(FORTUNE Magazine) – Edward E. Whitacre Jr., the plain-talking CEO of SBC Communications, is in his headquarters in San Antonio, telling how much he likes the Internet. He volunteers that he has used his home computer to buy shoes and books online, and to send and receive digital photos of his 2-year-old granddaughter. That's all very charming, yet something's wrong with this picture: While Whitacre's executive suite has plenty of room for outdoorsy items such as golf clubs and fishing paraphernalia, there isn't a PC to be seen. Asked about it, Whitacre seems unembarrassed. He just shrugs and says he's not in the office enough to need a computer; his secretary and other aides handle the e-mail.

You'll find similar disconnects--is it e-schizophrenia?--all over SBC. As recently as two years ago, a visitor to the company's nondescript corporate offices wouldn't have heard much talk of the Internet; Whitacre and his lieutenants were focused on buying other phone giants, hawking second phone lines to households, and imploring regulators for permission to offer long-distance calling services. Such concerns are still crucial to SBC's lucrative $50-billion-a-year business, but they're no longer what the executives want to talk about. They steer the dialogue to nerdy topics such as Web hosting and the superfast online connections the company is unleashing across the country. "SBC is going to be a major player in e-commerce and the Internet," Whitacre declares. "We are not just caretakers of the network."

Investors, unsurprisingly, are skeptical at the notion of a Baby Bell morphing into a broadband data company that can compete with, say, MCI WorldCom or Qwest. In the midst of the Internet boom, SBC stock has remained a stubborn underachiever, trading recently at $42 a share with a lackluster P/E ratio of 22 times trailing earnings.

Yet something strange has happened in recent months: By combining local monopoly power, marketing ingenuity, and financial brute force, SBC has emerged as the most formidable challenger to cable-TV companies in the race to deliver broadband Internet access to the home. Whitacre has declared that SBC will spend $6 billion over the next three years to make fast Internet connections available to most of the company's 36 million business and residential customer locations.

Quaintly named Project Pronto, the plan calls for SBC to sell and install a million connections by the end of this year alone, up from a mere 139,000 on Jan. 1. If Pronto works, it will open the way for SBC to add billions of dollars in annual revenues. The typical household that today pays SBC $20 a month for plain-vanilla local phone service could fork over $40 a month more for fast Internet service, plus money for add-on fare such as online 3-D games and even movies.

Of course, every Baby Bell would love to transform itself from staid telephone monopolist to player in the Internet economy. But some smart money in telecom and on Wall Street is starting to like SBC's odds. Janus Capital, the Denver mutual-fund company, which manages over $270 billion, recently bought more than three million SBC shares for some of its growth-oriented funds. Analyst and portfolio manager Matt Ankrum thinks SBC will succeed in shifting revenue growth from traditional phone service to broadband. "What got us interested in SBC is that through its broadband initiatives it will increase the return on investment capital over time," he says. "That ultimately drives stock-price performance."

The smart money also likes SBC's size: With some 61 million access lines in 13 states, SBC can absorb the cost of deploying high-speed lines while driving suppliers to quickly develop cheaper, more reliable gear for its data networks. And it can leverage its relationship with millions of households to push fast phone connections and other services into the mass market. "SBC can dramatically change the market conditions in terms of Internet momentum," says Don Listwin, executive vice president of Cisco Systems, which recently formed an alliance with SBC under which the telco will buy $1 billion of Cisco data-networking gear and help develop new products. While SBC may not be Cisco's most technologically advanced customer, Listwin explains that its size makes it an attractive partner: "If you remember your physics, momentum is mass times velocity. They have a lot of mass."

Fifteen years ago, the old Southwestern Bell might have been voted the telco least likely to succeed. The smallest Baby Bell, it emerged from the breakup of AT&T with operations in just five states--Texas, Arkansas, Oklahoma, Kansas, and Missouri. Two of the region's main industries, oil and real estate, were in the dumps, and SBC's growth prospects were as flat as much of the terrain. While other Baby Bells moved to buy cable companies or contemplated making bids for Hollywood studios, SBC's big plan for growth was to create a national yellow-pages business--a scheme it quietly abandoned after a few years. Yet in 1986 SBC stunned Wall Street by making an aggressive $1.4 billion bid for Metromedia's cellular-phone operations. It showed that this seemingly dowdy carrier could dance. The deal made SBC an overnight leader in wireless, now a $7-billion-a-year franchise for the company.

The pace of change picked up when Whitacre took over as CEO in 1990. Born in Ennis, Texas, and schooled at Texas Tech, Whitacre is a flinty 37-year telco veteran who started as a facility engineer. One of his first moves was to relocate Southwestern's headquarters from St. Louis to San Antonio, where the company could be closer to TelMex, a south-of-the-border telco in which SBC had an investment, and where the CEO thought SBC's best growth opportunities lay.

Under Whitacre, SBC quickly went from milquetoast to industry intimidator. Like most Bell CEOs, he had served a stint in the company's regulatory affairs department, and he immediately set to work getting the goal posts moved in SBC's favor. While some Baby Bells were grudgingly opening their markets to competitors, SBC spent heavily, successfully lobbying Texas legislators to pass a law making it harder to compete against SBC in its new home state.

The growth strategy that Whitacre would use to transform SBC from the smallest Bell to the biggest was born of necessity. In February 1996, President Clinton signed sweeping legislation that nixed SBC's guard-the-monopoly approach by forcing all the Baby Bells to open their markets to rivals. Faced with the prospect of losing market share, the Bells set out in different directions. BellSouth, in Atlanta, and Ameritech, in Chicago, invested heavily in telecoms abroad.

Whitacre saw no reason to go that far afield. Days after the law was signed, he assembled his top managers at an Ojai, Calif., inn and declared that the way to grow would be to buy more local telephone lines in the U.S. and reduce costs by eliminating overlapping operations. Using its stock as currency, SBC made a bold $17 billion bid for sibling Pacific Telesis just a few weeks afterward. It later also acquired Southern New England Telecommunications, gaining a foothold in the Northeast, and last year--after 18 months of regulatory hearings--completed a $72 billion acquisition of Ameritech. The deals expanded SBC's reach to 13 states, a power base from which to pursue the ambition that Whitacre had laid out for a visitor in 1997. Predicting that the telecom industry would consolidate into a handful of international full-service companies, he promised then that SBC would be one of them.

SBC digested its acquisitions with the efficiency and coolness of a true predator. Whitacre typically has little use for the senior officers of the companies he acquires; he doesn't try to blend management teams the way his counterparts at Bell Atlantic and AT&T have. At headquarters he is surrounded by trusted, like-minded no-nonsense executives. Few high-ranking SBC executives have fled to dot-coms or telecom startups--they are fiercely devoted to Whitacre, who enjoys a sort of Clint Eastwood status among his direct reports. A lot of statements at the San Antonio offices start with some variation of the phrase, "Ed says."

Whitacre's prediction that the phone business would boil down to a gang of giants has become reality--and they are all gunning for SBC's most lucrative customers. Bell Atlantic, on the verge of completing its merger with GTE, has vowed to enter some of SBC's markets. MCI WorldCom and Sprint hope to combine in a deal that would create a formidable provider of data, phone, and wireless services to U.S. businesses and households. AT&T has spent more than $100 billion amassing cable-TV systems over which it will offer phone, entertainment, and broadband services. "We are going to lose market share in our traditional businesses over time," says SBC vice chairman Royce Caldwell. "It's almost preordained."

Like most telecom and cable companies, SBC sees broadband as essential to growth in the competitive crush. The Internet's popularity, even via slow, clumsy dial-up connections, makes it a cinch that demand for fast, convenient broadband access will be huge. A study by the Yankee Group, a consulting firm in Boston, predicts that in 2004 more than 16.5 million households will plug into the Net via some broadband connection, vs. just 1.4 million at the end of last year. Eventually, when such high-speed services are ubiquitous, the broadband battle will be fought with weapons such as price and marketing. But for now, the technological challenge of delivering broadband to households is so formidable that large tracts of the market lie open to whichever competitor can get there first. "The early race is just to sign up customers," says Tod Jacobs, a telecom strategist at J.P. Morgan. "Whoever locks up the customer early will clearly have an advantage going forward. The customer experience tends to be so good in broadband that customers don't easily switch."

Without question, cable companies have the lead in this giant land grab. Their cable modems were delivering broadband Internet service to about one million households by the end of last year. The phone companies, meanwhile, reached about 300,000 households using a rival technology called digital subscriber line, or DSL, which hooks up to ordinary copper telephone wire. From a user standpoint, cable modems and DSL are roughly equal. Both are "always on," which means the connection to the Internet is instantaneous. Both are plenty fast, even for demanding tasks like downloading video. Cable companies claim their modems can receive data at up to three megabits per second (about 50 times faster than a standard 56K dial-up modem), but industry executives privately admit that, in practice, customers never pull stuff off the Internet at those speeds. SBC's DSL offer pledges speeds of 1.5 megabits per second--half as fast as cable broadband advertises--but the company says that in some neighborhoods downloads will be much faster.

Project Pronto is designed to overcome DSL's major shortcoming: The technology works only on "clean," relatively short copper lines that don't stretch more than three miles from the customer to the telco's central office. Part of the $6 billion price tag involves building curbside switchlike facilities in far-flung neighborhoods. With this investment, SBC believes it can reach 80% of its customers with DSL.

So far, by analysts' estimates, the company has reached the 250,000 mark in installed lines--good, but a long way from the million it needs to meet Whitacre's goal. SBC has been hooking up customers free and giving away the expensive DSL modems. And in an un-Bell-like concession to consumers' busy lives, the company recently launched Saturday "drive ins" in some cities. Customers sign up to bring their computer to an SBC facility, where a technician will equip the PC with the gear it needs to receive DSL service. Thus, working folks don't have to take a day off to wait for a technician, and SBC saves money by avoiding a costly truck roll.

Users' experiences ordering DSL from SBC are far from hassle-free, however. Customers complain of having to wait weeks to get the service, even if they live close to a central office. They also give SBC low marks for the ordering process. "The bad news is that, prior to your installation, the people you talk to are clueless," groans Bob Watson, a 46-year-old Los Altos, Calif., resident who ordered DSL from SBC's Pacific Bell unit last year. The good news? Since the installation, Watson says, "It's been working great." SBC has launched a training program to get its order takers up to speed on Project Pronto.

Such glitches haven't kept SBC's marketers from attacking its cable-TV rivals. SBC's advertising takes potshots at cable-modem systems that, in theory, can bog down if too many users in a neighborhood do things like download video at once. A clever commercial that has aired in several SBC states depicts discord in a suburb where the residents have cable modems. A homeowner laments in a voice-over that before cable Internet service, the fictitious town "used to be a nice place to live." Onscreen a man surreptitiously snips his neighbor's cable line with gardening shears; neighborhood kids taunt a frazzled-looking adult, screaming, "Web hog!"

Cable operators aren't happy about this negative campaigning. AT&T, one of the largest cable providers, says that while traffic jams are a potential problem for its broadband systems, they can easily be remedied by adding extra equipment at the "node" serving a neighborhood. And AT&T scoffs at SBC's technology. "You never see [new competitors] try to build over us with a copper-loop network," sniffs Tony Werner, chief technology officer of AT&T's broadband unit. "This is really an effort to spruce up a 100-year-old network."

In the broadband war, cable operators can be hyperaggressive too. Time Warner Cable (which belongs to the same company as FORTUNE) caused a flap in May when its managers in Houston asked employees to order, then cancel, broadband service from SBC. The idea was to find out exactly which areas SBC could and could not serve. Higher-ups quickly squelched the scheme; SBC complained to federal regulators.

The question now is whether SBC can move fast enough to impress an increasingly fickle Wall Street. So far, Project Pronto hasn't budged the share price. "Our stock has not reflected the value we're creating," says CFO Don Kiernan. "Investors like what we're doing, but they're saying, 'Prove it, give us evidence.' " SBC figures its stock should trade between $73 and $82 a share, based on a sum-of-the-parts valuation. Kiernan likes to point out that SBC has delivered on promises before. It achieved cost savings from the Pacific Bell merger faster than expected, and it hasn't missed analysts' earnings estimates since Whitacre took over as CEO. That's a big reason Janus Capital bought the stock. The broadband story is ''what got us interested," says portfolio manager Ankrum. "Then you ask, 'Do they have the right management team with the right strategy?' We think the answer is yes."

Even though SBC's bread-and-butter local telecom business continues to generate billions of dollars in cash each year, the company needs Project Pronto and other growth schemes to attract investors. SBC has been working on plans to sell phone and Internet service to customers outside its 13-state footprint. It forged a joint venture with BellSouth to combine their cellular operations, boosting SBC's wireless reach by 50%. SBC continues to fight for permission to offer long-distance services in its home regions. And as SBC becomes a national company, it expects to sell DSL services to corporations that want employees to work from home. (It has a contract with IBM to provide residential DSL for some 15,000 telecommuting employees in California, Texas, and Connecticut.) Within just a few years, SBC says, all these new lines of business will represent 50% of its revenue, up from about a third today. "We believe SBC is one of the clear surviving telecom companies," says J.P. Morgan strategist Jacobs.

SBC is already thinking beyond Pronto. Indeed, a time will come when consumers will expect more from their speedy Internet hookups than from always-on eBay. To keep its customers happy, and to attract a new breed of broadband junkies, SBC will have to start pushing attractive fare through those big pipes. Movies would be a natural, but games and home-security systems are also under consideration. "We're looking at a whole palette of applications to help customers manage their lifestyles," says Abha Divine, a member of SBC's corporate-strategy team. She is helping develop an "online home" product that acts as a sort of electronic mom, keeping track of appointments and phone messages, and paying the bills electronically. Divine hopes to see a version of the service available to consumers next year.

SBC employees may not know it yet, but Whitacre has already picked a goal for next year's DSL deployment. "We'll get a million customers this year, and double that next year," he vows. And for anyone who doubts that SBC's future is firmly hitched to the Internet, he has a message. ''Broadband will be indispensable, and it's going to happen pretty quickly," says Whitacre. He pauses, then draws a comparison with a technology he knows pretty well. ''It will be as basic as telephone service." Maybe there's a good reason after all to listen to this guy without a PC.

FEEDBACK: smehta@fortunemail.com