WE'RE ALL CONNECTED

By Richard Zoglin

MAYBE IT WAS SHEER EXHAUSTION. The vast telecommunications bill had been lumbering through Congress for so long, tinkered with so many times, fought over by so many competing industry lobbyists that its passage last week--by an overwhelming margin in both the House and Senate--looked almost like a cry of surrender. How will the measure affect telephone service, cable TV, the networks? Who wins and who loses? Will consumers come out better or worse? Never mind, Congress seemed to say, let's just have done with it and see what the new world brings.

One thing is certain: it will bring changes as sweeping as any since the 1934 Communications Act, which established most of the ground rules by which the industry now plays. The new bill junks virtually all the federal regulations that have traditionally defined which companies can enter which communications businesses, setting up a free-market free-for-all. Local phone companies, for example, will no longer have a monopoly on providing phone service in their areas. From now on anyone--cable company, long-distance provider or gutsy entrepreneur--can enter the market as well. In return, the local Bells, once they face competition in their home market, will be allowed to compete against AT&T, MCI and Sprint in the lucrative long-distance business. And any of these companies, technology permitting, will be able to cross over into the cable business to challenge systems that have long had an effective monopoly in their localities.

Though faced with the prospect of new phone-company rivals, cable companies had reason to cheer. Not only will they be allowed to venture into the local phone business, they will also be freed from any limit on how much they can charge for cable service. All federal rate caps (removed by Congress in 1984, only to be restored eight years later) will be phased out in three years--sooner in smaller markets.

Broadcasters too found some bonuses in the bill. Until now, no company could own more than 12 TV stations reaching a maximum of 25% of U.S. households. The cap has been raised to 35%, with no restriction on the number of stations. (Caps on radio-station ownership will be removed entirely.) Broadcasters dodged one bullet, at least temporarily, when Senator Bob Dole dropped his opposition to a provision awarding new spectrum space (for digital broadcasting and other advanced technology) to existing TV stations for free. Dole, joining many Democrats and consumer advocates, had argued that the valuable spectrum space should instead be auctioned. In a compromise, Dole won assurances that no spectrum space will be given away until Congress revisits the issue.

Deregulation is the bill's calling card in nearly every area but one: protecting children from the alleged harmful effects of media exposure. To allay concerns about violent TV fare, the bill requires that new TV sets be equipped with a V-chip--a device that allows parents automatically to lock out programs labeled as high in violence. And computer pornography is targeted by a provision that sets criminal penalties for anyone caught sending indecent material over the Internet without ensuring that minors won't have access to it. Civil-liberties groups objected to the measure as a violation of free speech and vowed to fight it in court.

It was a sign of the bill's delicate balance--or perhaps its unfathomable complexity--that its passage was hailed by virtually every industry affected, as well as by President Clinton, who asserted that "consumers will receive the benefits of lower prices, better quality and greater choices in their telephone and cable services." The major objections came from consumer groups, which warned that removal of federal rate caps, as well as a provision allowing local phone companies and cable systems to own a piece of each other (or merge totally in small markets), will make cable and telephone service more expensive. "For consumers the risk here is deregulation without competition," says Brad Stillman of the Consumer Federation of America.

The elimination of cable rate caps may cause local cable bills to rise, at least initially. But if phone companies and other new competitors enter the market, rates could ultimately be driven down. Similarly, more competition in local and long-distance phone services should result in lower rates. But the picture is complicated by the fact that any potential provider of local phone service will first have to negotiate with the local Bell company to lease existing phone lines. The Federal Communications Commission will establish rules in the next few months to guide these transactions; the bill requires that local phone companies show they are allowing true competition before they can compete in the long-distance business.

If consumers face uncertainties, media companies are entering a scary (if potentially lucrative) new territory. With nearly all the boundaries removed, aggressive companies will undoubtedly try to expand into new areas. The quickest way to do that is through alliances and mergers, and most observers expect that industry consolidation--ventures linking phone companies, broadcast networks, computer firms, cable companies--will soon shift into high gear. "Companies must choose their partners in the next 12 months, because when the markets converge, anyone who's not a partner is probably a competitor," says Bill Deatherage, telecommunications analyst at Bear Stearns. The end result may be a handful of industry behemoths, each of which can offer customers the whole panoply of information and entertainment services, from cable sports to online chat rooms, from Friends to long-distance friends and family. If that's the future, Washington has just fired the starting gun.

--Reported by Georgia Harbison/New York

With reporting by Georgia Harbison/New York