from the Chicago Tribune


   Cable phone service a muted success
   By Jon Van
   Tribune Staff Writer
   August 25, 1998

   When Karon Sultan dropped Ameritech 18 months ago to get her phone
   service from the same outfit that provides her cable TV, there were
   some problems.

   "Sometimes my phone would just go dead," she said. "But I expected
   glitches with something new, and in the last 10 months, everything's
   worked just fine. I'm really happy with my phone service now,
   especially the lower bills. I pay $45 to $50 a month instead of the
   $80 that Ameritech used to get."

   Sultan lives in Arlington Heights and gets her phone and cable TV from
   TeleCommunications Inc. as does Chris Tortorella, who also appreciates
   lower phone bills.

   "My service is very clear and dependable," said Tortorella, "and the
   rates are very cheap."

   Without doubt, TCI has pleased Sultan and Tortorella and a few hundred
   other phone users in Arlington Heights, but they are clearly a
   minority in the northwest suburb.

   In a community of more than 75,000, TCI has signed up fewer than 500
   telephone customers since it launched its local phone service two
   years ago. It's hardly a threat to Ameritech Corp., the dominant local
   service provider to Arlington Heights and the rest of the Chicago
   area.

   Even though AT&T Corp. has bet nearly $50 billion -- in its proposed
   TCI acquisition -- that it can convert TCI's so-far feeble cablephone
   venture into a fiercesome competitor, don't count on joining Sultan
   and Tortorella any time soon in getting discount phone service.

   In the coming months, TCI will be pushing high-speed Internet
   connections over its cable system, not local telephone service.

   The strategy is grounded in technology and marketing.

   While it works fine on its present small scale, the local phone
   service TCI supplies in Arlington Heights is the circuit-switched
   flavor based on traditional technology. Expanding it throughout the
   region probably isn't desirable for AT&T because it doesn't provide
   the economies and competitive advantages the long-distance giant
   seeks.

   What AT&T wants is a data network considered so state-of-the-art that
   equipment to operate it won't even be available until next year. With
   such a network, running voice telephone connections could become cheap
   enough to enable AT&T to offer local phone service at super-low rates
   and still make money.

   This technology, called Internet protocol, breaks voice into small
   packets of digital bits just like other data and then reassembles it
   to sound like a regular phone conversation at the receiving end of the
   call. IP technology eliminates the need for most of the expensive
   switches required by traditional telephony.

   With the most long distance customers of any company in the U.S., AT&T
   has the most to lose once local phone companies like Ameritech get
   government approval to offer long distance service to their customers,
   something that's likely to occur within a year or two.

   To match this competitive threat to its base, AT&T has to begin
   offering local service, and to make a profit while undercutting
   existing phone rates, the firm desperately needs the competitive edge
   the new technology offers.

   But it can't happen overnight.

   As it is in most of the nation, TCI's first priority in the Chicago
   region is to upgrade its cable systems with optical fiber so they can
   carry digital TV programming and high-speed Internet. TCI also is in
   the process of swapping franchises with other cable operators
   nationally so that by the end of next year it will control about 90
   percent of the Chicago area's cable TV, making this its largest market
   when AT&T takes over.

   As TCI's upgraded fiber-cable networks go on-line, they will first
   offer customers traditional cable TV as well as pay-per-view premium
   choices and high-speed Internet connections.

   When a system can handle high-speed Internet reliably, it will be
   ready for voice telephony, said Mark Dzuban, AT&T division manager of
   corporate business development. And because residential customers are
   used to low-speed dial-up modem connections such as that offered by
   America Online, the lightning fast cable connections will impress them
   even if a few bugs in the system cause some service interruptions.

   This gives technicians a chance to find the bugs and fix them without
   causing customer irritation and frustration as happens if basic phone
   service suffered frequent interruptions.

   "Once the upgrade is done," said Dzuban, "your basic transport path is
   in place. Then it's a matter of combining voice to become bits with
   your data, using the same path."

   Even if it hasn't become a market worldbeater, TCI's Arlington Heights
   experience should be regarded as educational, said Dan Murphy, the
   cable firm's regional engineering director.

   "We wanted to try the technology to learn how it works," said Murphy,
   "and learn how to manage it operationally."

   In contrast to fewer than 500 telephone customers, TCI has signed up
   more than 1,000 Arlington Heights residents for its high-speed
   Internet service, and while expansion of telephone service is on hold
   as the AT&T merger proceeds, it's full speed ahead on Internet
   hook-ups.

   The most frustrating thing right now about TCI's Internet rollout is
   that it is only available in Arlington Heights. But that soon will
   change as TCI completes other system upgrades.

   "It's hard to market something regionally when most people you reach
   can't get it yet," said Howard Rudolf, TCI's Internet field sales
   manager. "You're kind of stuck with word-of-mouth."

   Later this year, as TCI finishes network upgrades in some Chicago
   suburbs and in parts of the city, Rudolf will offer the high-speed
   Internet service, called @Home, for $40 a month. Even though that's
   nearly twice what dial-up services like America Online charge, it's
   still competitive, Rudolf argues.

   "For $40 a month, you've got an open connection to the Internet that's
   always on, and you don't tie up your phone line," he said. "If you use
   a dial-up modem, and want to have phone service too, you need a second
   phone line. When you look at it that way, we're very competitive."

   Once TCI's Internet connections prove themselves to be reliable, the
   firm can offer to provide local telephony to those same customers for
   just a few dollars more a month.

   While the strategy may sound good, investors have been skeptical.
   Since AT&T's announced TCI acquisition in June, its stock has been
   sluggish. Too many people remember TCI's chief executive, John Malone,
   for his past grand plans that came to nothing.

   After an acquisition of TCI by Bell Atlantic fell apart five years
   ago, the cable firm entered an alliance with Sprint Corp. to bring
   cablephone service to Arlington Heights and other communities, but
   then that alliance, too, crumbled.

   In a scaled-back plan, TCI was to launch cablephone service in
   Hartford, Conn., Arlington Heights and Fremont, Calif., by the end of
   1996. But Malone pulled the plug on that effort before the California
   service was even started.

   TCI's on-again, off-again history along with failed technology
   expansions by some other cable operators have helped promote the
   general view that cablephones are unreliable. But that's not a fair
   assessment, say people who design equipment intended to get cable
   companies into the phone business.

   One enthusiastic advocate of cablephones is Tim Fritzley,
   vice-president of the cable telephony group at Tellabs Operations
   Inc., based in Lisle.

   "A few failed efforts in the U.S. have gotten a lot of attention,"
   said Fritzley. "But there have been plenty of success stories here and
   in Europe that are mostly ignored."

   A year ago, for instance, on the first day that de-regulation allowed
   it in the Netherlands, cablephone operations using Tellabs equipment
   were begun in Amsterdam and Hilversum, Fritzley said.

   Tellabs upgrades available in a few months will enable cable companies
   to mix digitized voice and data together and divert only a minimum of
   the system's information carrying capacity from video programming, he
   said.

   In the future, Fritzley predicts, most phone calls will be nearly as
   cheap as posting e-mail.

   "You could call someone across the country for a penny a minute and
   have perfectly acceptable quality," he said. People who want to pay a
   little more to give their phone calls top priority and assured high
   quality will have that option, too, he said.

   "Given the technology we have developed, AT&T's plans won't be as
   difficult to execute or as expensive as a lot of people think," said
   Fritzley.

   Others who are more skeptical still agree that although AT&T's TCI
   play is risky and difficult, it had little choice. If it cannot get
   into the local phone markets with advanced communications technology,
   AT&T will see its core business eroded by a variety of competitors,
   according to an analysis by the Yankee Group, a Boston-based
   consultancy.

   "When viewing this deal with a longer-term perspective," concludes the
   Yankee Group's analysis, "the cost of the acquisition becomes less
   relevant. The important corollary to what AT&T paid for TCI is what
   AT&T would be worth five years from now if it did not."