Telcos: Raiders of the Cable Market

In the past two months, telecom companies have been rushing forward with proposals and alliances to get into the video business

Right now, most telecom companies have something missing in their one-stop-shopping offerings: video. Not for long.

While local telephone service executives are looking forward to getting into the long distance market and vice versa, both groups also can't wait to enter the lucrative cable television and video business.

The Telecommunications Act of 1996, signed into law by President Bill Clinton in February, opened the telco market to new competition. Not only will the communications companies raid each others' markets, but they will do what they can to chip away at the video market dominated by cable television companies, direct broadcast satellite firms and the newer wireless cable businesses.

In the past two months, telecommunications companies have been coming forward with cable plans, alliances and FCC proposals. The battle for market share has officially begun.

"Most [telcos] have plans to provide video service," said Morgan Broman, a spokesman for the cable services bureau at the Federal Communications Commission. "They've already got the wires."

Some companies have moved beyond the planning stage already.

In the past month, the FCC approved the first two telco proposals under the new "open video system" rules.

"The open video system operator will be a new competitor in the video marketplace, providing competition to incumbent cable operators," according to the rules.

On Oct. 11, the first approval was granted to Digital Broadcasting OVS, a start-up firm in Santa Ana, Calif. The following week, Philadelphia-based Bell Atlantic Corp., arguably the most active telco in the video market, was given permission to launch a video system in New Jersey.

FCC cable services Bureau Chief Meredith Jones said then that she hopes a wide range of companies will get into the video market. So far, the FCC has shown on this part of the Telecommunications Act that it wants to move things ahead as fast as possible.

"There won't be a lot of regulatory impediments," said Richard Wiley, former chairman of the FCC who now practices with Wiley, Rein & Fielding, Washington.

The FCC's Broman agrees. Under the law, the agency must make a decision on an application within 10 days of receiving it. "[Congress] didn't want any roadblocks here," he said. "Unless there's something weird about it, we'll approve it."

So telcos, many of which have been preparing for the cable market for years, are suddenly unveiling their video plans.

"Bell Atlantic has constantly had a crew working on this, and others are going to do it," said Wiley. Besides Bell Atlantic, Wiley predicts that Englewood, Colo.-based US West and Chicago-based Ameritech Corp. will lead the charge.

"It's time to be more than a telephone company," said Richard McCormick, CEO of US West in a recent speech at the U.S. Telecommunications Association's annual convention in Atlanta. McCormick went on to tell USTA members that telecom companies can and should use their networking knowledge in new businesses such as cable TV, wireless telephony and interactive services.

For US West, however, cable is hardly just a plan on the horizon. The US West Media Group, which includes cable and wireless operations, just reported a 20 percent increase in revenues -- up to $1.5 billion -- for the quarter ending Sept. 30 compared with the third quarter last year. The media group now has 6.5 million customers.

"These results demonstrate our success in delivering more services to more customers in more markets," said McCormick. This month, he added, US West will greatly increase its cable market share as it closes a merger with Continental Cablevision.

The merger application was approved by the FCC in October. US West expects to offer the cable service to 4 million subscribers.

In addition, the US West Media Group this past quarter generated $151 million in operating cash flow from its investment in Time Warner Entertainment.

Many telcos, in fact, over the past few years have been forming alliances or planning acquisitions of entertainment conglomerates.

Last month, Kansas City, Mo.-based Sprint teamed with Viacom Inc., New York, to develop and sell Internet access products. Viacom counts among its divisions Blockbuster Entertainment Group, Paramount Pictures and Television and Showtime Networks.

GTE Corp., Stamford, Conn., also in October formed a partnership with TCI Satellite Entertainment, a division of Tele-Communications Inc., Denver, which runs a direct broadcast satellite network. Rick Wilson, president of GTE Media Ventures, said the satellite and local broadcast services will cost about as much as cable TV service.

Right now, only GTE customers in California, Florida, Oregon, Texas and Washington state who live in multiple-family housing such as apartments will be able to buy the service. Other regions will be included in 1997.

GTE is marketing this new offering as a key to its one-stop-shopping plan. A single bill will include any or all of the following: video, Internet access, local and long distance telephone service, paging and cellular.

This new competition comes at a time when the cable market is under enormous fire. Giant cable company Tele-Communications Inc., which many industry executives describe as a bellwether for the market, recently fell to its lowest trading point in five years.

Also, direct broadcast satellite, such as Hughes Electronics Corp.'s DirecTV, has been a success. "DBS is the most successful home technology start-up ever," said Broman.

Another aspect to this battle is the high-definition television, or digital TV, debate. Computer companies, which fear they will lose the Internet access war to televisions and broadcasters, have been fighting for years about if, how and when to introduce digital television to the United States. The debate centers around which technology standards should be chosen and how receptive the general public will be to buying new televisions or devices that would allow them to see digital pictures.

Digital television, which delivers much better quality television than analog, would compete with cable in part because broadcasters would offer more programming.

Last month, FCC Chairman Reed Hundt said he favored little regulation of digital TV. "In the digital era, we would only need three rules for broadcasters -- no interference, spectrum caps and clear public interest guidelines," he said at the International Radio and Television Society in New York. The FCC is expected to make some decisions about digital TV by Christmas.

While they do not have the lobbying power of telcos as a whole, cable businesses are fighting the encroachment into their territory. Specifically, cable companies are suing the FCC to get the agency to further regulate the telcos entrance into the video market. Groups such as the National League of Cities and the U.S. Conference of Mayors have backed the cable companies. "They're concerned about loss of franchise fees from the cable companies," said Broman.

And while telcos certainly have a wire into the home, many are not sure the old lines will be able to carry video or other more sophisticated technologies.

Many are expecting the telco raid of the video market to be fast and furious, but the speed will rely heavily on how long distance companies and local telcos are allowed to get into each others' markets. That mutual invasion is first priority. "While the telephone companies are interested in video, long distance and local [telephone service] is their first interest," said Wiley.

But telcos still have a little while before the cable market is at its most promising. The Telecom Act called for the removal of cable rate regulation by 1999. "By that date, people will have a choice," said Broman. More likely, many choices.

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