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February 26, 1996

Aerial Assault Begun Against Wired Nation

By MARK LANDLER

Jim Robbins is a cable television executive, but these days he sounds more like the cellular telephone billionaire Craig O. McCaw.

Robbins, the chief executive of Cox Communications, oversees the nation's fifth-largest cable operator. And while he remains enthusiastic about serving Cox's 3.2 million subscribers, he really comes to life in describing the company's new foray into wireless telephone service.

Along with Sprint and two other big cable companies eager to break into the local phone business, Cox has invested $2.1 billion for licenses to offer a new cellular service, called personal communications services, or PCS. The partners, which include Tele-Communications Inc. and Comcast, are spending $2 billion more to build a national network capable of reaching 144 million people.

"Wireless is absolutely exploding," Robbins said.

Three weeks after President Clinton signed a bill uncorking competition in the telecommunications industry, the battle among local and long-distance phone companies and cable operators has taken an unexpected turn.

Rather than waging a ground war for each other's wired network, many companies now seem intent on taking their battles to the skies -- trying to infiltrate the well-protected markets of their rivals by beaming telephone or television signals directly to customers.

"People ask when local competition is going to happen; that's the wrong question," said David Roddy, chief telecommunications economist at Deloitte & Touche, the big accounting and consulting firm. "The real question is: When is wireless competition going to happen?" he said. "The answer is: now."

Roddy said Americans spent roughly $22 billion on wireless services in 1995, and he expects that to double by the turn of the century.

Long-distance carriers are particularly keen on catching the air wave, because they have national networks but lack direct connections to individual telephone and cable households.

Late last month AT&T announced that it would invest $137.5 million in a satellite broadcasting service, DirecTV. A week later MCI paid $682 million for an orbital slot to offer its own high-powered satellite broadcasting service.

And just last week, Sprint and its cable partners reorganized their alliance to focus on wireless, rather than wired services -- even changing the venture's name to Sprint Spectrum, an allusion to the radio-frequency spectrum used by wireless services.

Meanwhile a frenzied Federal Communications Commission auction continues in Washington for an additional round of PCS licenses, with the total bids approaching $7 billion through last Friday.

To be sure, the popularity of wireless stems partly from the fact that the business has already grown so rapidly. The cellular industry that made McCaw so rich went from almost nothing in 1980 to a $20 billion business last year. And in the last few years, refinements in digital technology have also made wireless transmission suitable for a broader range of services, including computer-precise television transmissions and high-speed data transfer.

But the current craze also reflects a more sober business reality: Even after the telecommunications market is fully deregulated, the high cost of stringing wires or laying cables, and the expected resistance of the local cable and phone-wire monopolies to interlopers, will make it tough for long-distance carriers, local telephone companies, or cable operators to break into each other's traditional land-line markets.

"It is very hard to develop a wired strategy," said William Esrey, chairman and chief executive of Sprint Corp. "You can pursue a wireless strategy far more easily."

Consider Sprint's strategy for breaking into the $90 billion local phone market. As part of its original cable alliance, Sprint's partners were supposed to upgrade their coaxial cable television networks to begin carrying telephone traffic.

Earlier this month, however, the partners dropped the wired component of the deal, in part because they feared that the schedule for renovating their networks -- 10 million homes by the end of 1996 -- was overly ambitious.

Some analysts said the decision stemmed from a more basic fear -- that the cable industry might never be able to compete economically for local phone customers. Already, cable companies have locked horns with regional Bell companies in negotiations over issues like how much they should pay for handing off calls to the Bell network.

"I think there could still be a tremendous revenue stream from telephony," said Brian Roberts, the president of Comcast. "But until all these issues shake out, it's prudent to keep your options open."

Just as the cable industry has qualms about taking on the Bell companies, the Baby Bells have lagged in their efforts to go after the cable industry. Several of the Bells announced plans a few years ago to upgrade their copper-wire networks to carry video services. But while Bell Atlantic is still rolling out a small video service over phone lines in Dover Township, N.J., most of the other efforts have quietly disappeared.

And though both AT&T and MCI have tried to get a direct link to households by broaching deals with cable operators like Tele-Communications or Time Warner, neither has succeeded.

By plunging into the satellite broadcasting business, however, AT&T and MCI will eventually be able to beam 150 channels of programming directly from satellites to pizza-pan-sized dishes on rooftops.

So far, direct-broadcast services have only two million subscribers in this country. But with the muscle of AT&T and MCI, some analysts estimated that the industry would have 10 million customers by 2000.

If anything, the local telephone business is even harder to penetrate than cable. The Baby Bells own the wires that snake into most American households. And would-be rivals like long-distance carriers face an unappetizing choice. They can either negotiate to lease capacity on the local network, try to duplicate the network or find ways to bypass it.

"If you want to duplicate that kind of a network, you've got to dig up streets or put up ugly telephone poles," said Lee Cox, the president of Air Touch Cellular, the wireless company that was spun off from Pacific Telesis, a regional Bell company. "We're shooting an arrow straight at the target, and there are no front lawns or streets in the way."

So far cellular has been too expensive to become a viable competitor to local phone service. But personal communications services may have a better shot.

PCS networks, using digital radio transmissions for voice and data communications via small hand-held devices, can serve many more customers simultaneously than current cellular networks. That fact, and the cut-throat competition as several wireless companies compete in many of the larger metropolitan markets, should result in prices much lower than cellular companies have typically offered.

In the first PCS auction, AT&T, like Sprint, was a heavy bidder for licenses, spending $1.6 billion for a potential market of 107 million people. Add that to AT&T's cellular franchises through its 1994 acquisition of McCaw Cellular, and the company has considerable ammunition in its battle to bypass the Bells.

For their part, the Bells are also seizing on wireless as a weapon to compete for customers outside their regions. Air Touch Communications is part of a four-company alliance -- including Bell Atlantic, Nynex, and US West -- that paid $1.1 billion for PCS licenses.

And some Baby Bells are using wireless as a stalking horse for their foray into long-distance. SBC Communications, formerly Southwestern Bell, recently filed for permission to offer long-distance service in 16 states, including New York. SBC has chosen states where it already owns cellular franchises operating under the Cellular One name -- a brand that SBC plans to use for marketing long-distance services.

Still, not every telephone executive thinks the future is wireless. Richard Notebaert, the chief executive of Ameritech, has largely eschewed the costly wireless investments of his Bell brethren.

Notebaert said he was spending the bulk of Ameritech's capital resources -- $2 billion a year -- to upgrade the company's existing wired network with fiber optics for data services, and in some cases to build coaxial cable television systems alongside the phone networks.

"You won't know for five years whether PCS was a good investment or a bad investment," Notebaert said.

Given that the telephone industry is spending $30 billion on PCS and other forms of wireless communications, the next five years promise to be nerve-racking ones indeed.


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