Communications: A Giant Tug-of-Wire

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 proponents of 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.