War of the Wires

By Robert Strauss

That rumbling noise you hear on the horizon isn’t a volcano. It’s the sound of the telecommunications industry exploding into a frenzy of mergers, acquisitions and new ventures as telecom companies scramble to win the ears, eyes, homes and offices of consumers.

In short, it’s the sound of unbridled, unprecedented competition. The 1996 Telecommunications Act, signed into law by President Clinton on Feb. 8, removes the barriers that for decades have prevented local, long-distance, cable TV, broadcasting and wireless services from invading each other’s turf. The stakes are enormous: Approximately $1 trillion in annual revenues that analysts predict will be generated in telecom services by the year 2000.

Already, the Regional Bell Operating Companies (RBOCS) have set in motion the steps needed to enter the $76 billion long-distance market; long-distance companies like AT&T, MCI and Sprint have applied to enter the $105 billion local market; cable companies have linked up with phone companies; phone companies are acquiring cable companies and entertainment giants like Time Warner, Inc. are offering local phone service.

As everyone knows, this story is not primarily about telephones. Telecom companies understand that their future success hinges on their ability to add on, integrate and deliver a host of additional information and entertainment services to homes and offices. “We realized several years ago that if you only offered local telephone service, you would quickly be out of business,” says John Gamba, W’61, senior vice president of Philadelphia-based Bell Atlantic, one of seven RBOCs in the U.S. “We needed to get into video, information services and long distance through wirelines and/or wireless. The Telecommunications Act provides the means to achieve an important component of our strategy by opening up the long-distance market. It would be difficult to be the world’s best communications company if you couldn’t offer long-distance.”

The smartest companies are already gaining footholds — either by acquisitions or joint ventures — in the wired, wireless (including cellular) and satellite markets, thereby positioning themselves to sell consumers some combination of long-distance and local calling, interactive TV, wireless, cable, information services and Internet access.

“Telecommunications used to be described as POTS, plain old telephone service. Now it has turned into PANS, pretty awesome new services,” notes Mary Beth Vitale, AMP’93, an AT&T vice president who is responsible for creating a new AT&T operation that will offer local telephone service in the 14-state territory and service mix of U S West, the Denver-based RBOC. AT&T, in addition to its long-distance and cellular service, already offers satellite – TV and Internet access and has applied for the interconnections that will allow it to provide local service in all 50 states.

Other telecom companies have their own versions of diversification. U S West, for example, is merging with Continental Cablevision Inc. in order to enter — through cable lines — the local phone markets of its rivals. San Francisco-based Pacific Telesis Group (PacTel), together with Bell Atlantic and Nynex, have formed Tele-TV. Meanwhile RBOCS Ameritech in Chicago, SBC Communications, Inc. in San Antonio and BellSouth in Atlanta, along with GTE, have formed Americast with Walt Disney. Both alliances intend to develop interactive TV programming, a service that allows viewers to select TV programs on demand. Tele-Communications, Inc. (TCI), Cox and Comcast Corp. cable companies are in a joint venture with Sprint to build a Public Communications Service (PCS) network that can offer digital wireless telephone service and thereby compete with wired local calling. They also have plans to offer telephone service over the wired cable TV network.

Mergers and acquisitions clearly bring scale and synergy to the rush to offer consumers one-stop telecom shopping. Bell Atlantic’s pending merger with New York-based Nynex will make it the second largest telecommunications company in the country and fourth largest in the world. SBC Communications is merging with PacTel and adding on new services. Time Warner Inc.’s acquisition of Turner Broadcasting System, Inc. turns the new entity into one of the largest media companies in the world, with $20 billion in revenues from cable TV, telephone service and the Internet, not to mention books, magazines and movies.

“There are big fortunes to be made in the changes taking place within telecom,” notes Daniel Raff, associate professor of management at Wharton. “Technical innovations and broadening user population clearly are going to affect a company’s strategic plans … Whole new markets are opening up, and opportunities exist to get the jump on old established firms that are set in their ways.”

All of which begs the question: Given the relentless speed with which new technologies appear in the marketplace, just what is a telecommunications company these days? The broad answer seems to be: Anything that offers the ability to deliver information over distances — from telephone companies to cable companies to Internet service providers (like Netcom) to on-line service companies (like AOL).

“The traditional telecom market used to be the voice communication market,” notes Eric Blachno, WEMBA’95, a securities analyst at Bear Stearns who covers data communications and data networking. “But now it is so much more than that, especially with the proliferation of networking technologies and PCs. The data communications market is growing far more rapidly than traditional voice markets, which means that the long distance, local and cable operators are trying to get into the information business.”

Sitting on top of this mountain of activity is the Internet. Although initially ignored by most of the telecom community, the Internet’s dizzying popularity — and its potential for combining information services with entertainment — assures it a key place in any telecom package of the future. Internet access is already available via the telephone network, cable modems, by satellite or through wireless connections. “The Internet is a real wild card,” notes Brian Roberts, W’81, president of Comcast Corp. “It represents great opportunities but also has the potential to fundamentally change the economics of telecommunications.”

Roberts, among others, sees the changes set in motion by the Telecommunications Act as an endless vista of opportunity. “If you look at telecom, there always seem to be more competitors at the end of the day. There are now six TV networks where for decades there were three. There are now more than 100 cable networks whereas there were only a couple of dozen in the mid-80s. That’s the great thing about this industry. You can keep coming in with new entrepreneurial ideas, establish yourself and maybe partner up, consolidate or merge with another business. It’s still a market with great potential for new entry.”

Gerald R. Faulhauber, professor of public policy and management, agrees. “Here you have an industry that 15 years ago was incredibly sleepy, like the water company, suddenly pushed into something that is undefined and changing incredibly fast. The smart telephone companies, like Bell Atlantic, realize that in terms of their traditional business, they can’t get any better at it than they are now. So the question is, what are they going to do?

“What is anyone going to do who is looking for opportunity in the telecom field? Is the telephone company where he should be looking? The cable company? The Internet provider? The web designer? What can any individual or company do that will best leverage all this new capability?”

WIRED, OR NOT: TECHNOLOGY PUT TO THE TEST

The telecom revolution is above all about technology. Companies will rise or fall in the next seven to ten years depending to a great extent on the answers to such questions as:

– Who will win the battle of the lines? Will the telephone line or the cable line be the main hook-up for services going into the home?

– Who will win the battle of the screens? Will the screen that people use in their homes for communication and entertainment (including movies and TV shows) be the television screen or the computer screen?

– Can cable do it all? Can cable companies, which already have high capacity lines going into 66 percent of people’s homes, also deliver interactive video and voice service?

– What will the all-purpose “information appliance” look like? Will the computer become a telephone? Will the television become a computer?

– Who or what will deliver the Web? Which technology — wired, wireless or satellite dishes — will deliver the Internet to increasing hordes of cyberspace cruisers?

– How big can the information pipeline be? Can bandwidth — the pipeline through which digital information moves back and forth — be broadened enough to allow more, and faster, transmission of the services that customers want and at prices they can afford?

The quiz will be not what AT&T, MCI, TCI or AOL stands for, but what is meant by such acronyms as ADSL (asymmetric digital subscriber line), ISDN (integrated services digital network), DBS (direct broadcast satellite), PCS (personal communications services), and HFCs (hybrid fiber coaxial networks).

Consumers are already bombarded weekly with new and amazing feats of technology: Five Baby Bells are working with ADSL modems as a way to provide customers with high-speed Internet access; Sony and Gateway have introduced PCs that can, to varying degrees, offer enhanced video, including TV transmissions and movies; AT&T’s cellular company has introduced a new cellular phone that can integrate voice and Internet services; Microsoft’s Bill Gates and Craig McCaw are proposing a project called Teledesic composed of hundreds of satellites that would provide links to personal computers and allow two-way, high-speed connections; cable companies are deploying high-speed modems from Motorola and other companies that deliver data to PCs several hundreds times faster than today’s phone lines.

Meanwhile, while the Telecommunications Act has clearly established a new agenda for the telecom industry, Congress has left much of the detail work of setting rules and rates to the Federal Communications Commission.

One example of the FCC’s ability to affect the health of individual companies involves interconnection policy. “There is no way a consumer wants to pay for physical connections to multiple networks providing the same local telephone service,” notes Dennis Yao, associate professor of public policy and management and a former commissioner of the Federal Trade Commission. “For there to be true competition, there has to be sharing of network facilities among local exchange carriers. In Philadelphia, Bell Atlantic has control of the local connection into your home, but now rules are being implemented that allow new entrants like AT&T an opportunity to use or resell some of Bell Atlantic’s local exchange services.

“Let’s say the FCC sets a price at which Bell Atlantic has to sell AT&T use of its local exchange services at some percentage below its retail price. It may be that the discount the FCC or the states set does not reflect actual economic costs and will favor one company over the other. That will have consequences not just for Bell Atlantic and AT&T, MCI and Sprint, but also for the other competitive access providers, like wireless companies. Decisions by the FCC will help determine telecom’s winners and losers.”

Indeed, the whole issue of who wins and who loses in the telecom wars will be based on so many factors that few players are willing to name names, except to say that they expect to be one of the winners — along with you and me.

“The ultimate benefactor of the 1996 Telecommunications Act is the consumer, who will be offered a package of services bundled together by one provider,” says Timothy Samples, AMP’94, vice president, domestic wireless operations, at U S West Media Group. “But I also think the benefits won’t be immediately recognizable. Consumers will be faced with a myriad of complex offers from telecom companies. I think it will take them a while to sort these offers out and really understand what they are buying.”

Below, alumni who hold key positions in five of the leading telecom companies discuss the new marketplace and their own company’s strategic initiatives.

Company Highlights:
– Pending merger with New York-based Nynex
– Invested $100 million in CAI wireless to provide TV
– Constructed fiber-based competitive cable interactive TV system in Dover Township, N.J.
– In conjunction with PacTel and Nynex formed Tele-TV, a consortium to develop interactive TV programming
– Was first RBOC to offer long-distance outside its region to cellular customers and wireline customers
– 1995 revenues: $13.43 billion

“Bell Atlantic’s vision, which has been in place for several years, is specific. We see ourselves as becoming the world’s best communications, information and entertainment company. It’s clear that scale is important. So part of our strategy is our proposed merger with Nynex, which will make us the second largest telecommunications company in the country and fourth largest in the world. It gives us a very lucrative growth market in the Northeast corridor from Maine to Virginia.

We feel that we will be a winner in this new marketplace for a number of reasons. For example, we have the infrastructure to serve the whole range of customer requirements. We have the ability to package communications, information and entertainment services to capture and retain the high value customer. Customers can come to us for wireline, wireless, voice, video, long-distance and data. In addition, we have just launched an Internet access business.

We are using the technology available to us to initially enter the video business with wireless technology. We will be serving our customer in Norfolk, Va., with a service that is better than the cable TV companies. We also have a fiber-based cable TV business in New Jersey which, again, offers service superior to cable’s. Through the Nynex and PacTel consortium, we can provide the content for our information and entertainment offerings.

I realize that other telecom companies have similar visions. The successful one will be the one that can package these services, price them, and provide high quality and value. It will have sufficient scale and scope to get at the market opportunities. In short, it will look like the new Bell Atlantic.

In addition, we have been at the forefront of technology. We have ISDN available throughout our region; we were the pioneers who pushed the envelope of ADSL; we have two million miles of fiber cable already in place; our wireless cable service in Norfolk is bringing cable TV not through a wire but through a transmitter and antenna; we also have a major corporate commitment to a fiber-based switched digital full-service network to all of our customers.

Our commitment to our customers is second to none with a reliability and service record that is excellent. We will build on our positive customer relationships as we offer Internet access, a video package and high speed data connectivity along with our traditional wireline and wireless voice services.”

Company Highlights:
– Owns America’s third largest cable TV company
– Owns cellular networks serving more than 700,000 customers
– Owns electronic retailing service QVC
– Owns Philadelphia’s NHL Flyers and NBA ‘76ers, and is creating cable sports networks around these teams
– Member of Sprint Spectrum partnership
– Partner in Primestar, a direct broadcast satellite operation
– Part of a partnership that owns Teleport Communications Group
– Majority owner in Eastern Telelogic Corp.
– Part of a programming partnership on the West Coast
– 1995 revenues: $3.5 billion

“Our goal is to be the first choice of all our potential customers for all of their electronic communication needs. Our strategy has three integrated component parts — wired, wireless and content.

On the wired side, we have 4.3 million cable subscribers in 19 states. We are partners in Teleport Communications Group (TCG) and majority owner of Eastern Telelogic Corp., both of which are competitive access providers that offer less expensive means of reaching the long-distance network. We also have cable/telephone networks in the United Kingdom; our track record there has been very successful in getting as much market penetration for our telephone service as for our cable service.

In the wireless area, Comcast Metrophone, also known as Comcast Cellular One in some markets, has about 700,000 subscribers in our greater Philadelphia market, which has just about the highest overall cellular penetration of anywhere in the U.S. We are the leading provider in that market. We are also a partner in Primestar, a direct broadcast satellite operation that serves more than a million homes.

On the content side, we have a 57 percent interest in QVC and a programming partnership on the West Coast called C3 — Comcast Content and Communication. C3 has a broad mandate to produce all forms of video and film content.

We consider our ownership of the Philadelphia Flyers and ‘76ers to be an integral element of our content strategy. We will be using the non-broadcast rights from the two teams and from the Philadelphia Phillies, which means we will be able to create new regional sports networks.

We are starting off as an established competitor in video. On the telephone side, we will weigh all our options in entering the local telephone business. In the meantime, we have another service to offer — a dedicated cable modem which will connect through your cable line to the Internet and commercial on-line services. We are also developing some new proprietary on-line services with a cutting-edge company called @Home. The key advantage we see in the cable modem is that it will make us the leader in providing interactive service. A cable modem can carry data to and from your home at speeds several hundred times faster than traditional telephone connections and at very affordable prices.

We are upgrading our cable network with fiber optics, which will make it more cost effective and more robust than the telephone line. Wireless is an important part of our strategy, from cellular and paging services to personal communications services and direct broadcast satellite.”

Company Highlights:
– Owns AT&T Wireless Services, the largest cellular network in the U.S.
– Offers unlimited Internet access for $19.95 a month to its long-distance customers
– Markets DirecTV’s satellite-TV service
– Split into three separate companies — telecommunications, telecom equipment and computer operations — to focus more sharply on each part of the telecom business
– Has signed agreements with 20 competitive access providers (CAPs) in major cities in the U.S.
– 1995 revenues: $47.28 billion (after divestiture of Lucent and NCR)

“Our strategy is to offer local and long-distance service, wireless, entertainment through our DirecTV, and Internet access through our Worldnet product, and package all that together so our customers can have one-stop shopping for all their needs.

Up until now it’s been a monopoly on the local side, and consumers have not had a choice. But competition is good. What we saw when the long-distance market opened up in 1984 [when AT&T, as part of a federal antitrust suit, agreed to spin off its 22 local companies into seven independent Baby Bells] was that prices for long distance went down 60 percent. Where there was once one long-distance company, today there are more than 500. We see similar things happening now. Customers will benefit from more innovation, more products and better prices.

We hope to gain a 30 percent share of the local market in the next couple of years nationwide.

As now allowed under the Telecommunications Act, we are currently negotiating with U S West for a total services resale because it is the easiest and quickest way for us to get into the local business in the short term. We are also negotiating to buy unbundled parts of U S West’s network to connect with our own facilities. Since we have not been able to reach an agreement yet, it now goes to the public utility commission in each state for arbitration. These PUCs have until Dec. 1 to decide what the agreement should be, although we will also continue our own negotiations with U S West. One of the biggest unresolved issues so far is the price we should pay U S West for these interconnection rights.

AT&T will definitely be a strong competitor in the telecommunications field. Quality has always been paramount with us, as reflected in the honors we have received, including the Malcolm Baldridge Award for customer satisfaction and service. The 1984 divestiture put us in a position to learn how to market and how to compete. We have been at it for 12 years.

There will be many uses of technology out there to choose from. AT&T will look at partnerships, alliances and our own network in order to deliver the combination of services that customers want.”

Company Highlights:
– Has agreement to merge with Continental Cablevision
– Holds 25 percent stake in Time Warner Entertainment (that part of the company which includes its cable operations, movie studios, HBO and retail outlets)
– Has partnership with Airtouch, a domestic wireless company
– Has partnership, along with three others, with PCS Primeco, a cellular company
– Owns 100 percent of Media One, a cable operator in Atlanta
– 1995 revenues for U S West: $11.7 billion

“U S West has two trading stocks. U S West Media Group is one, and it’s primarily cable, cable telco (i.e., the ability to make telephone calls through your local cable system), wireless and the publishing business. The other, U S West Communications Group, is the telephone company.

With our partnerships in Airtouch and Primeco plus a technical operating marketing alliance with Bell Atlantic/ Nynex, we hope to deliver a kind of national wireless footprint.

One of the primary benefits of the 1996 Telecommunications Act is that within wireless we can offer long distance to our subscribers and have the freedom to try and expand the breadth of our offerings.

In cable, after our merger with Continental Cablevision we will become the third biggest cable operator. We expect to be a large force in cable telco, for example, and will soon be offering that service in our market in Atlanta, allowing us to compete directly with BellSouth.

Through our Time Warner Entertainment partnership, we are already offering cable telco service to Rochester and Elmira, N.Y. In addition, we can do high-speed cable transmissions, via modem, so that consumers can connect into the Internet in their homes.

Companies that don’t have a presence in wireless are at a disadvantage in my opinion. You don’t necessarily have to own a wireless business, but you should have an agreement or affiliation with a wireless company to offer that service as part of a package. Consumers are going to want a full array of services bundled together at a discount and all in one place.

Internationally, I personally think you are going to see a significant influence from offshore. And because of that I think you will see some regulation over time on a federal level that will relax foreign investment in the U.S. That will be due in part to the fact that companies in the U.S. are interested in investing more heavily internationally. Of course that has to come with a trade-off.

With telecommunications making up one-seventh of the total gross domestic product in the U.S., you are starting to see quite a bit of interest from abroad. The traditional list of big international players is short: BT, Deutschetelephon, Cable & Wireless, Nipon Telephone and Telegraph (NT&T), and many of the Korean and Asian companies that manufacture electronic equipment, such as Hundai. But I also think you will see some companies coming in that have not traditionally been in the business.”

Company Highlights:
– Committed to invest $2 billion in Rupert Murdoch’s News Corp.
– Bought license to launch its own DBS service, to be built in partnership with News Corp.
– Bought a cellular phone reseller and computer systems integrator
– Teamed with Microsoft to develop Internet services
– 1995 revenues: $15 billion

“MCI’s goal is to be a $30 billion company by the year 2000, and we predict 50 percent of that will come from new products and product lines that will leverage our long-distance business.

We won the bid for the last available DBS spectrum slot in the U.S. in January and shortly after we announced a joint venture with News Corp. — outside of our equity investment in them — to utilize it.

In addition to buying the largest wireless reseller in the nation, we also bought professional services/computer systems integrator SHL. SHL is similar to EDS and Andersen Consulting and the largest of such firms in Canada.

We see a wholesale change in telecom. Your basic per minute type of product is getting to be a commodity. You need to be able to add value to that, which we do in a number of ways for our customers through the robust network we have in place.

Many companies have similar strategies but are executing these strategies differently. We have not sunk dollars into wireless except to acquire Nationwide. We are not building networks, whereas Sprint has built heavily with PCAs and AT&T has McCaw. We did bid on DBS service and have acquired SHL.

The capabilities that we envision in downloading data and other kinds of content — everything from entertainment and information for consumers to business-to-business and business-to-customer communications — are all part of a huge market that hasn’t been tapped yet.

The long-distance side of telecom has had competition for a long time, so we know what it’s all about and feel we are well positioned to take advantage of these tremendous opportunities.”

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