The Bells' Sibling Rivalry Turns Into Sibling Warfare

An empire falls, and before long its sovereign states are at one another's throats. The Soviet Union? Yup. And now the Bell System, too.

The seven Baby Bells that were spawned in the court-ordered 1984 breakup of American Telephone & Telegraph have skirmished from the start. Until now, though, it has been mainly low-intensity, resembling the maneuvering of preening entrants in a beauty contest. To date, the judges--investors--have given the highest marks to Ameritech Corp. and the lowest to Nynex Corp. (map).

On Oct. 13, with Bell Atlantic Corp.'s $12 billion deal to buy Tele-Communications Inc. and Liberty Media Corp., the preening turned to war. In this conflict, the winners are assured major roles in the explosion of information and entertainment services; the losers are left to defend the slow-growth business of plain old telephone service.

SLIM PICKINGS. For now, count Bell Atlantic a winner. It intends to strike at the heart of the other Bells' phone service monopolies by upgrading TCI's cable networks to carry phone calls. A TCI network in Chicago, for example, that delivers television and movies soon might deliver phone calls as well, stealing revenue from the local Bell company, Ameritech. That's a huge opportunity: TCI has more than 10 million cable subscribers nationwide.

The other Bells are likely to acquire cable operators themselves. But with TCI scarfed up, the pickings are suddenly slim. The No.2 cable operator, Time Warner Inc., isn't available for partnership: U S West Inc. bought a $2.5 billion stake in it this year. Players such as Cablevision Systems, Jones Intercable, and TCA Cable TV don't boast TCI's national presence. "We'd have to buy two or three or four or five" cable companies to match Bell Atlantic, says Steve Dimmitt, Southwestern Bell Corp.'s director of strategic business development.

With the stakes suddenly raised by Bell Atlantic, the other Bells would do well to avoid cutting deals just for the sake of cutting deals. Some properties just don't fit. One possible example: Viacom Inc., the cable programmer and operator that shopped itself to all of the Bells and is seeking a cash injection to help fund its bid for Paramount Communications Inc. Nynex jumped at the chance, spending $1.2 billion for 11% of Viacom.

Nynex argues that Viacom gives it "vertical integration"--programming as well as distribution. But vertical integration isn't all it's cracked up to be. Plenty of companies flourish by doing one thing well--Intel Corp. in chips and Microsoft Corp. in software, to name two. And it's hard to find the synergy between the hardware of Sony Corp. and Matsushita Electric Industrial Co. and the movie studios they have bought.

In contrast, the blending of Raymond W. Smith's Bell Atlantic and John C. Malone's Tele-Communications is more horizontal integration than vertical. TCI has high-capacity coaxial cables but needs experience in networking. Bell Atlantic is strong in networking but lacks high-capacity connections to the home. Their skills are complementary: Together, they intend to build easy-to-use networks that let people order movies, participate in on-line debates, and make video phone calls.

Developing those services will be costly. But Bell Atlantic and TCI together have enough customers to justify the expense. Ronald L. Altman, a managing director and telecom strategist at Furman Selz Inc., calls the merger "a brilliant move by two brilliant individuals to create the dominant communications entity on a worldwide basis."

Just under a decade since Ma Bell went to her reward, Bell Atlantic has mounted a stiff challenge. Its six siblings ignore it at their peril.

Before it's here, it's on the Bloomberg Terminal.