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  1. Technology
March 1, 1994

THE PAINFUL LESSONS TO BE LEARNED FROM BELL ATLANTIC’s FAILED MERGER PLANS

By CBR Staff Writer

To call the collapse of the merger of Bell Atlantic Corp and Tele-Communications Inc a wreck on the information superhighway is drastically to understate the significance and portent of the setback. Even to liken it to the explosion that destroyed the Space Shuttle with the first civilian aboard shortly after take-off scarcely expresses the enormity, and it will take time for the consequences to sink in, just as the world seemed reassuringly unchanged only weeks after the 1987 Wall Street crash. But just as Meltdown Monday heralded the deepest global recession since World War II, the failure of the Tele-Communications-Bell Atlantic merger is going to alter the whole perception of the convergence of telecommunications, computers and television. In particular, all those that felt uneasy about the unrealistic hopes being hung on the information superhighway will now be emboldened to start doing the sums and come up with awkward numbers like the one that suggests that if someone can rent a video of a movie for $2.50, they are hardly likely to spend the current cost of a two-hour telephone call over an Integrated Services Digital Network to get the thing on demand.

South Sea Bubble

So what? People are accustomed to pay high prices for phone calls, but do not expect to pay much for access to entertainment or information – the price of the daily newspaper sets a disconcertingly low ceiling on the amount that can be charged for on-line news in a mass market. So you continue to charge high for the phone call, low for the entertainment or information. The trouble with that approach is that within about a week, some bright spark has spotted the potential for arbitrage and come up with a means of making a long-distance phone call look to the phone-plus-multimedia service company like video-on-demand, and in very short order, the whole economics of the thing fly out of the window. The fact that the multimedia convergence is coming is incontrovertible: what is in question is the speed at which it will become established, and the exact nature of the multimedia future. The feeding frenzy that led up to the failure of the Bell Atlantic Telecommunications negotiations is far to reminiscent of all the investment hypes of the past from the South Sea Bubble forward. Businesses have been changing hands at ridiculous valuations, none more so than the exit price paid for Paramount Communications Corp, and for those of a nervous disposition, Barrons has pointed out that the last really big American crashes – in the late 1880s and in 1929 – were preceded by furious speculation in communications stocks – railroads late last century, telephone companies in the 1920s. The fragility of major markets today is underlined by the fact that the merest hint of an interest rate rise in the US is enough to unsettle not only Wall Street but continental European markets where the trend of interest rates should, given the depth of recession, be emphatically down for at least another year. Such an uncertain climate is hardly conducive to a continuation of the hectic US deal-making between US cable television and telecommunications companies, if only because any would-be buyer must now factor in the possibility that if the whole market is headed south, any deal it wants to do may be do-able at a much lower price a few months out – although there is the counter worry that if that deal is to be done with equity rather than cash, there may not be much benefit in waiting, since the shares of predator and target are likely to decline in lock step. The US West Inc investment for 25% of the cable arm of Time Warner Inc is now expected to be the model for the future, but the level of uncertainty is vastly increased by the failure of Bell Atlantic to do its deal.

Reuters

The company that was to have been created was to have been the bellwether for the entire new industry: now that it will not happen, would-be players do not know where to look for guidance, and increasingly companies like Reuters (Holdings) Plc and Walt Disney Co will be presented as role models, com

panies that intend to face the inevitable revolution by bending the new technologies to what they already understand and do best rather than trying to create something completely new. Reuters plans to use the technology to present to its existing customers more and better of the same – instead of simply seeing reports of annual meetings on their screens, subscribers to Reuters financial feeds will be able to attend the annual meeting remotely, and likely even be able to ask their own questions at analysts’ meetings that are held not in New York but in the ether. As for Disney, it reckons that it knows a lot about creating entertainment software, and, crucially, about marketing it. It seems absurd that a 1930s movie could be more valuable now than it was when it was first made, but that is the case with Disney’s Snow White. By parsimoniously husbanding its resources in the shape of classic films, it has been able to increase their value over the years, so that ancient feature-length cartoons have been out of circulation for so long that they can be given new cinema releases where they successfully compete with first-run movies, or are made available on video for a desperately short time before being withdrawn. The example of Disney makes it certain that one of the most enticing promises of video-on-demand – that you will be able to watch anything you want when you want it will not be met: you will not be able to watch 101 Dalmations or Mary Poppins on September 13 in the year 2000 just by pressing a few buttons unless Disney has decided that those are the movies from its back catalogue that it will allow you to see that year.

Beavis and Butthead

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Sun Microsystems Inc chief executive Scott McNealy has been pouring cold water on what he sees as the myths of the brave new world of the information superhighway, telling the Commonwealth Club of San Francisco: There seems to be a perception that this magic network will be built allowing people to point and click for any service imaginable, including everything from entertainment to food, he says. First off, that’s not going to happen. Beavis and Butthead on demand is not going to improve the quality of life in America. He believes that the real value in an information network will not be in 500-channel cable television and other entertainment services for the individual consumer, but will be driven by commerce: to help large workgroups automate their organisations, and use fibre optics and other technologies to transmit video, audio and text. He also points out that unless there are universal standards, so that anybody’s set-top box works on anybody’s system with anybody’s server, very little of the dream will become reality. Any parent who has purchased a Nintendo game knows what it means to be locked into a type of technology. Once you buy the Nintendo machine, you can only buy the proprietary game cartridges from Nintendo. The best that can be said about the sorry wreck on information superhighway is that it has thrown a cold douche of reality over all the fevered hype, and while it will slow progress down substantially, what does come to be built should be more soundly based.

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