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                                                                                BUSINESS, Page 36

COMMUNICATIONS

A Giant Tug-of-Wire


New technology and deregulation are blurring the lines between
telephones and cable TV, provoking a battle for America's homes

By THOMAS MCCARROLL


    Randy and Betty Hyatt may not realize it, but their
two-story ranch house in Cerritos, Calif., is a high-tech
battleground. The Hyatts, along with 58,000 other residents of
this affluent Los Angeles bedroom community, are testing a
futuristic cable-television service that is years ahead of
conventional systems. Linked by 2,500 miles of hair-thin optical
fiber, the network not only offers 78 channels of TV but also
lets subscribers browse through the Sears catalog, check their
bank accounts and select from a large menu a movie of their
choice anytime they want. Perhaps most surprising is the builder
of the sophisticated TV system: the local telephone company,
GTE. Says Betty: "I thought the only thing phone and cable
companies had in common was that they both dig up the streets."

    Historically, the two were as different as sight and
sound. Phone calls reached the home over one kind of line, while
cable-television signals traveled along a different kind. Their
markets were separated by a thick wall of government
restrictions, so competition between the two public utilities
was almost impossible. But that has been changing dramatically
owing to the rapid pace of deregulation and emerging new
technologies. Among the most important developments:

    -- Recent decisions by the courts and the Federal
Communications Commission have given telephone companies -- like
GTE, Pacific Bell and U.S. West -- limited entry into such
businesses as information services and television.

    -- The FCC, prodded by its chairman, Alfred Sikes, has
proposed a more sweeping set of rules -- which it may enact
later this year -- allowing phone companies to provide a "video
dial tone" that would allow people in effect to attach their
television sets to their phone lines and call up shows they want
to watch.

    -- At the same time, cable operators, such as Cox Cable,
Comcast and Continental Cablevision, have received permission
from the FCC to develop a new "wireless" telephone service.

    -- The development of compressed fiber-optic wiring will
give cable companies the potential to supply hundreds of
programming channels in the home as well as interactive
communications, movies and musical releases on demand, and
digital information services.

    With the fading of the technological differences and
regulatory barriers that keep them apart, cable-TV and phone
systems are trying to position themselves -- legally and
financially -- to provide the expensive fiber-optic networks
that can handle communications, entertainment and digital
information of the 21st century. Some Bush Administration
officials and other propoof deregulation hope the result will
be competing pipelines that can carry voice, video and digital
information into homes, so that consumers will have more
choices. More likely -- and probably more economically efficient
-- only one company will end up providing the fiber-optic
pipeline in each local market. Says Clifford Bean, a
telecommunications expert at the consulting firm Arthur D.
Little: "The cable industry and the telephone industry are
headed toward each other like two steaming locomotives."

    The stakes in this wire war couldn't be higher. Producers
of computer software, books, video games and Hollywood movies
-- as well as the hardware companies that make computer chips,
high-definition television screens and VCRs -- are investing
heavily in products to supply the dominant pipeline into the
home. It is a market that is expected to ring up nearly $1
trillion in revenues by the year 2000, accounting for 14% of the
U.S. economy. Bringing advanced fiber-optic wires into every
home in the U.S. could eventually cost anywhere from $150
billion to $500 billion. Whoever controls these wires will not
only have a say in what the TV of the future will look like but
will also have a grip on the lifeline of those leading-edge
industries whose fortunes are tied to the network. Says Fritz
Ringling, an analyst at Insight Research: "The winner could wind
up calling the shots, and the loser could end up with an
electronic white elephant."

    On paper, it doesn't even look like a fair fight. The
phone companies dwarf the cable industry in size and scope.
While cable TV serves about 60% of U.S. households, telephones
are in 95% of all homes. And with assets of $193 billion, the
phone industry outweighs the competition by at least a factor
of four. The revenues of just one phone company, such as GTE
(1991 sales: $19.6 billion), almost equals those of the entire
cable industry (1991 sales: $20 billion).

    Cable has some advantages, however. Although phone
operators had about a 10-year head start in deploying
fiber-optic wire, cable systems are now laying fiber about three
times as fast and could catch up in a few years. Cable also has
expertise in the complex art of video broadcasting as well as
a knack for entertaining programming -- two skills the phone
companies lack. Still, cable companies fear being snuffed out
by their elephantine rivals. Says James Robbins, president of
Cox Cable: "They're giants who can squish us like bugs."

    Cable hasn't been stepped on so far owing to regulatory
safeguards. A federal law, for instance, bars phone companies
from owning cable-TV systems in cities of 5,000 or more unless
they have a waiver from the FCC. (Some 250 cable systems in
rural areas are owned by small, independent phone companies.)
And until recently the phone companies were prohibited from
transmitting TV signals on their networks. In addition, these
old-fashioned wire networks were not well suited to carry
high-quality video signals.

    But the mood in Washington has shifted. Traditionally, the
telephone company was the utility that the public loves to hate.
Cable now appears to hold that distinction, thanks to growing
public resentment over the rapid rise in cable rates -- up 78%
since 1985. Responding to public anger, the Senate voted 73 to
18 last month to re-impose the local and federal restrictions
on cable prices that were lifted eight years ago. Similar
legislation, which the White House has threatened to veto, is
pending in the House, where the calls for re-control of cable
prices have been even louder.

    The phone companies appear to be cashing in on the
anti-cable sentiment. A bill co-sponsored by Democrat Rick
Boucher and Republican Michael Oxley in the House and by
Republican Conrad Burns in the Senate would let phone companies
own cable systems. The legislation, which has won the cautious
endorsement of the White House, is intended to encourage the
phone companies to invest in advanced technologies, such as
fiber-optics and visual communications. Its backers say such
investments are crucial if America is to meet the future global
challenge in high technology. But the bill was designed as much
to punish cable, says Boucher. "The only way you can stop the
unregulated monopoly of cable from gouging subscribers is to
introduce competition."

    The phone industry has launched an all-out lobbying
campaign for decontrol. The industry was opened to competition
10 years ago -- but not deregulated -- with the court-ordered
breakup of the old "Ma Bell" into eight separate companies,
including AT&T, which provides long-distance services, and the
seven regional "Baby Bells," which provide local wiring and
switching. While the regional phone companies have been given
some freedom to venture into new markets, they have been barred
from electronic publishing and television. Now the companies
claim they would have more incentive to spend and upgrade their
networks if the remaining barriers were removed. Says John
Sodolski, president of the U.S. Telephone Association: "If it's
going to be a race between us, then we want to run with both
legs like cable, not with one leg tied down."

    The cable industry has countered with its own campaign to
stop telephone decontrol. It charges that the phone companies
can compete unfairly by tapping their ocean-size pools of
ratepayer funds to underwrite their newly formed ventures. If
the Boucher bill passes, predicts James Mooney, president of the
National Cable Television Association, "it would mean the end
of independence for cable television." Although federal rules
prohibit the phone companies from using ratepayer money to
subsidize new enterprises, critics cite a number of misdeeds by
the Baby Bells as proof of the FCC's inability to properly
police the companies. In 1990, for instance, NYNEX was indicted
on criminal-contempt charges for providing computerized
information in 1986 in violation of a federal court order.

    Cable has enlisted some powerful allies, such as newspaper
and magazine publishers. They say new information services
provided by phone companies will siphon off a large portion of
the $11 billion classified and other advertising that is their
lifeblood. In an alliance with the television networks, they are
appealing the FCC's proposal to let the phone companies carry
TV signals, and seeking to overturn a decision by a federal
court last year that let phone companies transmit computerized
information such as stock quotes, sports scores and an
electronic version of the Yellow Pages. This week New York-based
NYNEX became the first Baby Bell to introduce a computerized
version of the phone directory.

    The phone companies maintain that they are better suited
than cable to offer the TV of the future because it will be
interactive and they have more experience in dealing with such
technologies. Viewers will not just passively watch television
as they do now, but will have an opportunity to "talk back" and
participate in quiz shows, order pizza with the TV remote
control and pick which news stories they want covered in depth.
That requires expertise in switched, or two-way, service, a
craft practically invented by the phone companies. GTE's
Cerritos cable system offers interactive exchanges between one
teacher and students in six different classrooms at two
different schools at the same time.

    Most phone companies want to go even further. For them,
video is the last link in their ultimate high-tech fantasy: the
Integrated Services Digital Network. ISDN is the phone
industry's grand scheme to be the dominant conduit for every
conceivable communications service -- from faxes, newspapers and
video conferencing to home shopping, radio broadcasts and TV.
At least seven phone companies, including Pacific Telesis,
Ameritech and BellSouth, are developing the ISDN software for
special fiber-optic wires that can carry such multimedia
information. But the companies need state regulatory approval
for telephone-rate increases to cover installation costs. Public
service commissions, however, have been reluctant to let
companies raise phone bills to recover the investment.

    Cable operators see telecommunications as just another
service offered on their new networks. These high-capacity
systems could provide 300 or more channels in the future. In
December, Time Warner (the parent company of TIME magazine)
launched the nation's first 150-channel cable system. Located
in the New York City borough of Queens, the 1,800-mile fiber
network includes 50 channels of movies and is capable of
providing interactive television. Time Warner is also planning
to use extra channels on the Queens system to test a new
portable phone service that could greatly expand the use of
mobile communications. It is one of 32 cable companies
developing the service.

    Called personal communications networks, these systems
operate much like cellular phones but are not intended for cars.
Instead they are designed for pedestrian use and will consist
of pocket phones so small they can be folded up like a wallet
to the size of a pack of cigarettes. They can be smaller and
less expensive than conventional cellular phones because they
need to be powerful enough only to transmit to one of hundreds
of receiving stations located throughout the local cable
network. The user could thus bypass the local phone company,
which makes the PCN system a threat to the Baby Bells' local
monopoly. Last week Cox scored an industry first by becoming the
first cable system to test-market a PCN service.

    The PCN market is expected to reach $30 billion by the
year 2000. But cable operators may have to invest up to $40
billion in software and hardware to capture that market. Another
obstacle is that the cellular phone companies are investing
heavily to upgrade their conventional portable-phone service,
which does not depend on cable networks, so it is possible that
PCNs could be rendered obsolete before they ever reach the
market. Although such risks have given some cable operators
pause, they say it is a chance worth taking as a hedge against
being shut out by phone operators. Says William Schleyer,
executive vice president of Boston-based Continental
Cablevision: "If the phone companies are allowed in our
business, we'd better be prepared to enter theirs." The
confrontation needn't necessarily lead to a duel to the death.
Perhaps the best solution may be cooperation rather than
competition. Rather than fight, Southwestern Bell and Sammons
Enterprises formed a joint venture to test a combined cable
TV-telephone service using fiber. Indiana Bell and Cardinal
Communications also joined forces to try out a fiber-based TV
system. The Colorado-based telephone company U.S. West is
developing a PCN in Britain in partnership with cable companies
Comcast and United Artists, and it is building an advanced
cable-TV system in Denver, as part of a team that also includes
the largest cable operator, Tele-Communications, Inc. "The days
are over when everybody has to own everything," says Gary
Bryson, president of U.S. West's cable operations. "There's
plenty of synergy between us."

    In shaping the rules that will determine who can build and
control these new networks, Congress and the regulatory agencies
will have to balance two sets of competing demands. Whichever
companies or consortiums end up laying the new fiber-optic
cables must be permitted a way to ensure a return on their
massive investments. But for the consumer, the best outcome
would be one in which the powerful new pipelines would allow
competing companies and industries a chance to offer their many
options. A whole array of amazing new entertainment services and
communications products -- including those as yet undreamt of
-- may then find their way into America's homes.