Who Needs The I Way Anyway?

Chuck Lee certainly knows a lot about corporate turmoil. Growing up in Pennsylvania farm country, the young man who would become chairman and chief executive of GTE Corp. first set his mind on running U.S. Steel. He joined the company fresh out of Harvard business school--just in time to experience the slow demise of the American steel industry. In 1971, he moved to Penn Central Corp.--only four months before the bankruptcy of that high-flying conglomerate. Next stop: In 1980, Lee became chief financial officer at Columbia Pictures, where he was hired to tighten financial controls in the wake of a check-forgery scandal.

So Lee might be excused a bit of caution as he ponders the seismic shifts rocking the telecommunications industry. With a resume heavy on corporate cleanups, it's no surprise that Lee, head of $20 billion GTE, the world's No.4 telephone company, is moving with far less haste than such rivals as Bell Atlantic Corp. and Pacific Telesis Group. While others race to stake out a spot on the Information Superhighway as entertainment, cable, and telecommunications converge, the 55-year-old Lee prefers to concentrate on improving GTE's core phone franchise.

So for GTE, there have been no splashy announcements of cross-industry mergers. No signings of Hollywood media mavens. No radical new technologies. Instead, Lee is leading a $1.3 billion restructuring of GTE's local phone unit--the source of 80% of revenues--while cutting $1 billion in operating costs. "We don't blow smoke," he says. "We haven't chased a pot of gold at the end of the rainbow."

Think of it as a "bird-in-the-hand" strategy. While high-profile plans for cable industry alliances, online video, and other I-way services may take years to bear fruit, Lee sees big growth in phone services. "What amazes me is how people don't appreciate what a great business we are in," he says. For now, there's plenty to appreciate: For the first half of 1995, operating income rose 7%, to $2.5 billion, on a 4% rise in revenues, as cost-cutting offset pricing pressure.

IN FLUX. The question is whether GTE's go-slow strategy will work long term, as deregulation opens the market. Like the Baby Bells, GTE--which provides local service to 20 million people in 28 states-- will face new rivals, from cable companies such as Time Warner Inc. to long-distance suppliers such as AT&T. And emerging technologies such the Internet threaten everyone. "The market is in flux," says Sanjay Mewada, an analyst with the Yankee Group Inc., a Boston-based technology consultancy. "The race hasn't really started."

GTE can't rest on its laurels in the core phone business. Lee and newly appointed President Kent B. Foster have plenty to do to improve operations and make GTE quicker on its feet. It has long lagged behind Baby Bell rivals in profitability and efficiency. Although GTE's margins are much improved since Lee was named CEO in 1992, employee productivity still runs below industry averages. So in July, Lee shook up management, making longtime phone chief Foster heir apparent and placing him in charge of combining GTE's traditional and wireless units.

GTE is also in the midst of axing roughly 17,000 employees, or 20%, from its telephone workforce. And it has shut more than 200 service centers, using technology to do the work people once did, while spending close to $4 billion a year upgrading its networks to handle more digital and video transmission.

Still, GTE must overcome a history of poor customer service that dates back to the 1980s. In Santa Monica, Calif., service was so bad that officials tried to remove GTE as the local phone company. "We were the pits," Lee admits. He claims big improvements--GTE has largely done away with its old system of taking customer service requests, which required writing up a problem and passing it along for resolution. Now, using personal communication services and specially designed software, service reps can solve 70% of all problems on the initial call--double the mid-1980s success rate. Repair workers, meanwhile, plan their schedules on laptops, cutting down time and speeding responses.

VULNERABLE? But with rivals on the way, more than good service is needed. In California--where local toll calls are opening to competition--GTE is offering steep discounts. Jim Cawthorn, Los Angeles-based regional telecommunications manager for Allstate Corp., saw GTE's rates fall from 12.5 cents a minute to 5.5 cents when he signed up for a year's commitment. GTE's Foster says that in the highly competitive L.A. suburbs, it has lost only 10% of its market to Pacific Bell and others. Foster counts on getting that back once GTE can offer long-distance service, possibly by January.

Still, competitors lurk. MFS Communications, a small but fast-growing provider of corporate phone services, is already cherry-picking GTE customers around Tampa and Dallas suburbs with its state-of-the-art fiber-optic networks. Time Warner is testing telephone service in Rochester, N.Y. By 1997, it's likely to attack some of GTE's more lucrative phone franchises, including Hawaii, where it says poor service makes GTE vulnerable. "It is not unreasonable to expect to grab 15% market share within several years," says Time Warner phone chief Tom Morrow. But Lee notes the cable companies' own rep for lousy service. "We'll hold our own," he says.

Lee knows he needs to counterpunch with new businesses. So far, GTE has barely tested the Information Superhighway: Main Street, an early interactive experiment aimed at providing home banking, games, and other entertainment services over phone lines, has had little success. So now GTE is spending $250 million to build its own video network to be delivered over cable; it expects to have 500,000 homes by early 1996. And GTE has joined a $500 million programming consortium with Walt Disney Co. and three Baby Bells, though the venture is still in its infancy.

Meanwhile, the bulk of GTE's investment is going toward expanding its telephone franchise. The company has spent heavily to build a national cellular business; revenues--at $1.6 billion--are growing at close to 50% a year. And last year, GTE launched the first residential PCS service, a cheap alternative to cellular. With 150,000 customers so far, GTE is now licensing its service to others.

Pushing forward on the international front, GTE is taking ownership stakes in the phone networks of Venezuela, the Dominican Republic, and British Columbia. It won the Argentine cellular franchise in 1994 and is prospecting in Mexico, Indonesia, and China. International services provide about 12% of GTE's earnings and 13% of sales--figures the company plans to double over five years. Risky overseas markets haven't always paid off in the short term: Disputes with the Venezuelan government have led to severe foreign exchange problems and heavy losses for GTE's local unit. But Lee argues that the long-term potential is huge. Besides, with the competitive turmoil now starting to roil U.S. phone markets, such developing-world plays may not seem so risky after all.

How Chuck Lee Is Reshaping GTE

RESTRUCTURING Spending $1.3 billion on reengineering moves that will slash 17,000 jobs, replace people with technology, and speed business practices. Lee's goal: Cut annual operating costs $1 billion by 1997.

TECHNOLOGY Betting heavily on PCS, a cheaper alternative to cellular. Meanwhile, taking a cautious approach to the Information Superhighway: Building a video network and joining a consortium with Disney and three Baby Bells.

INTERNATIONAL Lee wants to double GTE's global presence, which now accounts for 13% of sales and 12% of profits. Already a big player in Venezuela and Argentina, GTE is eyeing Indonesia, China, and other markets in Latin America.