HUNG UP ON COMPETITION

By John Greenwald

The Telecommunications Act of 1996 was supposed to turn the phone companies into a pack of hungry competitors, willing to tear one another to pieces for the privilege of providing you with low-cost phone service. AT&T and its long-distance rivals were to charge into the $100 billion market for local calling, freeing the seven Baby Bells to enter the $70 billion long-distance fray.

Instead all we've heard is howling. Last week MCI Communications was baying at Wall Street, explaining that it will lose $800 million this year trying to bust into local phone service with nothing to show for it. MCI blamed its loss on the intransigence of Baby Bell operating companies in complying with the law. Baby Bells such as BellSouth have been wailing that regulators won't let them into long-distance markets and that the long-distance companies don't want to compete anyway.

Actually, it's consumers who should be howling, because 17 months after the act became law, any significant reductions in local phone bills remain on hold. Less than one-half of one percent of U.S. households receive competitive local service, according to a study by the Yankee Group consulting firm, and not a single Baby Bell has opened its home market enough, in the judgment of regulators, to be permitted to offer long-distance calling there. "This law has been a disaster," says Arizona Republican Senator John McCain.

So far, the major players have appeared more eager to make love than war. The marriage of Northeastern neighbors NYNEX (1996 revenues: $13.5 billion) and Bell Atlantic ($13.1 billion) awaits final government approval, while Southwestern titan SBC Communications has hooked up with Pacific Bell in California to create a $23.5 billion MegaBell. And in perhaps the worst-kept secret in Big Business history, AT&T ($52.2 billion) tried to buy the bulked-up SBC in a deal that went dead last month over disagreements between the companies and the hostility of regulators.

In fact, AT&T's fumbling grab for SBC--which the company has never admitted making--reflected the frustration of even the largest long-distance carrier in trying to break into local calling. AT&T, which holds a 53% share of the long-distance market, has vowed to provide local service in all 50 states and to seize at least a third of the market in five to 10 years. But AT&T today offers local calling to households in parts of just six states (California, Connecticut, Illinois, Michigan, New York and Georgia), and will be in no more than 14 by the end of the year. Nonetheless, "our strategy hasn't changed," insists Harry Bennett, the vice president in charge of AT&T's drive into local markets. "It's just a very, very complex process, and there are problems every step of the way."

The most complex problem might be this: if you were a local phone company with 100% of the market, how helpful would you be in allowing a competitor into the area? Exactly. Although would-be warriors such as AT&T, MCI ($18.5 billion) and Sprint ($14.1 billion) are huge, well-capitalized companies, they can't duplicate the $100 billion infrastructure of switches, wires and poles that serves local neighborhoods. Deregulation allows them to ride the incumbent's system, but here's where the static begins: they must rely on the tender mercies of the Bells and GTE to put them into customers' homes. That gives AT&T's enemies every incentive to drag their feet, first by challenging the terms of agreements to carry AT&T local traffic and then by taking their sweet time to switch over customers who request AT&T service.

Such tactics have done much to blunt the invaders' advance. In California AT&T had hoped to add local subscribers at the rate of 5,000 a day. But Bennett says Pacific Bell has been installing local service for only about 100 new AT&T customers a day, forcing him to scale back marketing efforts in the Golden State. New MCI subscribers have experienced similar delays. Jonathan Sallet, MCI's chief policy counsel, says PacBell takes an average of three weeks to switch on MCI customers in California, although PacBell switches on its own clients in seven days. Replies a spokesman for PacBell parent SBC: "We have spent $1.2 billion to fulfill our obligation to open our networks. You'd be hard-pressed to find another company that has committed so many resources to helping competitors take its customers."

SBC and its sister Bells say the real problem is that AT&T and MCI do not want to get into the local market, because to do so would free the Bells to compete in the long-distance domain. Says Jim Ellis, SBC's general counsel: "We can bring them [the long-distance companies] to water, but we can't make them drink." Retorts Dan Schulman, AT&T's vice president for local marketing: "To say that we're not interested in moving into local residential service could not be farther from the truth."

Actually, one of the biggest roadblocks to full competition may be the Telecommunications Act itself. To qualify for the long-distance game, the Bells have to demonstrate that their home markets are open to competition. How? By fulfilling 14 separate terms of compliance. So far, none has. When regulators rejected SBC's application to provide long-distance service in Oklahoma last month, the company filed a suit charging that the law unfairly discriminates against the Bells. "If the FCC would go ahead and let us into the long-distance business, that would stir competition [in local service] faster than anything," says Roger Flynt, a group president for BellSouth.

It would certainly take away the advantage now enjoyed by GTE, which has some 20 million local customers scattered across 29 states. GTE (1996 sales: $21.3 billion) was never part of the Ma Bell monopoly, and thus is free to offer long-distance service to its local subscribers without having to open its own markets first. GTE has already signed up more than 1.25 million long-distance subscribers, snatching most of them from AT&T.

That gives GTE a head start in the race to sell customers a bundle of branded services that would include not only local and long-distance calling but also cellular and Internet access, all payable on a single bill. "Speed is critical here," says Rob McCoy, GTE's president for long-distance services, and GTE intends "to run very hard and very fast through this open window."

That's smart, because local rivals like Chicago-based Ameritech (1996 sales: $14.9 billion) are getting ready to join the race too. While the Justice Department recommended that regulators reject Ameritech's application to provide long-distance service in June, Justice said the company had satisfied 11 of 14 requirements for opening its market. The Baby Bell still has a month to make up the deficiencies before the FCC rules. Richard Notebaert, Ameritech's chomping-at-the-bit chairman and CEO, can't wait to grab part of the $9 billion long-distance market in the five states that his company has already wired up. "We have zero percent of that market now," Notebaert says, "and our infrastructure is completely in place."

That will make Ameritech a force when wide-open competition begins. "Things will continue to play out in court for the next six to eight months," says Gary Stibel, founder of the New England Consulting Group, whose telephone clients have included all three major long-distance companies as well as Baby Bells. Stibel expects the courts to clear away the obstacles, giving rise to a "bloodbath" among rival companies as the marketing wars start. Until then, lower prices will be on hold.

--With reporting by James L. Graff/Chicago, Sylvester Monroe/Atlanta and Bruce van Voorst/Washington

With reporting by JAMES L. GRAFF/CHICAGO, SYLVESTER MONROE/ATLANTA AND BRUCE VAN VOORST/WASHINGTON