`Compunications' a new word in Baby Bell expansion plans

One recent example of a not-so-baby ``Baby Bell'' reaching out to grab a bigger piece of the telecommunications market occurred last month when NYNEX bought 81 retail computer stores from International Business Machines. Added to the 16 stores it has, the acquisition made NYNEX -- which runs New York Telephone and New England Telephone, and last year chalked up $10.5 billion in revenue -- the nation's third-largest retail computer chain.

Yet stock analysts aren't sure that will add to the phone company's bottom-line profits. They expect that such centers in general will continue to be only marginally profitable.

``It's a furthering of their strategy that may eventually show some profit, but right now it's not meaningful,'' says analyst Edward Greenberg at Morgan Stanley & Co. ``It's a minuscule part of their operations.''

But to understand why NYNEX bought IBM's product centers, and why the other Bell operating companies (BOCs) are expanding into areas other than the telephone business, it is important to understand their point of view.

Down the road, Pacific Telesis, USWest, Southwestern Bell, Ameritech, Bellsouth, Bell Atlantic, and NYNEX all believe ``compunications'' (the marriage of computer terminals and telephone systems) will be routinely used to pay bills, use personal checking accounts, and allow shopping by terminal.

``Imagine yourself at one of those companies,'' says Richard Vietor, a telecommunications expert at the Harvard Business School. ``You've been told about the fabulous future for telecommunications. But here you are, stuck in an industry facing slow growth -- the low-usage, high-cost local exchange service -- a plain old phone company.''

But the BOCs have not been able to expand -- at least not as much as they might have liked -- because of federal court restrictions imposed at the time of the AT&T divestiture.

Still, ``diversification is inevitable,'' says Eli M. Noam at the Columbia Business School.

``It's not really a matter of choice whether they will do things in the competitive realm. It's not a question of `if,' but of how much they will do and how abuses are to be handled.''

And under the scenario in which ``compunications'' is a reality, a distribution network for communications and computer equipment (such as that now owned by NYNEX) makes a lot of sense.

``Our strategy includes a deeper thrust into information services,'' says NYNEX chairman Delbert C. Staley. ``In reality, we feel like we acquired not just 81 retail stores.

``I know everyone refers to them as retail stores. But we really acquired distribution capability in 33 states, not only for computer products but for telecommunications products or for software products. We acquired a couple of software companies, too. We really acquired a distribution system, not a retail system.''

Still, there are the questions of where all this is heading and whether traditionally regulated monopolies like phone service will end up somehow subsidizing failed or ailing unregulated ventures the phone companies get involved in.

Given the current weakness of the computer industry, there is considerable concern that companies like AT&T and NYNEX, which understand the communications business, just aren't likely to make a profit on computer or compunications retailing before the 1990s.

``The question is how to protect yourself from abuse of this mixture . . . , says Columbia's Professor Noam. ``There is a threat of subsidizing, with ratepayer money, retail computer business, for example.''

Dekkers Davidson of the National Telecommunications Information Administration, says ``cross-subsidization'' of nonregulated business with revenues from regulated business is ``a theory that's been around quite awhile, but not been verified.''

Still, there's no great incentive to pour money back into the regulated subsidiary beyond what is necessary, says Professor Vietor at Harvard Business School.

Some in the computer retailing business simply wonder how they will survive in a David-and-Goliath battle.

Businessland is the nation's largest computer retailer, with some 140 retail stores. Yet, with $287 million in sales last year, it is many times smaller than NYNEX. Despite the fact that Businessland has thrived in recent years while other computer stores have failed, its chairman, David A. Norman, is concerned.

``Suddenly in come huge companies capable of putting in hundreds of millions a year, funded by a public utility. They're going to dominate the marketplace,'' Mr. Norman told Business Week magazine.

Though the NYNEX venture gives it yet another way to get customers into the higher-margin value-added services and products, there is also concern that the NYNEX venture is not without risks, since it essentially pits the phone company against IBM.

But NYNEX's Staley disputes concerns that such nonregulated operations might tug at the pocketbooks of regulated users: ``It's the other way around. Some of the unregulated businesses are subsidizing a regulated business. And that has always been the case.''

Second of two parts. Part 1 ran Wednesday.