AT&T and Verizon are girding to grab viewers as giants such as Time Warner increase prices.

As cable companies roll out their annual rate hikes, telephone carriers are seizing the opportunity to tout their video services as a cheaper alternative — the first salvo in what’s expected to be a nasty, high-stakes fight for the nation’s television viewers.

AT&T Inc. and Verizon Communications Inc. are upgrading their phone networks to deliver high-quality video and challenge the dominance of cable and satellite operators. Meantime, cable giants Time Warner Inc. and Comcast Corp., along with Cox Communications Inc., are leading their industry’s aggressive push to sell phone and Internet service.

Cable companies have picked up 5 million phone customers in recent years, but it will be a while before the phone industry’s TV technology catches up to its rhetoric.

“There’s no doubt consumers want choice,” said AT&T spokesman John Britton, noting cable increases as high as 6% for 2006. “They’re tired of increases year after year from cable. We’re in the wings. We think we will come into the market and provide the choices.”

Countered Time Warner Cable Inc. spokesman Keith Cocozza: “Outside of test markets in Texas, I don’t think anybody in the country has seen what their video service looks like. And what does it look like? It looks like what ours looked like years ago.”

The turf battle comes 10 years after the Telecommunications Act of 1996 allowed the industries to cross boundaries and opened the door to consolidations.

Branching out is key to the potential growth of cable and phone companies. There’s little room to expand in their core markets — TV for cable, voice for phone carriers — and they are beset by new competitors. Cellphones are starting to offer video clips, and an array of young firms offer cheap phone service over high-speed connections.

That pressure has helped to put name brands on the block. Time Warner and Comcast are awaiting regulatory approval to take over Adelphia Communications Corp. AT&T was bought by SBC Communications Inc., which took the AT&T name, and Verizon purchased MCI Inc.

“The competitive landscape is shifting,” said Theodore Henderson, a cable industry analyst at Stifel, Nicolaus & Co. “That’s why folks are cautious about telephone, cable and satellite stocks. If you look at them, Wall Street is saying there isn’t going to be a winner.”

Cable and phone companies have battled to a draw in offering high-speed Internet connections, which are becoming the foundation for most new and improved telecommunications services. Although better technology is lowering costs in both industries, investors aren’t seeing the returns they expected.

Cable firms spent $90 billion since 1996 to get their networks ready for phone service, digital TV and faster Internet connections, and they are spending more than $10 billion more for further upgrades for such service as high-definition television. Phone carriers have invested billions more to provide better high-speed Internet access and to install fiber-optic lines.

Fiber is the gold standard in speed, quality and reliability for voice, video and data, and it has nearly unlimited capacity for such bandwidth hogs as video programming.

Within a month, AT&T expects to launch its U-verse video service over an upgraded fiber and copper network in San Antonio, where the company is based. It expects the service to be available in half of its 13-state territory by mid-2007.

Verizon rolled out its initial video service over an all-fiber network in Keller, Texas, in September, charging $43.90 a month for 180 TV channels and $34.95 for a high-speed Internet connection.

Anticipating the move, cable operator Charter Communications Inc. slashed prices there to offer 240 channels plus the connection for $50. Previously, Charter charged $69 just for the TV package.

The two phone giants also have contributed a total of $150,000 to fund an advocacy group called Consumers for Cable Choice to beat the drum for more competition.

“We’ll try to keep the facts of the matter in front of the customer,” Verizon spokesman Eric W. Rabe said. “That’s what competition is all about.”

But even Rabe acknowledges that competition will arrive slowly.

Said Henderson of Stifel Nicolaus, “The two phone companies are a long way from having critical mass in video. It’s not an overnight thing.”

The key technology driving the changing landscape is called Internet protocol, or IP. It was designed for the Internet but now is being used separately. Some of the free and cheaper voice over IP, or VOIP, services go over the Internet, but others don’t.

AT&T and Verizon also are using IP to deliver video, giving viewers instantaneous channel changes and freeing up the network. IPTV sends only the channel the viewer selects; cable television broadcasts all channels at the same time.

IPTV still has some glitches, especially in delivering live programming. In Keller, Verizon is using cable technology to deliver those programs until Microsoft Corp., the software company behind the video delivery, can fix it.

While the phone companies iron those issues out, continue installing fiber and sign programming contracts, cable companies will be pushing into new areas, Cocozza said. “We’re a moving target.”

In October, for instance, Time Warner introduced Start Over, a free service that allows customers who tune in late to push a button and start a show over. Launched in South Carolina, the service can be used by digital TV subscribers on programs from 60 networks.

The company expects to bring that technology to Los Angeles sometime after the deal to acquire Adelphia is final. As part of swaps of territory with Comcast, Time Warner will take over all of Comcast’s Southern California market.

By March, Time Warner expects to get court and federal approvals to serve 98% of the nearly 600,000 Los Angeles cable TV subscribers and a total of 1.9 million customers throughout Southern California.

Adelphia recently notified Los Angeles that it planned to raise equipment rental rates on expanded services in two of five districts it covers. It has until Jan. 3 to file for increases in the other districts. The city can regulate only basic prices.

Time Warner has said it doesn’t plan to raise rates as a result of the acquisition and swaps, but it said it would seek an increase of about 2% in basic cable prices for routine business reasons. Cocozza noted that programming costs rose 12% last year and that fuel for the company’s fleet of trucks rose 60%.

No other cable company has applied for a rate hike in L.A., although city officials expect one from Cox Communications Inc., which serves about 9,600 residents in San Pedro.

In the Bay Area and other parts of the nation, Comcast is seeking a 6% hike in basic cable rates. Other firms are asking for increases in parts of their territories of 2% to 4%.

AT&T’s Britton said his company’s average bill had dropped 25% in the last five years to $43.90 a month, and he expects the same will happen in the pay-TV market once the phone companies get going.

Said Verizon’s Rabe : “It’s going to be different with competition in the marketplace. The service will be better; there will be more channels and lower prices.”

Following Alltel’s wireline striking workers, its spinning off that businessBy Dave Porter

New York - Alltel Corporation (NYSE: AT), the largest rural local telephone provider in the nation, said Friday that it was spinning out its wireline business in a $9.1 billion deal to concentrate on its wireless market. Investors applauded the move, pushing Alltel shares up $1.06, or 1.64%, to $65.88 Friday.

Arkansas-based Alltel will combine its wireline business with Valor Communications Group Inc. (NYSE: VCG), creating a business with 3.4 million customers in 16 states. Alltel also will be transferring $4.2 billion in debt.

Shares of Valor rose 7 cents on the news to close at $12.31, an increase of .57%.

Alltel Chief Executive Scott Ford called the spin off a good move for the shareholders. That the wireline business would no longer be subordinated to Alltel’s dominant wireless business. Though Ford should have said shareholders lucked out, considering how Voice-Over-Internet-Protocol (VoIP) is taking hold and slowly chipping away at the marginal wireline side of the communications business.

Skype, Europe’s largest VoIP provider, just had a slice of its market taken by Yahoo! (Nasdaq: YHOO) which announced that it was getting into the VoIP business and would be offering the service for less.

To further enhance Alltel’s spin off, Ford said that Alltel would be buying back $3 billion of its stock on the market, this, after Alltel rose 10 percent this year on speculation that the telecommunications company would be doing something with its wireline business, shows that Alltel puts a lot of value in its growing wireless business.

Valor, which first went public in February, is a rural telephone provider in New Mexico and Oklahoma has seen its shares decline from their initial $15 IPO price.

Terms of the Alltel wireline spin off would give Alltel 85% of the new entity and Valor will issue 400 million shares to Alltel shareholders for its share. Basically, Alltel investors will own one share of the wireless unit and receive 1.05 Valor shares for each Alltel share. The deal is being done in a tax-free transaction known as a Reverse Morris Trust transaction.

The deal may have caused Alltel to have a second motive in buying back $3 billion of its shares, for after the sale of its wireline business unit the company - at these market prices - is an attractive takeover target for Verizon (NYSE: VZ).

A Verizon buyout would put the company in a better position after Cingular bought AT&T Wireless and Sprint acquired Nextel.

Earlier this year, Alltel bought Western Wireless and some assets from Cingular. Alltel intends on selling its Western Wireless sell Haitian and Bolivian wireless operations, though it did not disclose what it was asking for those operations.

Alltel is now the nation’s 5th largest wireless carrier with 11 million customers across 34 states.

The Indiana Utility Regulatory Commission said an order issued Friday should provide a more level playing field between large incumbent telephone companies and smaller competitors. In a statement, the commission said it had reduced some regulatory requirements on the incumbent providers, such as AT&T (formerly SBC) and Verizon, while also “standardizing” reporting requirements among all wireline providers.

Under the new rules, all wireline phone companies must submit copies of customer agreements to the state, as well as file cost studies that had only been required of the incumbents.

Additionally, the minimum price a wireline company can charge for service was lowered under the new rules, and incumbents are allowed to try to “winback” customers who go to another provider after a week, instead of the previous 17 days.

The order does not affect some providers of voice services, such as cellular phone companies, cable companies or Voice Over Internet Protocol (VoIP) providers.

“We’re still reviewing today’s ruling,” said AT&T Indiana spokesman Mike Marker. “It’s important to note that wireline is not the only option for consumers. We’re increasingly competing with cable companies and others.

“Regulating one form of voice communication is not the answer,” he added.

This week, representatives from some of Indiana’s incumbent providers visited several newspapers, including the Courier & Press, in an effort to push deregulation efforts ahead of the upcoming General Assembly session.

The incumbents said they face regulations that smaller phone companies did not have to follow. AT&T Indiana President George Fleetwood this week said Indiana’s regulatory environment did not encourage investment in the state’s telecom infrastructure.

“State law has not changed since 1985,” Marker said Friday. “The reforms the industry needs should be put into statute.”