(FORTUNE Magazine) – As the Internet transcends its geeky beginnings, phone companies that would use it to turbocharge their growth have been rethinking their strategies, often widening their circle of acquaintances in the process. That's the best way to understand the new alliance between lean computer types like Compaq, Intel, and Microsoft, and the usually slow-moving Baby Bells.

The PC world's leading trio is helping the Baby Bells develop a technology called ADSL (asynchronous digital subscriber line). If the Bells find success in this unprecedented alliance--unprecedented, that is, for companies compared more often to the tortoise than the hare--they just might win a high-stakes race with the cable industry to give consumers high-speed Internet access.

This is no mere sideline contest. The Baby Bells are investing billions in their networks to allow them to carry data in digital form. Eventually they wish to carry data of all sorts--voice, video, and graphics--but the first large opportunity is to feed consumer demand for faster connection to the Internet.

In this, their interests dovetail with the computer industry's. According to Compaq surveys, connecting to the Net is now the No. 1 reason people buy a computer, up from No. 7 only a year ago. PC companies believe that this demand is the key to selling ever more powerful devices and software. The fatter the pipeline, the more exotic the applications, and the greater the craving for big hardware. Today, though, PC companies see their growth stunted by slow connections. As Intel Architecture Lab chief Craig Kinnie says, "People have lots of horsepower in their boxes, and they're starving for the information they want to use."

ADSL lets skinny copper telephone wires, designed for the relative trickle of a voice signal, deliver the torrents of information needed to carry images. The wizardry that packs a lot into a small pipe resides in special modemlike devices, and two are needed for each subscriber--one in the home and one at the other end of the copper wire, usually in the telephone company switching office. No second phone number is necessary; the Internet connections and telephone calls can coexist on the same circuit. Best of all, the speed of the Internet connection is up to 200 times faster than with the best regular modems, and the connection is always on.

Several phone companies have introduced ADSL in parts of their service areas, led by US West, which recently announced it will start rolling out ADSL throughout its region. The trouble is that hooking people up has been cumbersome and expensive. Technicians must install a signal splitter on the side of each house to separate data signals from voice calls. From there they run a separate wire to the PC, open it up to install a modem, and load special software.

Enter Compaq, Intel, and Microsoft. They are backing a stripped-down technical standard called universal ADSL--known informally as ADSL Lite. ADSL Lite modems would be simple enough for consumers to hook up themselves. Instead of being the property of the phone company, they would be sold in electronics stores. In time, computer makers would build ADSL Lite modems into their machines.

With ADSL Lite, data and phone signals share a wire without a signal splitter and special inside wiring. That would eliminate the need for a home visit by technicians, saving $200 to $400 per household in equipment and labor costs. The pared-down version of ADSL would operate at a lower speed than full ADSL, so it wouldn't work for video programming, but it would power superfast Internet connections. The Baby Bells, GTE, Sprint, and the PC companies will submit their standard to the International Telecommunication Union this winter.

Given the mess they've made of their current fastest data service, ISDN--which is so expensive and hard to set up that it hasn't come close to matching expectations--there's no guarantee the Bells can turn ADSL into a hit. For one thing, many of the country's telephone lines aren't fit to carry ADSL. According to telecom consultant Dave Hill of Hill Associates in Colchester, Vt., about 15% of telephones are too far from the nearest switching center, and another 15% are served by phone lines that can't handle the bandwidth needed for high-speed data. Then there's the fact that Silicon Valley has hedged its bets by also endorsing plans of cable-TV companies for their own high-speed modem standard. As Vern Mackall, an analyst at International Data Corp. in Framingham, Mass., says, "Any kind of fast highway is a good deal for people trying to sell Maseratis."

The contest is still in a very early stage. The cable industry has a slight head start, with 100,000 customers signed up for fast Internet connections at the end of 1997, vs. just 4,000 phone customers with ADSL lines. Before the cable outfits can offer cable modems widely, though, they have to finish a $20 billion upgrade of their systems, now less than halfway done. AT&T chief C. Michael Armstrong may form partnerships with cable companies to sell local phone service over their wires. But he's unlikely to help fund capital projects as part of any deal. He says, "Their own greed will motivate them much more than my generosity."

Still, the question remains whether the Baby Bells really have the will to push their own standard into the marketplace. Forrester Research director Emily Green says: "These are organizations that experiment indefinitely. They are very good at risk assessment. What's supposed to follow is risk assumption, and they don't have a good track record." While the computer companies and the Bells all say they have been pleasantly surprised by the degree of cooperation between the two camps, the industries operate in different time zones. Compaq, for instance, says that it wants to build ADSL Lite modems into its Presario PCs by the end of this year--an optimistic goal, given that the standards aren't set yet. BellSouth VP John Cahill, co-chairman of the ADSL Lite steering committee, expects prototypes and field trials of the new modems by year-end but says that customers shouldn't expect a mass-market rollout for another two to three years.

The phone companies can't afford to cede the home market for high-speed Internet access, because to do so would alienate business customers. While casual surfers are unlikely to pay the $50 or so a month that fast Web access is expected to cost, telecommuters would--especially since most will have the bills paid by their companies. Microsoft, for example, has placed an order with US West to install ADSL in the homes of 2,000 of its employees. Says Lucent exec Janet Davidson: "Without exception, every telephone company I talk to would like to compete in the data market. ADSL Lite is their best near-term shot." Maybe they'll actually do it this time, given some prodding from Silicon Valley.

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