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The Corporation: STRATEGIES
IS BELLSOUTH REALLY `READY TO GET IT ON'?
If John L. Clendenin, chairman of Atlanta-based BellSouth Corp., ever had any doubts that rivals were invading his turf, they disappeared one day in mid-March. Calling home from a trip to Washington, Clendenin couldn't get through. So he tried his secretary, who told him that a fiber-optic cable in suburban Atlanta had been accidentally cut, blacking out BellSouth's service to the area around Clendenin's house. The culprit: MCI Communications Corp., which was installing new cable to better serve the lucrative region BellSouth now dominates. "It's ironic," admits Clendenin.
These days, cut phone lines are the least of Clendenin's worries. The longtime Bell executive sits atop the biggest--and most profitable--of the Baby Bells. But as telecommunications changes faster than Clendenin can say "Information Superhighway," potential short circuits abound. Competitors are angling for a big slice of BellSouth's juicy market. New wireless technologies could cut into BellSouth's dominance at home. And the company has been slow to jump into multimedia services, even as rivals such as Bell Atlantic Corp. and Pacific Telesis Group sprint into the interactive age.
BellSouth has long been one of the industry's most conservative players. Thanks to its cozy berth in the nation's fastest-growing region--as well as a heavily protected regulatory environment--BellSouth has stuck closely to its core of providing local phone and cellular services. So far, that strategy has paid off: BellSouth's revenues, up 6%, to $16.8 billion, in 1994, were the highest of all the Baby Bells'--as were operating profits. Cost-cutting helped them to nearly double last year, to $4.1 billion.
But the healthy numbers won't last if BellSouth doesn't adjust quickly to the dramatic changes sweeping the telecommunications, cable, and entertainment industries. Digital technology is rapidly expanding the services phone companies can offer, while deregulation threatens to knock down the regulatory walls that have protected BellSouth's vast turf from competitors. Other Baby Bells are grabbing headlines with more dramatic plans to capitalize on the new opportunities. The question now is whether Clendenin's cautious approach will save BellSouth from throwing money at expensive Information Age pipe dreams or simply cause it to miss the multimedia boat.
While BellSouth is beginning to build multimedia "broadband" networks, it isn't spending anywhere near the $16 billion Pacific Telesis plans to ante up by 2002. Nor has it invested directly in a cable operator, as SBC Communications Inc. and U S West have done. And while BellSouth recently announced a new $500 million programming venture with Walt Disney, Ameritech, and SBC, the effort trails that of a rival Bell consortium, which recently scored a coup by hiring former CBS Inc. Broadcasting President Howard Stringer.
OVERSEAS MARGINS. Certainly, some caution is warranted. With technology changing rapidly--industry leader Bell Atlantic just put the brakes on its plans to offer video services to phone customers--Clendenin argues that his go-slow approach will help BellSouth avoid costly errors. "We prefer to think of ourselves as disciplined, not conservative," says the former Strategic Air Command pilot. BellSouth remained mostly aloof from the recent federal auction of "personal communications services" licenses, for which rivals paid a total of $7.7 billion. Although Nynex, Bell Atlantic, and others count on PCS to create cheaper wireless networks that will compete with cellular, Clendenin believes billions will be lost on the unproven technology as the industry shakes out. "The big PCS winners are going to be like the dog that caught the bus," says Clendenin. "They'll wish they hadn't given chase."
Still, with its core business under attack, BellSouth is beginning to shed its conservatism. Clendenin has started investing more aggressively in new ventures, from $70 million allocated to build, in North Carolina, the first statewide Info Highway in the U.S. to its $125 million stake in the Disney partnership. And in wireless telephony, BellSouth has moved more rapidly overseas than any competitor, investing more than $900 million to join ventures in 16 countries in South America, Asia, the Middle East, and Europe. Clendenin prefers to place his bets on fast-growing telephone demand in emerging markets, where gross margins can hit 45%. "BellSouth is very particular and very cautious in deciding where to put its money," says David G. Lindsay, associate partner at Andersen Consulting. "But when they determine it's the right thing to do, they are very aggressive."
SLASHING JOBS. Nowhere is that clearer than in the approach BellSouth has taken in setting up an extensive high-speed data and video network in North Carolina. The North Carolina I-Way--which BellSouth built with partners GTE and Sprint--can carry the image of a cancer victim's brain from a rural hospital in Lumberton, N.C., to the office of cancer specialist Dr. Julian Rosenman at the University of North Carolina Hospital. Maria Domoto, a Japanese professor from the University of North Carolina at Charlotte, uses the network to teach Japanese to high school students simultaneously in three cities.
By providing such services first to state institutions and universities centered around North Carolina's Research Triangle, BellSouth claims it has generated strong revenues--and profits--from the start. It recently won a contract to move the technology into Kentucky and has plans to sell the network to other states as well. With the states as anchor tenants, BellSouth then hopes to offer the technology to commercial customers.
Even as it gains customers at the high end, however, BellSouth risks losing them at the low end as new rivals hit its home turf. Clendenin is slashing costs. Over the past two years he has trimmed 10,200 jobs and is expected to cut BellSouth's telephone workforce by an additional 15,000 positions, to 56,000, by 1998. Since late 1992, BellSouth has also shuttered 70% of its 288 operations centers as it consolidated inefficient field offices into more centralized service centers. The upshot: Operating costs, which had been growing rapidly, stayed steady last year. "The competitive game is coming," says F. Duane Ackerman, BellSouth's COO. "We're ready to get it on."
So, too, are the new competitors. Indeed, U S West has already begun its onslaught in Atlanta. After buying two local cable companies with nearly 500,000 customers last year, it's spending $300 million to upgrade its network to carry cable and multimedia offerings. If Georgia opens up phone competition this year, as expected, U S West could soon be competing for customers in BellSouth's hometown. "We expect to move quickly and aggressively," says Steven E. Andrews, president of Southern Multimedia, U S West's Georgia subsidiary. "I hate to lose. I'm planning to win." And long-distance rivals Sprint, AT&T, and MCI are also set to attack local phone markets. Along with newcomers--from cable operators to giant Microsoft Corp.--all want to compete with the Bells.
BellSouth will also have to scramble if it hopes to keep up in the multimedia race. While multimedia trials, such as Time Warner Inc.'s in Orlando and Bell Atlantic's in Dover Township, N.J., are already up and running, BellSouth is just now building its own test for 12,000 homes in Chamblee, Ga. For the moment, BellSouth will have to buy all the programming it pipes over the fiber-optic line, but that will change as its new programming venture comes onstream.
To get the most out of the Disney alliance, BellSouth executives will closely study what customers in Chamblee and elsewhere are willing to pay for the souped-up services. The venture partners plan to create a package of services, such as movies on demand, video games, banking, and home shopping. William F. Redderson, senior vice-president for broadband strategies, says BellSouth is already mapping out 30 top markets it can penetrate quickly but will do so only once the economics are clear.
"LARGER PIE." BellSouth's competitive picture in wireless communications is just as muddy. Over the next several years, the key factor will be PCS, a wireless technology that has a smaller range than traditional cellular phones but is cheaper to operate. Although BellSouth now dominates the cellular market in its region, it will come under attack from the likes of GTE Macro Communications, which is planning aggressive expansion after paying $19.4 million for a license to operate PCS networks in Atlanta and three other cities. "We're kind of salivating when we look at it," says C.J. Waylan, GTE's executive vice-president.
Still, Clendenin is hardly standing still. He may not have faith in PCS, but BellSouth will spend $750 million by 1996 to upgrade its cellular network from analog to digital. Although analysts say BellSouth is certain to lose some customers as rivals swoop in, it will gain others as it begins to offer cable and other services. "BellSouth may have a smaller share in some areas," says David J. Roddy, chief telecommunications economist at Deloitte & Touche. "But it's a much larger pie overall." The question, of course, is how it all gets sliced up.
A TORTOISE SPEEDS UP
THE INFO HIGHWAY With partners GTE and Sprint, BellSouth has built the nation's first statewide Information Superhighway in North Carolina, allowing hospitals, universities, and other institutions to transmit video and data over cable. Launch of commercial services is planned.
ENTERTAINMENT After months of negotiations, BellSouth, Disney, and two other Baby Bells recently agreed to invest $500 million in a joint venture to produce interactive entertainment programs that will be distributed through their phone lines as well as cable systems.
MULTIMEDIA BellSouth is building the system to run a long-awaited trial of new interactive multimedia services in an Atlanta suburb. By fall, BellSouth plans to deliver movies on demand, video games, and shopping over its high-capacity telephone wires. Eventually, 30 cities may join in.By David Greising in Atlanta, with Kathy Rebello in San Francisco