Not just phones anymore Bell Atlantic pins future on cable, cellular

THE BALTIMORE SUN

New York -- Just last year it would have seemed improbable: Ray Smith, boss of Bell Atlantic Corp., hobnobbing with Francis Ford Coppola. Sure, Mr. Smith ran one of the nation's biggest companies, but he dealt in telephone switches and cables, not movies.

But a few months ago, after Bell Atlantic announced plans to send movies over the phone lines into America's living rooms, Mr. Smith got a flattering letter from the famous film director.

Mr. Coppola hailed the executive as a visionary for allowing artists to "speak directly" to their audiences. A few days later, Mr. Smith visited Mr. Coppola's New York apartment in the exclusive Pierre Hotel, where they chatted about cinema and wine.

Executives at Philadelphia-based Bell Atlantic are likely to mingle with Hollywood types more often, as the company transforms itself from a simple telephone business. A barrage of new projects reflects the company's aspiration to lead the fusion of cable, phone and cellular technologies. The result: replacing VCRs with huge libraries of videos that can be called up at the press of a button, and turning the phone into a Dick Tracy-style gadget that is as portable as a calculator.

"Of the Bell companies, they're the most technologically innovative and entrepreneurial. They've become real standouts," said Eli Noam, head of Columbia University's Institute for Tele-Information.

Bell Atlantic, which owns the Chesapeake & Potomac Telephone Co. of Maryland, is launching simultaneous broadsides against telephone behemoths such as AT&T; and the cable television industry. If they find their mark, the salvos could make Bell Atlantic a leader in next-generation cellular technology and interactive home entertainment.

But such bold moves could leave Bell Atlantic the owner of an information highway that no one wants to use. And the multibillion-dollar effort could exhaust the company just as competitors assault its once-secure hold on local phone service in the mid-Atlantic.

"The question is not whether there will be new services," Mr. Smith said. "The question is whether anyone will make money on the new services. The answer to that is yes, but who and under what circumstances? That is the mind masher."

The telecommunications free-for-all has been sparked by a loosening of legal restrictions on AT&T; and regional phone companies such as Bell Atlantic.

The regional companies were created after the 1984 breakup of AT&T;, which held a monopoly over phone service. Bell Atlantic and the other Baby Bells were charged with providing local service; Ma Bell retained the long-distance franchise. Rigid barriers restricted the regional companies and their local subsidiaries from providing anything other than a cable infrastructure -- cable programming, for example, was taboo.

But new technologies such as cellular have blurred the lines separating the transmission of voice, data and pictures -- erasing the neat distinctions within the telecommunications industry. As legal barriers were challenged in court and in Congress, competition intensified. And new players such as long-distance companies MCI and Sprint, cable giant Tele-Communications Inc. and fast-growing McCaw Cellular Communications Inc. joined the fray.

The first battleground: cellular phone service.

Two years ago, when it acquired cellular phone company Metro Mobile CTS Inc. in a $1.65 billion deal, analysts fretted that Bell Atlantic had moved too slowly. While companies had been blanketing the nation with cellular phones for nearly a decade, Bell Atlantic was just becoming a big player.

The deal made Bell Atlantic the nation's fourth-largest supplier of cellular phone service. It also spread the company's reach into states such as Arizona and Texas -- far beyond its mid-Atlantic base of 18.2 million local subscribers in Delaware, Maryland, New Jersey, Pennsylvania, Virginia, West Virginia and Washington, D.C.

"Bell Atlantic did lag in its cellular strategy, but is now well positioned in the field," said Michael J. Balhoff, a telecommunications industry analyst with Legg Mason Wood Walker Inc.

Recently, Bell Atlantic has begun to push cellular technology in new directions. Last month, it joined with CellularVision of New York to develop wireless cable services, a technology that would combine the information available over cable systems with the portability of cellular telephones.

Cellular business has become a key to Bell Atlantic's growth. The company's cellular base of 840,000 customers is expected to grow 40 percent this year and its $800 million in revenues will rise 30 percent, says Larry Babbio, head of Bell Atlantic Enterprises International Inc.

But competition should get hotter. Last month, for example, AT&T; made its belated -- but thundering -- entry into the business by agreeing to buy McCaw Cellular for $12.6 billion.

Such moves could threaten the regional Bells' stranglehold over local phone service.

If companies such as AT&T; establish a national cellular network, callers could dial Washington from Baltimore, or even place a local call within Baltimore, without using Bell Atlantic's local C&P; subsidiary.

A serious blow

Although cellular technology poses a long-term threat to Bell Atlantic's local monopoly, a more immediate assault comes from aggressive competitors using standard cable technology.

Companies such as Illinois-based MFS Communications Co. have started to skim the cream off Bell Atlantic's local service by signing lucrative contracts to provide access to long-distance carriers.

Over the past three years, 200 Baltimore companies have signed on with MFS, helping to boost the 4-year-old company's revenues to more than $100 million.

Losing the fees charged for long-distance access would be a blow to Bell Atlantic -- they accounted for 23 percent of the company's $12.6 billion in revenues last year.

"Most of their revenues are still from plain old telephone services. Sure it's good stable money, but it won't last forever," said Liam Burke, a telecommunications analyst with Ferris Baker Watts in Baltimore.

MFS also wants to cut into the heart of Bell Atlantic's financial base, the monopoly over local telephone service, which provides another 40 percent of revenues.

MFS has asked state regulators to end Bell Atlantic's local monopoly in Maryland. That request, made in July, could take a year to be heard, but it signals the day when customers can pick a local phone carrier just as they can choose AT&T;, MCI or another long-distance carrier.

Fred D'Alessio, head of C&P; of Maryland, says his company is fighting back by spending $1 million a day to improve its infrastructure. For example, fiber-optic loops, which businesses prefer because they are more reliable, have been installed in all metropolitan areas. (Another sign of change: Next year, C&P; will be renamed Bell Atlantic-Maryland.)

"Clearly, as we look at the telecommunications landscape, it's not surprising that it's becoming more competitive. We're not sitting around and thinking it won't happen. We're pushing for it," he said.

Regulatory freedom

By touting competition in its bread-and-butter business, Bell Atlantic actually is prepping for an ambitious expansion, says Richard Moroney, author of a recent study on telecommunications for Dow Theory Forecasts. Why? If regulators allow competitors to attack Bell Atlantic's local monopoly, they can't object when it enters fields such as cable television.

"They're going to get their regulatory freedom, the question is just which one comes first: Do they lose their local monopoly first or get to enter other fields first?" he said.

A recent Bell Atlantic victory in federal court could jump-start the cumbersome process of changing federal regulations. The company challenged a government ban on telephone companies providing video programming in their local telephone service areas. Unless the ruling is overturned on appeal, Bell Atlantic can proceed with a project to offer cable television to 60,000 Alexandria, Va., residents.

Eventually, Bell Atlantic plans to provide interactive programming, including home shopping and information services, over the lines. These services, now part of an experiment with company employees in Northern Virginia, would land Bell Atlantic in a battle with information giants such as U.S. West-Time Warner, partners testing a similar system in Orlando, Fla.

Bell Atlantic's entry into the cable field required a technological breakthrough -- as well as a legal one. One key: its lead in applying a new signal-compressing technology, ADSL, that allows phone companies to avoid wiring an entire neighborhood with fiber-optic cables.

This is crucial because cable television companies have a tremendous lead in laying fiber. In bypassing fiber, Bell Atlantic should be able to offer interactive digital without huge capital outlays.

For example, Bell Atlantic can use ADSL in communities to see if a demand exists for interactive video, says Timothy Cain, who studies Bell Atlantic for Fitch Investors Service Inc. If revenues are high enough, the company could invest the money into fiber-optic cables.

"Eventually you're going to need fiber, but in the meantime ADSL is a great bridge," he said.

Bell Atlantic also is working on two cable-related pilot projects in New Jersey. In one, Bell Atlantic is building a fiber-optic network and hiring a local cable company to provide programming; in the other, an outside cable company has been hired to provide programming.

Bell Atlantic and other information purveyors are using cable television and video-on-demand services as a "Trojan horse" to get viewers hooked into fiber-optic networks, says Robert Cringely, an editor with InfoWorld magazine. Then the companies can sell other services.

"Imagine if Nintendo revealed that all 50 million games it's sold in the United States were bank terminals. Well, in Japan, with different soft ware, they are. If they can build this network by bringing "Lethal Weapon 3" into your house, they'll do it," he said.

$10 billion investment

Mr. Smith is confident that the costs of these investments can be recouped quickly, though he says the company must invest more than $10 billion in cable technology before it has reliable marketing data on consumer needs. That's a hefty investment -- even for a company with annual profits of $1.3 billion.

"Competition forces us to move very quickly into video services because market presence is a great value. HBO was only 14 months ahead of Cinemax and never lost its lead," he said.

And though cable companies dominate most markets, consumers often resent them, he says. After Bell Atlantic announced its goal of competing with cable, the company was inundated with supportive calls from disgruntled viewers and community leaders. Bell Atlantic has even set up a toll-free telephone number to handle those calls.

But beyond battling local cable companies -- who are backed by wealthy corporate parents -- Bell Atlantic faces some formidable competitors. For starters, there's AT&T;, the $65 billion gargantuan.

Bell Atlantic also is likely to face off against well-heeled fellow Baby Bells.

For example, in the local phone market, it could compete with Southwestern Bell, which purchased a Washington cable company and could offer phone service through the television cable. In interactive television, Bell Atlantic could face the joint venture between U.S. West and media giant Time Warner.

Mr. Smith, however, remains unfazed.

"When Exxon and Mobil compete, no one asks, 'Gee, weren't they part of Standard Oil in 1909?' It hasn't been 80 years since AT&T;'s breakup, but we're already seeing this sort of competition."

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