View from New York: Wall Street tunes in to Britain for advice

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The Independent Online
It is not often that Wall Street looks to the City of London for guidance about America's technological future.

But, with multi-billion-dollar telecoms mergers and unlikely media alliances in the air, the smart money on Wall Street placed a collective transatlantic conference call this week, seeking information about the British telephone system.

A decade after the Treasury began dismantling BT's monopoly, a de facto deregulation of telecommunications is under way in America, and everyone with any sort of stake in the emerging mega-industry known here simply as 'IM' - for Interactive Multimedia - wants to know who will emerge the winner.

Two events in the past fortnight - the dollars 17.5bn merger of AT&T and McCaw Cellular, and a court ruling on Tuesday allowing phone companies to carry cable TV over their wires - have brought home parallels with the rapid evolution that has taken place in Britain.

The business pages of the New York Times recently ran a feature showing labourers laying phone cable in Bexleyheath. Callers to investment advisers in places like Portland and Denver suddenly find them conversant with names like Vodafone, Mercury and Oftel.

To the surprise of many of them, their research is also yielding names like Nynex, US West and Southwestern Bell - regional US phone utilities that have dominated cable TV in Britain but have been legally barred from carrying video services over their wires at home.

With the 'Baby Bells' now free to exploit the synergies between cable and telephone service on their home turf, the race to build the 'information super-highway' that will carry all this IM has been thrown wide open.

Long shots

Stock-pickers are handicapping all comers, from long-distance carriers like AT&T and MCI and the seven Baby Bells to media conglomerates and cable companies such as Time Warner and Tele-Communications Inc, and even the cellphone manufacturer Motorola.

The cable companies have often been considered long shots in the race to rewire the country for 500 two-way channels, burdened as they are with high debt from building existing networks and a rollback in prices ordered by Congress.

The Baby Bells, with dollars 100bn in combined revenues, are roughly four times their size and can use their telephone monopolies to finance their 'video dial-tone' services.

'It is now almost completely a financial race, and none of these companies can stand still,' said one Wall Street specialist, who now describes himself as a 'converging industries analyst'.

'They all have to spend money or someone else will own their market.'

Tuesday's court ruling thus sent shares of the Baby Bells soaring at the obvious expense of the cable firms.

Bell Atlantic, the east coast telephone company that sought the ruling, went so far as to run full-page advertisements in US newspapers later in the week inviting American 'channel surfers' to 'catch the wave of the future'.

But some argue that with AT&T's wireless deal it is the Baby Bells that run the risk of being made redundant. The merger will allow calls to bypass local telephone exchanges completely, forgoing 'access charges' that now account for half the Baby Bells' annual revenues.

While cellular phones represent only a tiny portion of the calls they pass on to America's three main long-distance carriers, that number is sure to grow now that the giant AT&T owns McCaw.

The threat to the Baby Bells' long- term future could become significantly more serious next month when communications regulators, following in the footsteps of their British counterparts, hold an auction of franchises for the next generation of mobile phone personal communications services (PCS).

For one thing, they face a similar loss of access fees from America's second-largest long-distance carrier, MCI, which is proposing an dollars 8bn national PCS network, to be financed with the dollars 4.3bn BT paid it in July for a 20 per cent stake.

But, if the British experience is any guide, the introduction of low- cost PCS will also give US cable companies a new lease of life, providing them with an additional revenue stream to help pay the dollars 45bn they will need simply to upgrade their existing coaxial network to interactive fibre-optics.

The technology also eliminates the need to run wires into the home of each subscriber. The signal can be brought into a neighbourhood by fibre, then beamed into homes with PCS at considerably lower cost.

Other threats loom to both industries - Direct Broadcast Satellite, like Britain's BSkyB; the oxymoronic 'wireless cable', a system which in fact does not use cable but beams cable TV channels to household antennae; and, potentially, even 'cellular television'.

No guarantee

Even the apparent front-runners in the super-highway race, AT&T and MCI, face a long-term challenge in Iridium, Motorola's dollars 3.4bn project to create a web of 66 low-orbit satellites that it says will completely bypass all land-based communications by the end of the century.

What is clear is that none of the current participants or even industries is guaranteed victory in the race. On one level, analysts note, what is emerging in the US is what happened in Britain. Instead of trying to go it alone or band together as an industry to try to keep new rivals out, key players are breaking ranks and allying themselves with - or buying stakes in - companies with complementary skills.

Phone utilities tend to have expertise in complex switching - crucial to two-way communications - and in complicated billing. Cable companies bring experience with high-capacity transmission and with programming.

Thus US West has bought a dollars 2.5bn stake in Time Warner's cable operations, just as it allied itself with Tele- Communications in Britain. Southwestern Bell has bought into Hauser Communications, as with Cox Cable in the UK.

Investment bankers 'are burning up their phone lines pitching merger and alliance ideas', the Wall Street Journal reported, citing rumours in the past week alone of deals involving the Baby Bells Ameritech, Pacific Telesis, Bell South and Bell Atlantic, and the cable companies Cox, Viacom, Comcast, Adelphia and Tele-Communications.

The AT&T merger and the Baby Bell cable decision have 'served as a major wake-up call for all sorts of companies that seemed content just to defend their own territories', according to Sal Muoio, an analyst with Gabelli & Co, a big media investment firm in New York.

An international, inter-active wake-up call, perhaps.