Regulators Need New Rules As TV and Telephone Merge

THE simpler days of regulating the television and telephone industries are over. It is not just that issues are more complex. Regulators are going to have a tough time figuring out who the players are, let alone how to regulate them.

Technological improvements and a raft of business alliances are changing the rules of who does what.

"You'll see a flurry of activity both at the FCC [Federal Communications Commission] and the Congress and probably at the state level," says Edward Young III, vice president for federal regulatory matters for Bell Atlantic.

"There's a paradigm shift in how these industries will be treated," adds a congressional staffer.

These changes are taking place now because the telephone and television industries are converging. In part, it is technological. Both industries are beginning to use digital instead of analog technology to move information. Both are also showing increased interest in playing in each other's back yard (TV networks reinvent themselves, Page 2).

For example:

* Cable companies move into phones. The nation's largest cable operator, Tele-Communications Inc. (TCI), has teamed up with USWest, a regional phone company, and the British telecommunications firm Cable and Wireless to provide Britain with phone service and cable television on the same system. The company is looking to transplant elements of the system to the United States.

The cable industry's No. 2, Time Warner, has also joined forces with USWest to create an interactive television system by 1998. No. 3, Continental Cablevision Inc. plans next year to hook up directly with a huge computer network of networks, called Internet. The deal should give the system the capability of zapping high-speed text and, eventually, video data around the country.

* Long-distance carriers link up with TV and mobile-phones companies. AT&T, having just announced a complete takeover of McCaw Cellular, is now talking about hooking up with the nation's cable companies to create a huge new network of interactive TV. The alliance of the nation's largest long-distance carrier with McCaw, the largest cellular-telephone company, puts the long-distance giant into wireless telephone service.

Meanwhile, No. 2 MCI is building a nationwide network of a new-generation of wireless phone that, increasingly, will compete with local phone service.

No. 3 Sprint earlier this year took over Centel Corporation and United Telephone of Florida, extending into local and wireless mobile phone service.

* Local phone-service companies eye ex-pansion. Since so many other companies are pushing to provide local phone service or bypass it altogether, the so-called Baby Bells are expanding their horizons too.

Ameritech has proposed giving up its monopoly on local service in exchange for the right to get into other businesses, such as long-distance and cable TV. Pacific Telesis is thinking of spinning off its wireless business into a separate company, one that would be free to pursue other lines of business without regulatory entanglement.

In perhaps the biggest move of all, Bell Atlantic last week won a court case to sell video programming in its own service area. A federal district judge declared unconstitutional a 1984 provision that banned such activity.

Confused? Imagine the job of regulators in the years ahead.

"Certainly the government and all the industries have to try very hard to keep up with all the changes because everything is happening so quickly," says Lela Cocoros, a director of communications at TCI.

"Regulation is lagging behind," adds Mr. Young of Bell Atlantic. "The structures that have been set up simply aren't consistent with the technologies."

For example, long-distance companies have no regulatory barriers on getting into the mobile-telephone business. And while, at the moment, mobile telephones are no substitute for local phone service, one day they could be. Local phone companies, on the other hand, are barred from offering long-distance service. So regulators will have to decide how to divvy up the communications pie in a fair way.

Another hurdle: If cable companies want to enter local phone service, should they be required to offer service to everybody in an area (as the Baby Bells currently do) or just to those customers who provide them with the most profit?

In general, regulators are trying to move the industries toward more competition. State legislators in Pennsylvania and three other states this year have passed laws allowing Bell Atlantic to contest regulations in areas where telecommunications services are already competitive (such as pay phones and Yellow Pages).

The competitors themselves talk encouragingly about re-writing rules so that they are fair to everybody. "We all know government is going to be involved," says Ms. Cocoros of TCI. "TCI would like to see, in a lot of cases, a level playing field."

The problem is that once regulators enter into the nitty-gritty of writing rules, one industry's "fair" will be another industry's "unreasonable."

Regulators will have to grapple with how they will let a telephone company enter the cable TV business without forcing its phone customers to unwittingly subsidize the venture. How will regulators ensure that the telephone company re-mains financially secure even if it enters speculative ventures? "Every telephone executive thinks he's going to run MGM," the congres-sional staffer says. "We want to make sure that the basic, plain-old telephone service that people rely upon ... is protected."

Since last week's Bell Atlantic decision will likely face appeal before the company can enter the cable business, Congress probably has a one-year window to write new rules, the staffer says. The AT&T-McCaw deal, while interesting, is not as threatening to regulators.

At least, not for the moment. The new alliances and technologies will take a few years to build. "I would call it the year of competition," says Young of Bell Atlantic. "I'm really looking forward to it."