Baby Bells Acquire New Rights

THE telephone - that ubiquitous little box that has been ringing ever since Alexander Graham Bell invented it 115 years ago - is in the lab for an overhaul. When it reemerges a few years from now, it won't be just for talking anymore. It will serve as an electronic directory, a library, a gateway to information that will flow back and forth and back again. All this without the help of a fax machine or a computer modem.That's the future telecommunications companies are painting. The consequences of such a future are so large that the United States is struggling to keep up with them. The issues are many and contentious: What does electronic publishing mean? Who can do it? Just the print media? Telephone companies? Can cable TV networks enter the telephone business? Can phone companies broadcast video? "In the next several years, you will see an incredible blooming take place," says Rep. Michael Oxley (R) of Ohio."It's going to be very difficult to tell when a company is a telephone company, a newspaper, or a cable company." Until this summer, things were simple. United States courts restricted regional Bell operating companies - known as the Baby Bells - to the telephone transmission business and a few closely related industries. Publishers published. And cable TV broadcast. Then on July 25, US District Judge Harold Greene stunned policy-makers by knocking down the first pillar of that tidy world. He ruled that the Baby Bells could enter so-called information services. In other words, they would be free to publish electronic information as well as transmit it. Judge Greene, who presided over the AT&T breakup that created the Baby Bells in 1984, had long resisted such a move. But he said a US Court of Appeals decision left him no choice. Greene imposed a one-year delay on the Baby Bells' entry into information services, which the Appeals Court struck down Oct. 7.

Newspapers cry foul These court decisions have touched off a huge lobbying war in Congress. Baby Bells argue that they need the freedom to enter faster-growing industries if they are to invest in the next generation of telecommunications networks. Newspaper and other publishers worry that unleashing the Bell companies into the information business will allow them to dominate it. Cathleen Black, president of the American Newspaper Publishers Association, said in a National Journal article that allowing the Bells to publish their own electronic information and carry everybody else's is like forcing Domino's to deliver its pizza through Pizza Hut. Both sides are exaggerating their case, analysts say. "There's lots of smoke and a lot of mirrors in this business," says Leland Johnson, a senior economist with the Rand Corporation. Publishers have legitimate concerns but they won't be overwhelmed by the Bell operating companies. They'll enter gingerly. "None of those [information] companies have done very well," adds Paris Burstyn, vice president of telecommunications research at Business Research Group in Newton, Mass. Knight-Ridder and other newspaper chains have dropped out of the business. Prodigy, the dial-up computer information service, will go a long time before turning a profit, he says. Even AT&T, which has been free to enter the business for a number of years, hasn't invested. Instead of fighting each other in Congress, he adds, the publishers and telephone industry should team up and offer services. No one knows how large the industry will become. Daniel P. Reingold, telecommunications analyst at Morgan Stanley & Company guesses that within three to five years the typical Baby Bell could make $200 million to $300 million from the business. That's nothing to sneeze at, but it represents only 2 to 3 percent of the typical company's revenues. That's nowhere near enough to finance a major upgrade of the telephone network, analysts agree, which would involve bringing expensive fiber-optic cable to the home. "I don't think you're going to see anyone's capital spending jump up this year or next year," says Joanne Smith, telecommunications analyst at Nomura Research Institute America. The Baby Bells probably won't invest new huge sums unless they're allowed to enter the cable television industry too, these analysts say. Even then, Mr. Johnson says, the cable companies have such a head start that the Baby Bells probably will steer clear. Congress is looking into allowing such an entry into cable TV. But at the moment, it is stuck trying to play King Solomon for two huge and powerful lobbies. Now that the courts have unleashed the Bells (there's still a slim chance for an appeal), Congress realizes it must act now if it wants to play an important role in shaping policy. "We really do have the parties joined in a way that has never happened before," Rep. Ed Markey (D) of Massachusetts, chairman of the House telecommunications and finance subcommittee, said during hearings late last month.

How far, how fast? The Senate has passed legislation that allows the Baby Bells to manufacture equipment. But the House subcommittee is the focus of the current debate. Congressmen here agree the publishers deserve some safeguards, such as forcing the Bell companies to create separate subsidiaries to market information services. Congressmen also agree there should be separate accounting, so the Bells can't subsidize information operations with money from their telephone business. Most, if not all, subcommittee members concede the Bells have to be allowed to enter the information industry. It is divided, though, over how far and how fast the Bells should be allowed to go. Rep. Jim Cooper (D) of Tennessee has introduced a bill that would keep the Bells from offering such services in their own region (although they would be allowed to compete in the rest of the country). Rep. Jim Slattery (D) of Kansas wants fewer restrictions. He hopes to first pass legislation that would allow the Bells into manufacturing, while the situation sorts itself out. "To justify capital investment, you have to have a market out there to make it all work," he says. So chairman Markey is busy trying to fashion a grand compromise, which will give the Bells broad incentives to invest without jeopardizing the publishing business.