companies, in general, have this legacy of not being great at adapting to competitive markets," said Jim Penhune, an analyst at Strategy Analytics. "They've appreciated strategically for at least 10 years that they need to expand into services--in the consumer market--that went beyond voice. Where they've stumbled is in execution and sticking to the plan."

Last week, BellSouth inked a deal to market and distribute DirecTV's satellite service to its local phone customers. BellSouth joins Qwest Communications and SBC Communications in striking deals to offer satellite TV to their subscribers. The fourth Baby Bell--Verizon Communications--has not revealed any satellite plans.

These deals vary in depth. BellSouth will market, sell, schedule equipment installation and run all billing for the joint venture. SBC took its pact with EchoStar's Dish Network a step further by investing $500 million in the company as proof of its commitment. The Qwest agreement with EchoStar is not as far-reaching as SBC's, but entails the marketing and sales of Dish Network subscriptions.

This is a critical moment for the Bells, whose land-based phone businesses are being eaten away by cable and wireless services. Cable companies in particular pose the greatest threat because their ability to bundle video service with high-speed Internet and phone service has brought them more residential customers.

The Bells cannot match cable by offering video service via their copper-wire networks, which already handle phone and DSL (digital subscriber line) service. The four U.S. phone giants have talked about investing more heavily in new technologies--such as VDSL (very high-speed DSL) and fiber-optic cables--for delivering service to homes. But the economics of upgrading their lines to deliver higher-speed Internet services and video remain questionable.

The strategic importance of video has become more prevalent with the emergence of cable telephony.
-- Gordon Brown
SBC Dish Network
This situation has sparked a round of deals with satellite companies, so they can--at least, temporarily--offer service packages comparable to those marketed by cable companies.

"The strategic importance of video has become more prevalent with the emergence of cable telephony," said Gordon Brown, director of SBC Dish Network. "In the mid-'90s, there was not so much a threat from cable in the telephony space. But as things evolved, video has become a more important component for us."

A bit hesitant
Indeed, the Bells for years have entertained dreams of owning their own video systems to complement their core phone business. But coming up with a video strategy has been much easier than launching one.

In 1994, Bell Atlantic (now known as Verizon) tried unsuccessfully to merge with cable company Tele-Communications Inc., or TCI, in hopes of jumping into video programming. Although the deal eventually crumbled, it was one of the first strong signals that the Bells were thinking longer term about the evolution of their businesses.

The most famous video foray by the Bells was a project called Tele-TV, a company formed in the mid-1990s that would allow the Bells to deliver video over special networks to phone subscribers. The venture brought phone companies Pacific Telesis (the then-parent company of Pacific Bell), Bell Atlantic and Nynex together with Hollywood power broker Michael Ovitz and Howard Stringer (now CEO of Sony of America), who was appointed chairman of Tele-TV.

Tele-TV turned out to be an expensive experiment into digital television that collapsed under its own weight. After the Bells funneled a half-billion dollars into Tele-TV over two years, they receded from the project to refocus their priorities in the new, loosened regulatory environment shepherded in by the Telecommunications Act of 1996. Video ambitions took a backseat to the preservation of local phone service and to the more realistic desire to provide long-distance service.

The Hollywood moguls left the soon-to-be-defunct Tele-TV, and the Bells themselves began to stir. The Telecommunications Act loosened ownership rules and ignited a deal frenzy that prompted Pacific Telesis to merge with Southwestern Bell to form SBC, while Bell Atlantic and Nynex merged to become Verizon. New management did not look kindly on ventures such as Tele-TV, considered peripheral to more immediate concerns.

Piping into the home
Now, with the Bells again suffering from video envy, their ambitions are no longer tied to copper wire. Instead, the four companies are singing the praises of fiber-optic lines running into homes--essentially, super-high-bandwidth pipes that can handle video, voice and data with ease.

In May, SBC, Verizon and BellSouth announced an agreement to use similar fiber-optic hardware and software to expand their networks.

In the fine print of the Bell-satellite agreements are considerations for a possible fiber partnership between the parties. BellSouth said it will hold monthly discussions with DirecTV and the satellite company's future owner, News Corp., to figure out ways to pipe content through its fiber lines.

"At a central office, we could have a (satellite) dish receiving channels of video and audio and then deliver that via fiber to the BellSouth network," SBC spokesman Jeff Battcher said.

The question is: How long will it take?
-- Jim Penhune
Strategy Analytics
While fiber to the home could be one way for the Bells to provide video service, the technology is still many years and piles of cash away from becoming reality. While Verizon has pledged to spend billions of dollars on building out its network, SBC has remained vague about its fiber plans.

Some analysts say fiber won't be fully delivered to homes for at least 10 years. And given the billions of dollars that cable companies have invested in their own network upgrades to digital, many question the Bells' appetite for jumping head first into upgrading to fiber.

"The question is: How long will it take?" said Strategy Analytics' Penhune, who also wonders how much the fiber upgrade would cost and how many consumers would already have signed up with a cable company by time the Bells offered bundled services over fiber.

Cable: the common enemy
Although the deals between the Bells and satellite providers could be a temporary stopgap to buy time for fiber, the alliances are headed in the right direction, according to analysts. The partnerships allow satellite companies to market services directly to phone customers across the United States and to offer a competitive block against cable's ability to deepen its grip in residential markets.

"For DirecTV, it gives us a powerful tool to compete with the local cable provider," DirecTV spokesman Robert Mercer said. "The BellSouth alliance opens up a new sales-and-distribution channel for us."

Cable executives consider satellite operators to be their biggest competitors. Satellite companies are luring cable customers into switching, through cheaper subscriptions and through different programming packages. Thus, for satellite providers, any chance to steal customers away from cable--even customers billed by a partner phone company--is a plus.

Cable providers are still confident that they can hold off the Bell/satellite competition with their service bundles.

"We're used to operating in a highly competitive marketplace, and the marketplace has seen these types of arrangements before, with little success," said Tim Fitzpatrick, a spokesman for cable company Comcast. "We feel that the value of our products is what is contributing to our ongoing success and not what our competitors may or may not be doing."

The deals between the Bells and satellite TV is interesting on paper. But success will only come if the Bells prove that video is an effective means of slowing defections among its coveted phone customers.

"In the end, the consumer cares about the bundle of services and that one bill comes from one provider," In-Stat/MDR analyst Norm Bogen said.