The Battle for the End of Single Service

Baby Bells and cable kings are girding for the emergence of convergencePaying Those Tolls

The telecom bill is not yet written in stone, but the writing is on the wall for the era of single-service telephone and cable television companies. As representatives of the people and representatives of corporations grapple over a compromise palatable to all, it appears likely Congress will pass legislation updating the Communications Act of 1934 during this session.

"They will all come to a conclusion because they have to have a bill," said Pierrett Chabot, telecom research director of Newton, Mass.-based Business Research Group.

The final bill is expected to allow the Baby Bells into long distance; long distance carriers into the local exchange; cable companies into the telephone business; and telephone companies into the cable business.

The $64 billion question is when and how these powerful players will be allowed onto each other's turf.

"It's certainly a question of timing and procedure," said Richard Levine, a Washington-based director of communications industries consulting with EDS, Dallas, Texas. "People will get what they want, but the question is whether somebody comes in after one, two or three years and how long safeguards will be in place."

As the ramparts fall that surrounded tightly restricted local telephone and cable television markets it becomes far easier to ascertain competing battle strategies than it is to determine who, if anyone, can seize the lion's share of the billions of dollars at stake in the coming melee.

"I don't know that there is any group that stands to benefit while others are in a hopeless position," said Bob Rosenberg, president of Insight Research Corp. of Livingston, New Jersey.

While there probably won't be any mega-deals on the scale of the aborted Bell Atlantic-TCI merger, a feeding frenzy of vertical integration will probably ensue, with big fish swallowing little ones.

Competitive access providers, for example, the small but pugnacious telcos nibbling away at the Baby Bells' most lucrative business customers, are being pursued by cable television giants.

These boob-tube barons are anticipating entry into the telephone business by preparing to spend a king's ransom in an attempt to eat the Baby Bells' lunch.

Cable Television Laboratories Inc., a research and development consortium representing 85 percent of the industry, recently issued a request for proposal for telephone switching software and hardware valued at more than $2 billion.

The order, placed on behalf of seven of the nation's largest cable operators, signals their intention to muscle in on residential and business telephony.

But the major impetus behind cable's push into the phone business has more to do with retaining television subscribers than garnering telephone customers.

Domestic cable companies operating in the United Kingdom have learned an important lesson -- consumers who take telephone and television service from one provider are far less inclined to cancel their cable than traditional subscribers.

These cable operators, usually working with Baby Bells, have been successful in draining a significant portion of British Telecom's customer base in the United Kingdom. But how successful will they be in challenging telcos here, particularly given their less-than-sterling reputation for service?

"They may pick up some business, but any thinking person would be hard-pressed to give telephone service to a provider whose mean time to repair can be measured in days, when that of telcos can be measured in hours," said Rosenberg.

Conversely, the regional Bell operating companies are not exactly sitting around twiddling their twisted pairs.

The RBOCs' eagerness to enter the cable television market reflects their need to offset expected damage to their phone business, and is a major reason behind their frenetic attempts to see legislation passed as soon as possible.

"It's absolutely critical for the RBOCs that some form of bill be passed this year," observed Chabot. "The RBOCs absolutely, positively have to be able to get into cable this year, or the ship will have left the dock."

Baby Bells are also rightsizing like mad as they slim down and shape up for the battle they all know is coming.

"Clearly, it [telecom legislation] has already created considerable turmoil in the telephone industry," said Rosenberg. "All of them have laid off large numbers of employees in order to be able to prepare for a competitive environment."

Although increased competition, in theory, decreases prices, that may not in fact occur in the local exchange for some time. "I don't believe we will see substantial price wars or declines in pricing, certainly not in the near term," said Rosenberg.

Creative packaging of services and price realignment, rather than pure rate wars, may well become the norm. AT&T, for instance, is increasing retail prices, but offering special advantages to higher-volume users.

"Competition will take the form of different services offering pricing plans closer to what the customers desire," said Levine. "It's hard to say how any particular group will do better."

While it may be premature to pick the winners this early in the game, it may be possible to identify one loser -- consumers. In fact, competition may not turn out to be such a value-added experience for the reliability of residential phone service.

For decades, Ma Bell, and then her offspring, the Baby Bells, provided local phone service as a regulated utility.

Because they were guaranteed a certain return, amortized their expenditures over a long period and faced no significant competition, Ma Bell and her babies could afford to build the most expensive, reliable and lasting telephone networks on Earth.

But full competition in the local exchange will place intense pressure on the RBOCs to make money as guaranteed revenues become a thing of the past.

Planning cycles will be slashed from decades to months and basic service will suffer as the desire for quality is superseded by the need for profitability.

"Much of the redundancy and reliability and the gold plating has gone out the window and we will see a difference five years from now," Rosenberg said.

"For example, every time we have a thunderstorm, everything goes out, but the telephone always works," he said. "My question is, in 2004, when the lights go out, will the telephone still work?"

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