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Bells can hear opportunity calling--if legal decree falls

THE BALTIMORE SUN

The seven regional Bell phone companies are close to doing what they have been hankering to do since the breakup of AT&T;: forcing U.S. District Judge Harold Greene to cry uncle.

Judge Greene, who oversaw the breakup of AT&T;'s monopoly phone system in 1984, has refused to waiver from the consent decree that spells out what the Bells may and may not do. Despite heavy lobbying and litigating by the Bells, not to mention the millions of dollars they have spent to bend ears in Washington, he has remained stalwart.

The consent decree, a sort of Bill of Rights for the Bells, bars them from providing long-distance service, owning or producing electronic information, and making telecommunications hardware of any sort, including telephone sets.

In exchange for those concessions, the consent decree granted the Bells a financial plum: a monopoly on local phone service.

Now Congress is eyeing a proposal that, if passed, would overturn the restriction against manufacturing. The bill, introduced by Sen. Ernest F. Hollings, D-S.C., chairman of the Senate Commerce Committee, and heartily endorsed by the Bells, would permit the companies to design, develop and manufacture telecommunications equipment under certain restrictions.

The Hollings bill requires 60 percent of Bell products to be manufactured domestically, a provision aimed at preventing the companies from moving jobs offshore.

A slew of bills aimed at ending the manufacturing ban have been introduced every year since divestiture, but so far none has passed. The Hollings bill was approved by the Senate on a 71-24 vote earlier this month, but it still must clear hurdles in the House and with the White House before it becomes law.

Bell Atlantic and its siblings claim that ending the manufacturing ban will boost competition and create U.S. jobs.

Sen. Barbara Mikulski, D-Md., who voted for the bill, says that the Hollings bill can help get the United States back on track in the international game of equipment manufacturing, a $50 billion-a-year business that is dominated by AT&T; and a half-dozen foreign companies.

"In this country, we win Nobel prizes while other people win markets," Senator Mikulski said. "I want to make sure we win both."

The billion-dollar Bells consider the Hollings bill to be a strong legislative antidote for what ails them.

The manufacturing ban prevents the Bells from engaging in research and development on telecommunications products, or even discussing hardware ideas hatched in-house with manufacturers. Likewise, the Bells are precluded from forging alliances or investing in other companies that engage in research and development. Such a ban has cost smaller companies plenty in the form of lost opportunity.

Take International Mobile Machines Corp., located near Philadelphia, for example. BellSouth Corp., the regional phone company that serves the South, asked IMM to come up with next-generation cellular phone technology a few years back, and offered to hand over $50 million to see the project through.

But Judge Greene, citing the manufacturing ban on research and development, nixed the plan.

"We never got in to the cellular marketplace, and we're not profitable yet," said William Hilsman, IMM's chairman. "We were not able to finance this company for growth, but we could have if we'd been able to do that."

Nobody expects the Bells to open factories overnight if the Hollings bill becomes law. Entry into the market would be exorbitantly expensive. And the Bells might not have the expertise or incentive to handle day-to-day management of factories.

But freedom from the manufacturing restriction opens up a world of possibilities for the Bells, said James Young, a vice president at Bell Atlantic Corp., the parent company of Chesapeake & Potomac Telephone Co.

Besides striking up relationships with smaller companies like IMM, Philadelphia-based Bell Atlantic would use its new freedom to work more closely with manufacturers to come up with customized equipment, he said.

Bell Atlantic, he said, would like to develop phones with special buttons and keypads to promote the use of enhanced services. Such Bell Atlantic services as three-way calling, home intercom and call forwarding are currently activated by dialing two or three-digit codes.

According to Mr. Young, the ability to customize equipment to make it easier to use enhanced services would mean better service for customers -- and more profits for Bell Atlantic.

Other items on Bell Atlantic's wish list: A phone that works by verbal commands, a "prescription"

phone that automatically modulates sound to a particular tone and pitch for customers with hearing problems, and a compressed video offering that could be shipped over cable or regular phone lines.

The Bells also would like to work more closely with manufacturers to develop customized central office switches, which route and sort local calls. The Bells now buy most of their expensive switches from AT&T; and a few foreign suppliers.

And Bell Atlantic wants to explore joint ventures with established manufacturers worldwide, and to act as a venture capitalist to small start-ups with good ideas about communications technology, Mr. Young said. "It would not be metal-bending," he said. "We're more interested in services."

But what's good for the Bells may not necessarily be good for America, argues Michael Baudhuin, vice president of federal government affairs for American Telephone & Telegraph Co, which dominates the $10 billion-a-year communications equipment market in the United States, has vigorously opposed any tampering with restrictions contained in the consent decree -- including the manufacturing ban.

Holding onto the manufacturing ban would clearly be in AT&T;'s financial interest -- AT&T; sells about 80 percent of its large switching equipment each year to the Bells.

But Mr. Baudhuin argues there are more compelling reasons why the ban should be upheld -- like preserving jobs. According to AT&T;, lifting the ban on the monopoly Bells will wind up costing -- not creating -- U.S. jobs over the long run.

That view was reflected by the Labor Department in a January 1990 study -- completed before the Hollings bill was drafted -- which concluded that lifting the manufacturing ban would eliminate at least 18,000 to 27,000 U.S. jobs.

"This number does not include potential adverse effects on employment in research and development functions, much of which might be transferred abroad through [Bell] joint ventures with foreign companies," said the report, which was never publicly released because it ran afoul of Bush administration policy.

The report said that as many as 30,600 U.S. jobs "may be at risk if the joint ventures created by the regional Bells also serve the non-Bell market."

And who might the Bells choose as partners?

According to the Labor Department study, potential joint venture partners include NEC and Fujitsu of Japan, Siemens of West Germany and Ericsson of Sweden. Under current court rules, the Bells aren't allowed to be partners with AT&T.;

"We're afraid they'll put in place a system where the U.S. market gets closed one-seventh at a time to us," said AT&T;'s Mr. Baudhuin.

Restrictions in the Hollings bill are aimed at keeping the Bells at home and preventing U.S. jobs from moving offshore, but it isn't certain how long they will remain intact. President Bush has already threatened to veto the bill if that language is not removed.

Analysts, meanwhile, have mixed views about what the manufacturing bill might mean for investors in the Bells. Michael Balhoff, a telephone analyst with Legg Mason Wood Walker, said that any relaxation of restraints on the Bells is good news for investors because it means "new opportunities are on the

horizon."

But Julian Menear, senior vice president of Young Capital Group Inc., in Chicago, said he sees plenty of potential problems for investors if the manufacturing ban is lifted.

"At best, with reference to acquisitions, they've not had a great track record," Mr. Menear said. "And now they plan to buy metal-benders, which they don't know how to run. It's like trying to put a square into a circle. . . . They'd be trying to do something they're really not capable of doing."

Likewise, Mr. Menear dismissed the notion that easing the restriction on manufacturing will bolster the domestic market. If the Bells can't compete with foreign-produced goods on price, Mr. Menear expects the regionals to start angling to move operations out of the country.

Even if the Hollings bill doesn't become law, the Bells are taking satisfaction in what they see as a harbinger. According to Bell Atlantic's Mr. Young, the fact that the Hollings bill sailed through the Senate suggests it will be only a matter of time before the consent decree restrictions begin to fall.

"The fact that it's gotten to this point," Mr. Young said, "reflects the fact that policy-makers have talked about it long enough, and it's time to do something about the policy gridlock in this country."

Bell Atlantic's wish list

Given the freedom to enter the manufacturing game, Bell Atlantic Corp. has already identified projects it would like to pursue. They include:

* The creation of phones with special buttons and keypads to promote use of enhanced services. Services like three-way calling, home intercom and call forwarding, part of the Bell Atlantic family of enhanced services, are currently activated by dialing two or three-digit codes.

* Using voice recognition technology to create a sophisticated phone that works by verbal commands.

* Creation of a "prescription" phone that automatically modulates sound to a particular tone and pitch for customers with hearing problems.

* Using a compression video technique to send video signals over cable or regular phone lines. Such a service could be useful to deliver programming and live pictures to homes, classrooms and offices.

* Joint ventures with established manufacturers, both foreign and domestic.

* Acting as a venture capitalist to start-up companies. They would include companies with good ideas about communications technology, or ones with expertise in pure research and development.

* Working with manufacturers to develop customized central office switches, which route and sort local calls, and a variety of business equipment, such as Centrex.

jTC

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