NEWS ANALYSIS : Talk Is Cheap, and Now Bells’ Future Is Rich

Ten years ago New Year’s Day, an amazing thing happened. America’s beloved old phone company buckled to judicial pressure and broke itself into pieces.

The results were remarkable. Long-distance calls got so cheap they grew routine. Fax machines, answering devices and multi-line households became ubiquitous. Taken together, the value of AT&T; and its former segments tripled.

But the telecommunication changes of the past decade will pale next to the revolution ahead.

Within 10 years, many of us will skip commuting in favor of a “virtual” office. From your home computer, walk through the phone line and down the hall; with a click of your mouse, drop in on colleagues who have left their video “door” open. At lunch, visit Mom in Milwaukee, or see how your digital alter ego looks in a new blazer in Milan. Unwind later on with a movie--choose from a library of thousands--or work on your graduate degree with the world’s leading scholars.

The electronic revolution has been so ballyhooed that it sometimes seems as banal as it does implausible, yet the changes are already well under way. New technology is tearing down barriers that once helped distinguish radio, television, computers and phones. Companies are scrambling to join forces in offering products that seem culled from science fiction.

The end of AT&T;’s monopoly hugely accelerated these changes. For example, competition inspired by the breakup spurred major investments in a nationwide fiber-optic network, opening the way to vastly increased phone traffic. The increased business helped upstarts like MCI Communications Corp. grow into giants.

By opening up the network, the breakup also forced technical changes that paved the way for the millions of computers, fax machines and other devices now tethered to what was once Ma Bell’s system. And in doing so, the breakup helped spur the mass production that sent the price of such equipment plummeting.

Now the last barrier to change is about to fall. The set of competition-limiting rules contained in the breakup order, issued a decade ago by U.S. District Judge Harold Greene in Washington, has become a victim of its own huge success.

But unlike the last time around, when change was left to the judiciary, this time the impetus for change will come from technology--especially the digital revolution in communications--and the ground rules will come from the White House. Vice President Al Gore has already said that the Clinton Administration plans to allow broad competition in telecommunication, with the goal of bringing an information highway to homes with only the regulations needed to make sure it’s accessible to all.

“The changes always seem to take longer than you expected,” says Eli Noam of Columbia University’s Institute of Tele-Information. “But when it happens, the changes are more fundamental than you could have imagined.”

Wall Street is going wild at the possibilities. Investors are pouring money into telecommunication companies, giving tiny newcomers multibillion-dollar valuations reminiscent of the early days of biotechnology.

But for every promise from this new world of intelligent phones, there is an attendant threat. Burgeoning competition will mean opportunity for nimble new companies with creativity and drive, as well as a more efficient overall economy. But it also will mean job cuts as the Bell operating companies see their monopolies stripped away.

Consumers will have more choice, but they could also face higher prices for poorer basic services as telephone companies turn their attention to snazzy new products and profitable business customers.

Better networks will give people access to huge amounts of information. But such networks could also mean greater invasions of privacy, and already the quantity of information available seems to verge on overload.

William Baxter set the wheels of this communications revolution in motion in 1982 when, as head of the Justice Department’s antitrust division, he went against the wishes of his bosses, including President Ronald Reagan, to push for the settlement of an antitrust suit against AT&T; even while dropping a similar case against IBM.

Basically, Baxter won. On Jan. 1, 1984, the world’s most advanced telephone company was broken into AT&T; and seven regional Bell operating companies under the orders of Greene, the presiding judge in the case.

Critics predicted disaster. The phone company wasn’t broke, so why fix it? Consumers were flummoxed by the need to own their own phones. And how on earth did one choose a long-distance carrier?

Ten years later, hardly anyone would dream of going back on what is probably one of the most successful industrial-policy initiatives ever.

The AT&T; breakup spurred long-distance fiber-optic networks, yielding superior quality and capacity at lower cost. While inflation-adjusted long-distance prices fell 60% over the past decade and AT&T;’s market share declined to 62% from 90%, long-distance calling grew so rapidly that AT&T; still managed to show healthy earnings increases.

Cheaper long-distance services have been a boon to the U.S. economy; more businesses and individuals are calling more places on more lines for less money than ever seemed possible. Even small companies have 800 numbers. And mobile families can stay in touch for far less money.

On the other hand, the legendary Bell Laboratories in northern New Jersey has declined as a scientific force, its researchers nudged from pure science toward more commercial projects. And the AT&T; breakup set off a rush to buy foreign communication products, worsening the trade deficit.

Nor did the breakup do much for modernizing local phone services. Basic service remained cheap, but the Baby Bells, barred under Judge Greene’s rules from offering new services and facing regulatory disincentives to invest in the phone business, instead invested in everything from real estate to computer software and even interior design. Most of these ventures were dismal failures. Nynex, for example, the New York-based regional phone company, recently took a $250-million write-off to get out of the software business.

Now legislators, regulators and the courts seem ready to bring an end to the reign of Judge Greene, who continues to make critical decisions regarding the telecommunication industry from his second-floor chambers overlooking Constitution Avenue. The new rules would allow the Bell companies to offer services over their own networks, provided that they can show there are viable competitors in their major markets.

Baxter, who now teaches antitrust law at Stanford University, argues that such a showing will be difficult, given the natural monopoly phone companies still have because of their many lines into homes and businesses. “The local telephone companies were a monopoly in 1984, they are today and they will be in 10 to 15 years,” he says.

But changing technology and alliances between once-hostile businesses are eroding those monopolies at a surprising speed.

When Bell Atlantic recently announced its $33-billion acquisition of Tele-Communications Inc., the nation’s largest cable company, it signaled its intention to invade the telephone franchises of such Bell siblings as Nynex.

The major cable companies, including Time Warner and TCI, meanwhile, have jointly invested in Teleport Communications Group, a private communications provider. They plan to create a quilt-work of cable operators that will enable even the smaller operators to use the combined power of their 80 million coaxial cables into homes to offer phone services in competition with the regional Bells.

And there are other potential Bell competitors in the wings. AT&T;, through its acquisition of McCaw Cellular, will soon be able to offer services competitive with local phone companies. Satellite makers like Hughes Aerospace and even electric utilities are seen as potential entrants in the phone business.

“It’s a $100-billion market,” says Richard Liebhaber, chief technology and strategy officer at MCI, which hopes to acquire portions of the radio spectrum that the Federal Communications Commission plans to auction next year. Wireless devices feeding into cable television wires would be one way to offer local phone services.

The upheaval in the telecommunication industry is being driven by digital technology. Advanced telephone switches today can convert voice and pictures into the same string of ones and zeros that computers use. That means telephone calls, messages or even movies can be rearranged into dense streams of data or tiny packets of information and automatically sent to any of a number of addresses, whether the destination is your television set, your telephone or your beeper.

As it becomes all digital, the communications world is able to tap the same staggering advances in semiconductor technology that have made it possible to shrink a room-sized mainframe into a computer that fits in the palm of your hand and costs one-thousandth the price.

John Davis, a vice president in AT&T;’s communications services group, says digital technology is merging diverse technologies so rapidly that it is about to create what he calls a “step discontinuity.”

“All the conditions are ripe to lead to a major change in the way business is carried out and the way people lead their lives,” he says.

Davis envisions a day when he will be talking with his daughter long distance over a videophone and jointly browsing through documents. Shown on the video screen will not only be his daughter but also documents he has pulled by computer from the Bell Laboratories library related to her research on references to technology in Elizabethan poetry.

“I would feel closer to my daughter and closer to the things we share,” says Davis.

But this warm, orderly vision of the future is clouded by uncertainties. Technology has vastly increased the number of players involved, making it more difficult than ever to insure that all the newly emerging networks can be made to work together.

“My worst nightmare is that it will be like the early days of telephony, when each company had their own wires to each home and you couldn’t call your neighbor unless he used the same phone company,” says Fritz Ringling, a partner in Network Dynamics & Associates, a consulting firm.

Where once you had to be a sprawling bureaucracy to manage the complexity of phone systems, and a single company (serving almost everyone) to pay for the costly equipment, today entrepreneurs can compete in the phone business without investing a dime in equipment.

Seattle-based Mid-Com Communications promises customers better rates and more sophisticated billing services for long-distance calls even though the company does not own a single phone line or switch.

Mid-Com leases transmission capacity from long-distance phone carriers and rents time on the switches of the regional Bells to create “virtual networks,” says chief executive Ashok Rao.

He compares the telephone business to the airline industry after deregulation, when established players like Pan Am crumbled while innovative airlines such as Southwest flourished. “There is no loyalty. You can be with AT&T; today and MCI tomorrow, it’s so easy to change,” says Rao.

As the same kind of competition threatens to emerge in the local exchange, Bell companies are being forced to get into fighting trim. Nynex has already indicated that it will cut employment as much as 28%, an estimated 22,000 jobs. US West, the Baby Bell based in Denver, has announced job cuts of 9,000 workers.

“We are concerned that the synergies are not likely to be achievable over the intermediate term,” says Stephen J. Gutkowski, vice president at Moody’s Investors Services. Moody’s lowered its rating on Nynex’s debt and put Bell Atlantic on its Credit Watch list because of the large sums it had set aside for acquisitions.

The Bell companies are investing tens of billions of dollars in fiber-optic networks, and they are buying into cable companies in hopes of offering movies on demand, home shopping and home banking. But nobody really knows who will emerge as the winners.

“This is going to turn out to be an intensely competitive environment,” says Gutkowski. “It is difficult to imagine an environment in which the rising tide raises all boats.”