The Baby Bells' home turf still looks pretty safe -- for now.

The big regional telcos have long braced for an onslaught from cable-industry giants coveting the lucrative phone-service business. Having lost millions of lines to wireless rivals and suffered countless online customer defections to the cable modem, the local telcos have good reason to fear an invasion.

Some investors warn that a big cable phone push would unleash a scorched-earth price war, further eroding the big telcos' already soft financials. There's even some thought that cable-industry success could force reeling phone companies like Verizon ( VZ), SBC ( SBC), BellSouth ( BLS) and Qwest ( Q) into questionable competitive investments such as satellite TV broadcasting.

But insiders in both industries increasingly say that behind all the saber-rattling lies a phantom threat, amplified in part by Wall Street's fascination with emerging networking technologies. In reality, these people say, the so-called dueling monopolists have plenty of reason to wage a shouting match -- but little reason to actually fight. For investors in both of these capital-intensive industries, that's probably a good thing for the time being.

"The Bells and the cable companies are like two sumo wrestlers throwing salt at each other," says CIBC World Markets' analyst Alan Bezoza.

What Price 411?

It's not that one side doesn't desperately want what the other side has. It's more a case that it would cost too much to get it.

The cable companies, for example, just finished stringing together a massive network rebuild to accommodate digital signals. With the heavy spending behind them, some operators are finally seeing signs of lower costs -- a long-awaited development that puts them well within striking distance of breakeven for the first time since J.R. got shot.

Meanwhile, the Bells, keen to the vulnerability of their core businesses, have signaled that they are willing to fight. Finally able to offer long-distance service, the Bells have recently added service bundling to their product arsenal. In some markets, the Bells have even promoted lower-priced offers for their digital subscriber line, or DSL, service.

And SBC, for one, has had preliminary discussions to acquire some or all of DirecTV from GM Hughes Electronics ( GMH). Notably, nothing has yet materialized from the satellite TV discussions. In some eyes the entire setup hints at a standoff mentality.

"The question at the back of my mind is whether or not they are posturing," says Bezoza, who follows cable service and equipment makers for CIBC. "It's like they are saying, 'If you back off on telephony, we'll back off on data.'"

Small Numbers

As the two camps dig in for a showdown, it's important to note that Cox ( COX), the cable industry leader when it comes to providing phone service, has been waging this battle for six years. The company is widely regarded as a solid, well-run operator. Yet even now Cox's share of the phone market remains minuscule. Indeed, all the cable phone lines combined represent less than 2% of the total market, according to Broadband Daily.

One reason Wall Street is more focused on the cable vs. Bell phone battle lines is the emergence of voice over Internet protocol, or VoIP, technology. Gearmakers like Cisco ( CSCO) have presumably fashioned equipment that allows voice over the Net with all the features of conventional phone service, including 911 and government-mandated line-tapping capabilities.

The cable companies have been fairly evasive about their actual phone plans, though observers note that every major cable company is currently running trials of their own voice-over-the-Net service. Cablevision ( CVC), for example, isn't expected to announce a phone service offering until next year, but the Bethpage, N.Y., shop has targeted some areas within its market to test the service with customers.

The long-held belief in both the phone and cable industry is that the ability to offer phone, TV and Net service -- the now-infamous "triple-play" -- promises great returns. Indeed, cable's voice-over-the-Net technology transports conversations, like all information, effectively for free, giving the service handsome margins.

Of course, as former AT&T ( T) chief Mike Armstrong proved, actually trying to reach that goal can be perilous. As you'll recall, Armstrong amassed the nation's largest cable company, but a mountain of debt and declining revenues forced him to unload the cable part to Comcast ( CMCSA) last year.

History Channel

There's also a longer-term argument against any cable offensive -- at least at the moment. After an era of massive consolidation and capital investment, the cable industry is likely to coast a bit, says former AT&T cable chief Leo Hindery. Speaking to a gathering of investors in New York last month, Hindery predicted the cable telephony effort will take a back burner for the near future.

As CEO of YES Network, Hindery is busy trying to sell content to cable companies and no doubt prefers to see money spent on programming rather than new services. Those biases noted, Hindery nonetheless points out that with these newly upgraded networks, cable companies face upwards of $100 in monthly per-customer maintenance capital spending alone just to keep services in operation. Analysts put that number at about $45 or so.

Either way, if the cable companies hope to deliver on their promise to start making money for a change, they are probably more inclined to talk about telephony that to actually offer it.

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