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Some Believe AT&T’s McCaw Deal Is A Way Back to Local Phone Service

November 6, 1992

NEW YORK (AP) _ Will AT&T return to local phone service through the proposed deal it announced this week to buy a third of McCaw Cellular Communications Inc., the nation’s largest mobile phone operator?

That’s the burning question in light of AT&T’s announcement, particularly among executives of the seven ″Baby Bell″ companies that once were part of American Telephone & Telegraph Co.

AT&T flatly denies such a plan. But with the distinction between traditional wired phones and mobile phones expected to blur in coming years, some people aren’t so sure.

″They’re covering their bets,″ said John Pemberton, an independent phone industry analyst.

One bet is that local phone companies will end up providing a new generation of wireless phone service in which people will carry inexpensive pocket-sized phones everywhere. This service could largely replace today’s wired phones one day.

AT&T, a major maker of phone equipment, plans to make phone switching gear for local phone companies to provide these wireless connections, and so could benefit as a supplier.

The other bet is that AT&T itself would provide this so-called personal communications service, or PCS, perhaps through its proposed alliance with McCaw, Pemberton said.

That notion has the Baby Bells fuming.

″It positions AT&T to be able to enter local service,″ said Janice Rylander, a spokeswoman for Pacific Telesis Group, one of the Baby Bells. ″It will create a monopoly situation that AT&T was broken up for.″

AT&T calls such speculation ridiculous, since it says there is no way it ever could regain the monopoly it enjoyed in local service before its court- ordered breakup in 1984.

Today, almost all cellular phone calls must go through a local phone company for completion of the call - the cellular system only provides the link between the phone itself and the nearest cellular radio tower. But that could change with technological advances such as PCS, allowing AT&T, through McCaw, to connect cellular calls directly via its long-distance network, analysts said.

Under that scenario, the Baby Bells could lose a large chunk of the revenue they now enjoy through access charges they bill cellular carries for such connections. And AT&T would see increased use of its long-distance network, one of its major goals.

″Clearly, AT&T wants to re-enter the local exchange business with absolutely no restrictions, no fences whatsoever,″ said Edward E. Whitacre Jr., chairman and chief executive of Southwestern Bell Corp., another Baby Bell.

But in announcing the McCaw talks, AT&T chairman Robert E. Allen said the the planned alliance ″is not some veiled attempt to enter the local exchange business.″

AT&T spokesman Bill Weiss said it would be difficult to provide cellular service without going through the local phone company systems. Cellular networks, even PCS networks, would lack the capacity to carry so many calls without handing them off to the traditional wired local phone service, he said.

In its announcement Wednesday, AT&T also said it would have the option to take control of McCaw, which is based in Kirkland, Wash. The move would make AT&T a major player in cellular phones, an area where it has no presence except for selling equipment.

AT&T hasn’t offered local phone service since the old Bell System monopoly was broken up, resulting in the creation of the seven Baby Bells. They are barred from the long-distance market.

But under the breakup there is no restriction on AT&T re-entering the local phone market, as long as it doesn’t repurchase the Baby Bell systems.

Analysts expect the Baby Bells to protest the AT&T-McCaw linkup before regulatory agencies and the federal judge that oversaw the AT&T case.

These companies say the McCaw deal would bolster their long-running argument that they should gain the right to offer long-distance service and to make phone equipment, which they also were denied under the AT&T breakup, if AT&T can compete with them in cellular.

The Baby Bells were given one of the two cellular licenses that were awarded in each metropolitan area.

″It’s a very interesting illustration of why these regional (phone) companies need to have the restrictions removed,″ said Ormand J. Wade, a vice chairman of Ameritech, another Baby Bell.

Pemberton, the analyst, said the rising cost of maintaining the aging copper phone wires that run to each home and business makes it likely the local phone system will move to a wireless setup.

The question is, who will provide that wireless link, AT&T or the Baby Bells?

Some signs point to AT&T. The phone company, he said, has a grand plan to derive up to half its revenue from wireless communications by the year 2020, from a fraction today. That is a key reason for its planned alliance with McCaw.

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