Bells Retreat From Dial-Up Video

Local and federal regulators aren't giving a clear signal as to how they will assess new services

Three regional Bell companies, Ameritech, Bell Atlantic and US West, retreated in recent weeks from proposals to offer video dial tone service and compete with cable TV in their respective local markets. Publicly, they all stated that new communications technologies were moving so swiftly that they didn't want to commit to one now -- lest it become outmoded shortly.

But that may be only one reason for the retreat from video dial tone, as it is known. Top executives at Baby Bells are now pointing the finger at a brewing battle between local and federal regulators about just how advanced services from phone companies should be regulated.

"We tried to do video dial tone," said Richard Notebaert, chairman and CEO of Ameritech Corp., the Bell company for the five-state Midwest region, in an interview. "We tried to work with the Federal Communications Commission. It doesn't work. The FCC has abdicated [its] responsibility of preempting state and local municipalities and franchises." According to Notebaert and other telecom executives, the FCC wants to regulate the Bells' video dial tone services as if they were common carrier telephone lines. Rate plans would be filed and approved by federal regulators.

But local governments have a different idea. They want to treat the Bells as new cable companies entering their communities -- meaning a raft of local regulations and taxes must be paid by the Bells on the local level to enter the new market. The city of Naperville in west suburban Chicago publicly announced in May that it considered Ameritech no different than a cable company, a spokesman said. Other cities have not made similar announcements yet. "They try to license you and regulate you," said Notebaert. "The two sets of rules make it impossible to operate. So we've [told] the FCC [it] can't treat us as both a common carrier and cable TV. If the FCC ever decides what the rules are, maybe we'll go into video dial tone."

FCC rules regarding video dial tone are cumbersome, too. The agency requires that companies file tariffs, or documents that set the prices, terms and conditions of service offerings. Moreover, the Bells themselves cannot provide video. So-called video information providers, or VIPs, would handle the task. These included video producers from Hollywood, such as Universal Pictures and Walt Disney. They would have to lease the lines from the Bells in either monthly or yearly plans.

Ameritech was most forthright about the setback -- and the regulatory structure with which the Bells must contend. Gary Ames, president and CEO, US West Communications, did admit through a spokesman that local regulations were indeed a consideration in limiting video dial tone to just the Omaha, Neb., market, and rescinding plans for service in Denver; Portland, Ore.; Minneapolis; Salt Lake City; and Boise, Idaho. "While we are anxious to move ahead with our plans, I am confident that by slowing the process, we will end up with far better broadband networks in the future," said Ames.

Bell Atlantic stuck with the argument that its video-on-demand applications before the FCC were "technologically outmoded." But an examination of the new technology that it chose may raise doubts about that claim. The Philadelphia-based Bell has dropped fiber optic networks in favor of high-frequency microwave signals, commonly known as wireless cable TV. Multichannel, multipoint distribution services (MMDS) technology has been around since 1983. Programming is transmitted from satellites over a footprint of 40 miles. Eighteen-inch reception dishes are deployed in the home to pick up the signals of up to 33 channels. Signals would travel over wireless networks controlled by CAI Wireless Inc., a company in which Bell Atlantic and NYNEX in March invested $100 million. The virtue of the system is that the FCC is the primary regulatory body with which Bell Atlantic will have to deal. Indeed, Bell Atlantic President James Cullen seems to be biding time with the older technology, calling the move to wireless cable an "interim step," which will provide competition against cable TV in 70 percent of the homes in the Washington market by 1996.

The FCC, for its part, has adopted an approach that does not address the problem, as outlined by the Bells. Chairman Reed Hundt said that the commission "will continue" to process the so-called Section 214 applications for video dial tone service that were presented earlier. The FCC, he said, does not want to be an obstacle to development of the networks and wants to let the Bells choose for themselves what they want to do. In reality, video dial tone is not too different than cable TV. "The build plan and the interactivity are the same for both," said Notebaert. An array of companies from Oracle, to NCube to IBM, Silicon Graphics and the Bells are all involved in developing the technology for the new market. Technological challenges still have to be met to achieve two-way interactivity at an affordable price.

The Ameritech chairman and others in telecom are hoping that legislation to revamp regulation in the industry can provide some relief to the Bells, which are working under the aegis of the Communications Act of 1934, a measure written when rotary dial phones were the technological rage in telephony. With that out of the way, real work can begin. "Anything would be an improvement," said Notebaert. "A lot of the rules don't make sense anymore."

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