Already Riding the Highway : While Others Talk, GTE Says It Has Been Making Inroads in Communications Race

THOUSAND OAKS —  While most everyone in the telecommunications business has been talking urgently about the coming of the information superhighway, where has quiet GTE Corp. been?

Building the information superhighway, GTE says.

GTE was, in fact, one of the first to test complicated interactive voice, video and data services, such as home banking, shopping, education and movies on demand, in a five-year experiment in Cerritos. Run by GTE California, the Thousand Oaks-based unit of the parent company, the Cerritos project is now ending, and is regarded as a sobering lesson by some observers who say it cast doubt on consumers’ willingness to pay for additional entertainment and other services.

Possibly chastened by Cerritos, Stamford, Conn.-based GTE, the nation’s largest independent phone company, is now charting a conservative course in the mad race among phone, cable, software and wireless communications companies to transform themselves into the communications providers of tomorrow. Contributing to the chaos is that Congress and federal regulators haven’t decided on the ground rules.

Yet while other phone and cable companies tried to make mega merger deals to be ready for an interactive multimedia future, GTE waited. In November, California’s other regional phone company, Pacific Telesis Group in San Francisco, announced an ambitious six-year plan to spend $16 billion bringing consumers interactive video and data services, and other phone companies quickly followed with similar announcements. But GTE California made no such financial commitment, and its parent company said only that it would follow up Cerritos with another test of interactive phone, video and data services in Manassas, Va.

Now that various phone-cable deals are crumbling--including Bell Atlantic’s proposed acquisition of cable TV giant Tele-Communications Inc., which was scuttled in February--GTE looks wiser. GTE’s quietness, said A. Michael Noll, a professor at USC’s Annenberg School of Communication, “implies sense” because it didn’t rush into an expensive merger deal before the benefits of such a transaction are known.

While displaying caution, GTE must also prepare itself for a future that’s far from clear. As phone monopolies are dismantled and technology improves, local phone companies such as GTE want to become providers of not just voice communications but all sorts of services, including entertainment and educational video on demand, large-volume data transfers, and communications links between businesses and consumers.

In transforming itself, GTE faces plenty of potential competition from cable concerns, long-distance phone companies and wireless communications providers, which are also spending billions on new equipment and technologies. Movie studios, newspapers and computer software firms, too, are trying to figure out where they will fit in to the predicted explosion of information for businesses and consumers.

So, despite all its reserve, GTE is now beginning to market some information superhighway products.

In March, GTE rolled out a group of business services called the World Class Network. Along this network, companies, universities and government agencies can tap into video conferencing, transfer high volumes of computer data over fiber-optic phone lines, and make three-way phone calls. These services aren’t entirely new, but with technology gains, GTE can now make them better, faster and cheaper.

Targeting Businesses

The information highway “happens first in corporate America,” GTE California President Larry Sparrow said. “It is happening there today.”

Because data communications--transmitting massive amounts of computer data--is projected to grow four times faster than voice communications, GTE is tailoring its marketing efforts accordingly and telling businesses that it can save them money.

The key here, GTE says, is that its new fiber-optic lines are cheaper to maintain than old copper phone wires, and each fiber strand, thinner than a human hair, can carry vast amounts of information at very high speeds compared to a copper wire. GTE California engineers say that hospitals, for instance, could link up with their suppliers and vastly increase their ability to share data. A publisher could transmit 50 pages of a book over phone lines in less than a second, and the time it takes for credit card transactions to be approved could be reduced from 30 seconds to five seconds.

Big investments over the past several years are allowing GTE to provide these services. Last year alone, GTE’s capital expenditures totaled $3.9 billion--$500 million in California--much of it spent on technology and equipment upgrades. Over the past several years, it has laid 650,000 miles of fiber-optic cable throughout the United States.

Like others, GTE has been laying fiber-optic cables in big rings in urban areas, allowing it to reroute transmissions along one side of a ring should the other side fail--a big selling point to corporate customers who require reliable service. GTE has also installed super-fast digital switches that can route mind-boggling amounts of data. In California, 94% of GTE’s network will be digital by the end of the year.

“GTE is in real good shape in terms of having the pavement down on the highway,” said analyst Frederic H. Dickson at the investment firm D. A. Davidson & Co. in Great Falls, Mont.

GTE California will be a big market for these information highway services, Sparrow said, by virtue of its sheer size. California provides about 15% of GTE Corp.’s $20 billion in revenue and, in recent years, has accounted for 11% to 22% of its operating profit. Los Angeles is one of eight areas targeted for the World Class Network.

Still, Steve Harris, external affairs vice president at Pacific Bell, Pacific Telesis’ phone company subsidiary, said the World Class Network gives little insight about GTE’s real plans for the information highway. “We’re all sort of waiting to see what it means.”

Company ‘Has to Move’

Some analysts suggest that GTE has been reticent so far because it is still paying for its $6-billion 1991 merger with telecommunications company Contel Corp. But outsiders expect that GTE will get more aggressive.

“The PacTel announcement changed the landscape for everyone” because Pacific Telesis said its costs of providing interactive services to homes would be a fraction of what was previously assumed, said Jonathan Seybold, publisher of the Digital Media newsletter in Malibu. Now GTE “has to move.”

Indeed, Sparrow hinted that an announcement about GTE’s plans to bring interactive voice, video and data services to consumers would be made within weeks. A GTE alliance with another company to provide programming for the information highway is also in the cards, he said.

Sparrow denied that the Cerritos experiment dampened GTE’s enthusiasm for the information highway. He insisted that the company achieved its goal of learning about technology and how consumers react to a sudden growth of services, and GTE will use this information as it begins marketing multimedia products in earnest.

“I assure you,” he said, “we would not be investing a dime in this technology if we didn’t think we could sell it.”

As GTE and other companies spend the money and jockey for position, however, Congress and regulators are still grappling to set policy. Local and long-distance phone companies and cable operators all want free access to each other’s markets and, although there are many bills in Congress, little has been decided as yet. As a result of the final decisions that come out of Washington, Sparrow said, “we will either have the super information highway or not have it.”

As GTE hopes to compete in new markets, analysts point to its strength in the cellular phone business as evidence that GTE can be opportunistic. GTE is the nation’s second-largest cellular phone provider in a market that’s expected to grow from $12 billion to $50 billion in five years, and could play an important role in providing information highway services. GTE won praise for its recent announcement of a low-priced pocket phone service, called Telego, which will be capable of transmitting data as well as voice.

GTE also plans to bid in upcoming Federal Communications Commission auctions for licenses for personal communications service, a wireless technology that offers phone, paging and data transmission.

So when will the payoff come? For GTE, analysts say, technology and service investments are paying off already in increased efficiency. They say the money GTE has spent sprucing up its network was needed as much as a defense against new rivals as to prepare for multimedia services that might never come to pass. If business customers sign up for GTE’s World Class Network, profits could come in a year or two, they say.

But the profit potential of the vast information superhighway remains unknown, and years away at best. Companies will likely need to alter plans many times, and product life spans will grow ever shorter as technology improves. The dilemma for companies like GTE is “what they deploy now could be obsolete in a year, but if you don’t deploy now, you lose,” said analyst Robert B. Wilkes of the New York investment firm Brown Brothers Harriman.

For now, Sparrow said, GTE must be as efficient as possible. The parent company plans to lay off 17,000 workers nationwide over the next three years; a big reason for the cuts, Sparrow said, is that new technology has reduced manpower needs.

GTE’s biggest challenge now, he said, lies in “changing the culture of our company out of that regulated mentality to one of a fully competitive, marketplace mentality. We need that sense of urgency, the sense of ‘We ain’t good enough, we’ve got to get better.’ ”