Putting Out Lines in All Directions

By Barbara Rudolph

In a sense, they were like infants, their prospects in life a mystery, their potential unknown. And so it was that when the Bell system was broken up two years ago, the seven regional phone companies[*] that resulted were soon dubbed the Baby Bells. Today the scattered siblings are not yet mature, but they are rapidly asserting their newfound independence.

For the regional companies, growing up means diversifying beyond their traditional business of providing local telephone service. The Baby Bells now own and operate computer retail stores selling both hardware and software. The companies manage financial-service and consulting firms. They own real estate, ranging from commercial skyscrapers to industrial factories. They publish directories, city guides and maps. In short, they are putting out lines in all directions. These new enterprises are expected to generate $4.3 billion of the regional companies' $69.6 billion in projected revenues this year.

Nynex, the holding company for phone operations in New York and part of New England, last week made a major diversification move by agreeing to buy IBM's 81 computer retail outlets for an estimated price of from $125 million to $150 million. Nynex plans to merge the stores with the 19 branches of its Datago computer chain. The newly named Nynex Business Centers will be the seventh-largest computer retailer in the U.S.

One of the most aggressive of Ma Bell's offspring has been Philadelphia-based Bell Atlantic. Its businesses outside the basic telephone field, which include a computer-repair chain and a financing operation, accounted for $427 million of the company's $9.1 billion in revenues for 1985. Bell Atlantic executives hope to branch out even further, by entering the property-and-casualty insurance business.

San Francisco-based Pacific Telesis has established a significant presence in several new markets. It owns a small computer retail chain and publishes city tourist guides. A year ago, the firm agreed to buy Communications Industries, which markets radio paging equipment and car phones, for $431 million. It is the most expensive acquisition--some industry analysts have called it too expensive--yet made by one of the Baby Bells. As a result of the purchase, Pacific Telesis should generate $800 million of its expected $9.4 billion in revenues this year through ventures other than local telephone service.

Bold and promising as these new endeavors may be, few are profitable so far. The Baby Bells' nontelephone operations last year lost an estimated $500 million on revenues of $2.5 billion. The deepest deficit was suffered by Colorado-based U S West, which lost an estimated $200 million. Nynex had losses of some $100 million. Still, the seven regional firms prospered overall last year, earning $7.5 billion on total revenues of $63.3 billion. Their former parent, AT&T, last year earned only $1.6 billion on revenues of $34.9 billion.

Some industry experts are especially suspicious of Baby Bell projects that have no apparent connection to the telecommunications business. Examples: the real estate divisions of U S West, Bell South and Bell Atlantic. U S West owns $310 million worth of property, including the Dallas headquarters of Mary Kay Cosmetics and a Boeing plant in Seattle. Observes Fritz Ringling, who follows the industry for the Gartner Group consulting firm in Stamford, Conn.: "The regional phone companies are getting into businesses that they don't understand. They don't have the expertise. They are in way over their heads." Richard McCormick, an executive vice president of U S West, counters that these forays are not so farfetched. Says he: "We're not running taco stands or dude ranches."

In any case, the Baby Bells do not enjoy a free hand in choosing their new lines of business. New diversifications must be approved by Federal District Court Judge Harold H. Greene in Washington, who is responsible for overseeing the Bell System breakup. The legal consent decree that governs the process prohibits the seven siblings from manufacturing most types of telecommunications equipment. It also prevents them from using revenues from their basic local phone business to finance new enterprises. Nor are the Baby Bells allowed to sell long-distance service. In addition, sales from their new ventures cannot exceed 10% of total revenues.

The Baby Bells are lobbying to loosen those strictures. A bill before Congress would allow the firms to manufacture telephone and computer equipment and permit them to enter the hotly contested $45 billion-a-year long-distance market, which remains largely the domain of AT&T. Making money in this market would be difficult: last week AT&T proposed an average 8.9% drop in its long-distance rates, the steepest cut in the company's history. Still, the upstart regionals are confident. Says James Howard, president of Chicago-based Ameritech: "We know how to compete with AT&T."

Even as they venture into new terrain, the Baby Bells are feeling increasing pressure on their central business of providing local phone service. The threat comes from the familiar face of AT&T, which has begun snaring some Baby Bell business customers by offering them the ability to make long-distance calls using a network of satellites and fiber-optic cables. This enables the corporate customers to bypass local phone lines entirely. In these instances, AT&T is not required to pay the Baby Bells any access fees. Last year the regionals pocketed some $21 billion worth of these access charges. Says James Hennessy, a Nynex executive vice president: "AT&T is no longer the warm parent. Now it is another cold competitor."

Competition, of course, is what diversification is all about. It is clearly an unsettling new experience for regional phone-company executives who were accustomed to living with Ma Bell. Says one Baby Bell manager: "We've gone from 80-plus years of monopoly to the new open marketplace. It's tough, and it's not happening overnight." Call it a case of corporate growing pains. --By Barbara Rudolph. Reported by Thomas McCarroll/New York

With reporting by Thomas McCarroll/New York