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Phone companies' TV ambitions on chopping block

The fate of the local telephone companies' latest, most ambitious effort to move into cable-TV territory will be decided in the next week--and it may not be pretty.

The fate of the local telephone companies' latest, most ambitious effort to move into cable-TV territory will be decided in the next week--and it may not be pretty.

Qwest Communications International, fresh from its purchase of local phone company US West, is in the midst of "evaluating" many of the technology projects that the Baby Bell has launched during the past several years. The company will discuss the results of this process in a conference call with analysts late next week.

Among the most ambitious of these projects was US West's VDSL (very high data rate digital subscriber line), which has re-created the telephone company as a cable-TV provider in Phoenix, Ariz., using customers' ordinary telephone lines. Along with TV service, the 50,000 customers get Internet connections that are more than 450 times faster than average dial-up modems.

The company says it hasn't yet decided what to do with the project, although expansion plans are temporarily on hold. Analysts don't give the project good odds.

"There's so much bandwidth there that it's hard to know what to do with it," said Adam Guglielmo, a high-speed Net analyst with research firm TeleChoice. "There aren't really enough applications to fill it at this point, so it's not economical to go ahead with it at this point."

Whatever the outcome, the VDSL project is just one entry in a long--and to date unsuccessful--history of the telephone companies trying to move into cable-TV turf.

DSL was conceived as a way to transmit video before the explosion in Web use. Bell Atlantic tried to create a video production with Hollywood mogul Michael Ovitz, and US West created a cable-TV division before spinning it off as MediaOne.

But the recent, risky reinvention of AT&T as a broadband cable company, instead of just a phone company, has refocused many of the other phone companies on these efforts.

It's true that Ma Bell has far from proven that it can succeed in all of the markets it has set out to conquer, but the specter of a single corporate giant finally being able to offer packages of high-speed Net service, cable television and phone service over a single wire has spooked AT&T chief executive C. Michael Armstrong's competitors.

As recently as last year, US West's VDSL program appeared to be one viable response for the telephone companies. Although expensive, the technology allowed the local telephone company to offer video programming and more Net bandwidth than the cable company could promise. The company secured local cable programming licenses in Phoenix and in areas outside Denver, and it launched a full-scale service in the Arizona city.

US West executives trumpeted this project as the future of their business. The cost of setting up customers would be less than what AT&T had spent per subscriber to purchase its cable companies, they said. Even Qwest chief Joe Nacchio spoke optimistically of the project when he discussed his reasons for buying US West last year.

Nacchio's final verdict will come next week. But many expect the project to be put on hold, or at least limited to where the infrastructure is already in place.

"We now believe that Qwest is likely to move away from some of the initiatives undertaken by US West management and try to become more focused on a few select areas, particularly those with a focus on business data and Internet services," Lehman Brothers analyst Steven Levy said in a report late last week. The company is "unlikely" to include VDSL in this bundle, he added.

A company spokeswoman said Qwest is still marketing the service in the Phoenix areas where infrastructure is in place, but that the plans for expansion into Denver markets and elsewhere are part of the re-evaluation process.

Analysts note that even if Qwest pulls back from expansion, VDSL won't disappear. Bell Canada has plans to use the technology to reach apartment buildings, and a smattering of smaller telephone companies around the world are buying or trying the equipment.

"Independent telcos have jumped on the bandwagon," noted Michelle Abraham, an analyst for Cahners In-Stat Group. "I don't think VDSL is going away anytime soon."

But it's difficult to find sympathy among the large phone companies for using that technology to bring video to individual homes.

"We're not going VDSL," said Bill Noble, an SBC Communications spokesman. "We've looked at the technology...That tends to be a very expensive proposition."

Even if VDSL doesn't wind up being the technology of choice for telephone company video, the companies are still focused on becoming video providers.

Several of the biggest companies are convinced they can bring video on demand--the ability to watch feature films and other events--to customers using networks not much more advanced than they are today. SBC Communications' $6 billion Project Pronto is geared in large part toward this goal, and the company has already struck a deal with Enron and Blockbuster Video in anticipation of video services.

BellSouth is still working with the idea of bringing fiber-optic connections close or directly to the home. The company has said it believes that technology costs will come down far enough in the near- to medium-term future to make this viable on a reasonably wide scale. Verizon Communications also is testing fiber-to-the-home equipment, with a field trial likely to start later this year.

Several of the big companies also have deals with satellite provider DirecTV to provide video services, although this is viewed as a short-term solution.

Analysts say the companies will keep searching for the right way to do video until they settle on something cost effective. That is likely to mean a continuing patchwork of technologies over the next few years.

"They want to offer the full bundle," Guglielmo said. "The more services you can offer, the more likely it is that you'll ultimately stay profitable."