As appeared in U.S.News and World Report, February 12, 1996 (1357 words)

Racing into the future

Sweeping new legislation speeds the telecommunications revolution.

BY WARREN COHEN AND KATIA HETTER

It's hard to remember, but before 1984 no one thought about choosing a long-distance company. Phone service came from AT&T. Period. The breakup of Ma Bell changed that. Today, along with industry leaders AT&T, MCI and Sprint, there are 400 companies fighting for portions of the long-distance market. Over the past decade, the rivalry for customers has dropped long-distance rates roughly 65 percent. But if this business seems intensely competitive, it's just a preview of what's to come in the telecommunications world.

After years of deliberation, Congress overwhelmingly passed a telecom bill last week, the first comprehensive rewrite of the law in 62 years. The legislation, which President Clinton is expected to sign, had been stalled for several weeks after Senate Majority Leader Bob Dole complained about a giveaway of lucrative digital airwaves to broadcasters. After receiving assurances from the Federal Communications Commission that it would not award free digital TV licenses to the broadcast industry this year and that Congress would revisit the issue, Dole acquiesced. ``It's a tremendous bipartisan victory,'' Vice President Al Gore told U.S. NEWS, ``and a breakthrough for the communications and computing industries.''

The new initiative will radically alter the multibillion-dollar U.S. telecommunications business and enhance the nation's ability to compete abroad in advanced communication services and equipment. Until now, communications companies were restricted from entering other types of businesses. This meant that only local phone companies could complete local calls, that only long-distance carriers could connect people from remote locations and that only cable companies could offer cable TV. State regulators and the courts have chipped away at these restraints, and technology has eliminated differences between voice, video and data transmission. TVs can now place phone calls, for example. But passage of the new law will finally remove the formal barriers between industries.

As a result, there will be unending competitive struggles, in which companies raid each other's markets and customers benefit. Most rates will decrease; and consumers and businesses will be able to choose from different suppliers of phone service as well as from many long-distance, cable and wireless providers. At the same time, telecom enterprises will try to bundle these services so they can offer one-stop shopping. Because most telecom players come from previously sheltered industries, they will seek partners to provide total packages. The bottom line: Telecom companies will grow bigger, and there will be more industry mergers and acquisitions.

In the short term, the rash of mergers will result in the disappearance of traditional industry jobs. Phone companies, for instance, have already shed more than 140,000 positions since 1993. Last month, AT&T said it will slash 40,000 jobs over the next three years. And tens of thousands more layoffs are expected in the industry. But long-term job growth could occur in new, developing areas such as cellular phones, network services for business and the Internet.

The biggest beneficiaries of the new telecom law may be the Baby Bells, the seven regional phone companies spun off from AT&T. These companies connect 75 percent of local phone calls--a $98 billion market in total. The Baby Bells will eventually enter the long-distance arena, which has been growing about 6 percent a year, nearly twice as fast as the local phone business. Long distance is a natural fit for these local companies. Although they own facilities to complete calls in their region, they have been barred from crossing state lines. Ameritech, for example, operates in five Midwestern states, but the $13.4 billion carrier has been prohibited from connecting calls between Illinois and Wisconsin. Now, the company will get to siphon some of the $8.5 billion in regional business that has been garnered by the long-distance carriers. To compete outside their regions, where they don't own equipment to complete long-distance calls, the Bells may purchase capacity from long-distance companies.

The new legislation also allows the regional Bell companies to enter other businesses. The Baby Bells currently derive an average of 20 percent of their revenues from services other than basic phone calls, such as local cellular operations. The regional Bells will now pursue new opportunities in cellular long distance and cable. Bell Atlantic and NYNEX have been aggressive in these markets. The companies merged cellular phone operations and paired with U S West and AirTouch Communications to build a national wireless network. Bell Atlantic and NYNEX also have invested $100 million in a wireless cable company.

As the Baby Bells seek out fresh opportunities, other companies will move into their home markets. NYNEX, which operates in New York and Boston, and Pacific Telesis, which operates in California, are based in heavily populated regions that are sure to attract a slew of profit-hungry telecom competitors. The biggest threat will come from the top long-distance carriers--AT&T, MCI and Sprint--which have an advantage because they have been battle-tested in the market.

The hang-up for the long-distance companies is that they have few wires that reach homes or businesses. That's why they now depend on the regional Bells to complete their connections. As a result, the long-distance carriers currently pay the Bells access charges that represent about 45 percent of their long-distance revenues. The long-distance carriers want to cut these payments, but they have few options since the regional Bells are the dominant local providers. To help solve this problem, all three long-distance giants are investing huge sums to build local networks that will bypass the Bells. AT&T, for example, purchased McCaw Cellular Communications for $11.5 billion so that it can use wireless for its local connections, and MCI is investing $2 billion to construct a network that links businesses in large cities. Still, these ventures probably won't be fully operational until after the Baby Bells have invaded the long-distance market.

WIRED. Cable companies are also poised to offer phone service because their wires pass by 90 percent of the nation's homes. Cable enterprises like Comcast and TCI are already providing cable phone service in Britain, while Time Warner has been experimenting with a service in Rochester, N.Y. These companies will take longer to deploy phone service domestically because of the heavy investment needed to upgrade cable lines. But the new law removes cable pricing restrictions in 1999, which will enable large cable players to raise prices at first and generate cash for expansion.

Other industries will soon be dialing into the phone business. Nearly 30 electric utilities, for example, have deployed fiber-optic wires, which can carry voice and video. Other types of new technology may also expand the phone market. One possibility: inexpensive long-distance calls through voice modems could grow in popularity on the Internet.

Most of the communications industry cheered the bill's passage, but not all consumer advocates agreed. The telecom initiative has provisions that will concentrate ownership in fewer hands. The ban on owning both cable and telephone properties will be lifted in towns with fewer than 50,000 residents. The new law also allows TV station broadcast groups to reach 35 percent of the national audience, up from 25 percent. The four major networks are all expected to acquire more stations. And radio operators can also purchase more outlets.

Others are concerned that the telecom act will restrict civil liberties. One provision bans the transmission of ``indecent'' materials over the Internet, which many people believe violates free speech. Congress also mandated the inclusion of the V-chip in all future TV sets, which will give parents the ability to block programs. Finally, the new law makes no specific provisions for ensuring that poor people and rural residents have guaranteed access to new technologies. Providing all Americans with universal phone service has been a long-standing public policy goal, but Congress delegated the responsibility to the FCC.

Assessing the full impact of this sweeping legislation is difficult because all the business maneuvers and social and commercial implications won't become clear right away. But as long-distance users have already found out, it doesn't take much time to turn the telecommunications world upside down. Copyright 1996, U.S.News & World Report. All rights reserved.


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