(FORTUNE Magazine) – YOUR TELEPHONE company wants to wire your house with glass. Replacing your old copper telephone lines with the latest in fiber optics -- glass filaments that use lasers to transmit signals -- would make your service better, and maybe cheaper. The new technology could be a Trojan horse as well. Because glass fibers have a thousand times more capacity, the phone companies could sell you entertainment and video information services that copper can't handle. But the companies face formidable barriers. Rewiring the nation's homes could cost $200 billion. Federal law now bars the phone companies from the video entertainment business, and cable TV operators are doing their level best to keep it that way. The phone companies know there's money to be made in home entertainment. Their average residential customer uses the phone just a few minutes a day and pays $13 a month, while the typical cable TV subscriber has the set on nearly eight hours daily and runs up a monthly bill of $25. With fiber optics, the phone companies say, they could bring you videophones, push-button home shopping, news reports tailored to your interests, movies whenever you want to see them, and even high-definition television (HDTV), which promises picture quality that rivals the movies. So an epic struggle is shaping up. The new pitch by the phone companies causes fear and trembling among cable operators, who have come to view home entertainment over wire as their exclusive province. They like to portray the Baby Bells as big, rich businesses trying to muscle in on their modest franchises. Unquestionably, the seven regional telephone companies have thrived since the AT&T divestiture five years ago. With sales ranging from $8 billion to $13 billion and annual profits averaging $1 billion apiece, they're awash in cash and looking for places to put it. Still, we're not talking David and Goliath here. After years of heavy capital investment, cable operators are making good money and cable programmers are spiriting away advertising dollars from TV broadcasters. Last year the cable industry had revenues of $14 billion, 10% of it from commercials. January's $400 million agreement between ESPN and major league baseball, which will put 175 games a year on the cable network, reflects the industry's new clout. Cable now has access to 78 million U.S. households -- 54% of all those that have TV sets -- and is adding customers at the rate of 7% a year. For their part, the phone companies, having mastered a new technology, would like to find new uses for it. Local phone companies and long-distance carriers like AT&T, MCI Communications, and US Sprint have put 111,000 route miles of fiber into the ground in the past decade, doubling the capacity of the U.S. telephone system. Almost all domestic long-distance calls pass though fiber- optic cables at some point. Many international calls, until recently sent only via undersea copper cable or by satellite, are shifting to fiber as well. Fiber-optic service between the U.S. and Europe began in December, and a similar cable across the Pacific should be in service by mid-April. A nationwide or worldwide fiber network would make it as easy to send voice, computer data, video, or photographs anywhere as it is to make a telephone call today. THE CABLE COMPANIES argue that the Baby Bells have yet to prove any need for fiber optics in the home. The existing copper network easily handles a house with several phones, a modem, and an alarm system connected to a central monitoring office. The cable people see the phone people's talk about HDTV as a tactic to get them past the massive antimonopoly barriers set up by Congress and the Federal Communications Commission to limit their involvement in cable. The Cable Communications Policy Act of 1984 and FCC rules forbid the local companies to own cable systems in the areas they serve or to provide video programming. The consent decree signed by AT&T and the Justice Department at the time of divestiture, which is administered by U.S. district court judge Harold H. Greene, also bars the Baby Bells from providing information services. John Malone, president of Tele-Communications Inc., the largest U.S. cable operator (11 million viewers), says it's ''silly'' for the Baby Bells to use HDTV as an excuse to get into cable. He contends that ''people will have to wait until they have whiskers'' before the phone companies bring HDTV to the home. So far, bringing fiber to business is a lot easier to justify. Many companies welcome fiber's ability to handle thousands of simultaneous phone conversations and transmit data 100 to 1,000 times faster than copper. Consider Home Shopping Network, the St. Petersburg, Florida, company that sells $730 million of products and services a year over TV. MCI has extended fiber lines into the heart of Home Shopping's operations, enabling the company to manage telephone traffic that averages 100,000 calls a day. ''Phones are our front door,'' says Jerry Troupe, a Home Shopping official. ''If we can't answer the phone, people can't get in the store to buy.'' Home Shopping's use of fiber offers a glimpse of what's possible. In addition to the torrent of calls from customers, Home Shopping's fiber system handles an internal computer network, communications with branch offices around the U.S., and an electronic security system. Video conferencing with a San Diego telemarketing subsidiary will go on line soon. Yet just six of the company's 20 fiber circuits are active. If traffic increases, Home Shopping can quickly fire up more of them. An additional benefit: fiber's immunity to electromagnetic interference, an important factor in a region Troupe calls the ''lightning capital of North America.'' FIBER HAS ALSO proved its worth to SmithKline Beckman, the pharmaceuticals maker. SmithKline spends $40 million a year on a telecommunications network that links 130 locations and the home office in Philadelphia. William Caton, director of telecommunications, says fiber will eventually make possible a merger of all SmithKline communications -- data, voice, and video -- into one medium. He foresees a time when his firm will be able to ''narrow-cast'' training films or product announcements to physicians and hospitals via a fiber network. His system now uses a combination of copper and fiber. Because a fiber capacity glut has created intense competition among long-distance carriers, SmithKline is saving some $4 million a year. Says Caton: ''Until fiber started to come in, sending data was too expensive.'' Bellcore, a New Jersey research center funded by the Baby Bells, has used sophisticated mathematical models to estimate the spread of fiber to the home. Within 25 years, predicts Bellcore fiber-optics expert Paul Shumate Jr., half of all U.S. households could be plugged into fiber. Bringing fiber to a home can cost anywhere from $3,000 to $10,000. That's more than the $1,000 to $1,400 price of hooking up conventional telephone service and far higher than the $600 to $1,200 cost of a cable TV installation. Fiber also requires more careful handling and installation than copper. But its proponents say cheaper maintenance, less expensive electronic connectors, and fiber's greater capacity will eventually offset the higher cost. The phone companies foresee the price of a fiber installation dropping below that of a regular telephone installation -- probably in the early 1990s. So far the phone companies have had a hard time explaining to state and federal regulators just why their residential customers need lines that can handle tens of thousands of conversations at once. ''Fiber in the home for telephony doesn't make sense,'' concedes Richard Liebhaber, an executive vice president of MCI. Press the phone guys a bit and they concede that only one medium in the home can take full advantage of fiber: video. Fiber, they argue, makes possible better and more sophisticated cable TV service. HDTV has stalled in the U.S. because it can require up to twice as much signal per channel as regular TV. In large markets, there's little room left for over- the-air HDTV in the already crowded electromagnetic spectrum (FORTUNE, October 24). ''Fiber could be the solution,'' says Jim Carpenter, assistant vice president for technology planning and development at Southwestern Bell. The phone companies are spending millions to test their ideas about what customers will pay for. Southern Bell is working with local cable operators to wire two Florida communities for fiber-optic cable TV. (These tests need a waiver from the FCC to proceed.) GTE, which has built a 21,000-mile fiber- optic network, is awaiting FCC approval to connect 700 houses in the Los Angeles suburb of Cerritos later this year. GTE will offer both fiber and nonfiber cable service and pitch a panoply of video services. ''We don't want to throw a fiber party and have no one come to it,'' says Tom Gillett, director of advanced operations testing for GTE. He's confident that customers will pay to get movies on demand, for example. ''People are already spending $8 billion a year renting videotapes,'' he says. ''It's not a matter of looking for some funny services to offer.'' That's his view of unsuccessful efforts by cable operators and media companies to provide specialized services to customers via TV or computer. Teletext, owned by Time Inc., which publishes FORTUNE, offered news and features adorned with color graphics; Knight-Ridder's Viewtron included grocery shopping. Both have been abandoned. Gillett argues that fiber optics makes it feasible to go way beyond the cartoonlike graphics of Teletext and the Viewtron videotext system. GTE is developing a home shopping service that could show a customer color still pictures or video footage of items for sale. ''Videotext was going backward,'' says Gillett. ''People who look at their TV expect to see video-quality pictures.'' Because programs can be targeted to a single home, he envisions teachers assigning individually tailored homework or directing video tutorials to specific students over the Cerritos system. Or two subscribers could plug in their video cameras and create an instant videophone. CABLE OPERATORS were dismayed last fall when the FCC proposed lifting some of the restrictions on phone company ownership of cable. Both sides are fiercely lobbying Congress, which would have to alter existing laws, including the one that prevents phone companies from providing programming. The cable companies argue that the phone companies could gain an unfair advantage by subsidizing one business with the other; the phone companies say state regulators would never allow that. Malone of TCI concedes that a decade ago cable operators promised but failed to deliver many of the two-way services the phone companies are now touting. ''There didn't seem to be a demand,'' he says. This year the industry will spend $1.4 billion on system improvements. Cable operators have set up the Cable Television Laboratories to explore new technologies, including fiber. Jim Chiddix, a senior vice president at American Television & Communications, the second-largest cable operator in the U.S. (four million subscribers) and a Time Inc. subsidiary, says cable operators could cut down the number of channels they offer and transmit a few HDTV channels using the capacity this would free up. The robust health of the cable industry has encouraged advocates of deregulation to talk about opening cable to competition from the phone companies. A study by the FCC's office of plans and policy says competition to provide video programming could give consumers more choices and promote innovation. Program producers could pipe their products directly to consumers without having to sell them to a network or cable operator. Small businesses would be more likely to gain access to the new services fiber makes possible if more options were available. Michel Guite, an analyst at Salomon Brothers, says one group of players in the industry stands to benefit no matter what: fiber-optic cable manufacturers like AT&T and Siecor, a joint venture of the German electrical giant Siemens and Corning Glass Works. Guite also argues that such program suppliers as the Disney Channel, ESPN, CNN, and Home Box Office, which is owned by Time Inc., could force cable operators to give them a bigger share of their revenues by threatening to switch to competitors using the phone companies' fiber lines. The programmers disagree, saying they're happy serving the cable operators. They think the phone companies' entry could produce a free-for-all -- and there's no telling what new programming competition would emerge from that. In the end, most experts agree, fiber will reach the home because it has overwhelming advantages over earlier technologies. It promises access to vast stores of information anywhere in the world. In all probability the cable and phone companies, while maneuvering for position right now, will eventually have to work out a compromise. They need each other. The phone companies have not proved adept at selling new services, and the wonderful world of entertainment could prove even more treacherous. Their fiber lines, however, could carry programming for the cable companies over long distances cheaply and with high quality. TCI's Malone suggests one possibility: If fiber proves effective, cable and phone companies could form joint ventures, regulated by the government, to exploit the potential of fiber technology. Consumers and businesses alike could be the winners.