Converging Without Merging

High-tech companies switch gears on the infobahn

Infotech heavyweights have apparently decided that dating is preferable to marriage.

The infobahn has generated almost as much publicity as the O.J. Simpson trial, and may one day even generate as much revenue. But conventional wisdom holds that the communications, computer and entertainment industries must "converge" in order to make the digital delivery of information services to the home via the infobahn a reality.

Convergence, in short, describes the ongoing mating dance between those who control content and those who own the networks. "The content people are looking for outlets, and the cable and phone guys don't have much content, so they need everyone they can get onto their networks," said Alan Tumolillo, senior vice president with Probe Research.

Hardly anyone doubts this convergence will take place; indeed, it's already happening. But the foundations for futuristic information services are being laid in a manner distinctly different from what was imagined just a year ago. Back then, Bell Atlantic's proposed $26 billion purchase of Tele-Communications Inc. was widely touted as a model for the converging future, one in which corporate leviathans would marry their fortunes and take on the infobahn as one.

But the deal collapsed under its own weight, and in its wake, a new model of convergence has emerged, one that points to a future rife with partnerships but scarce on mergers and acquisitions, at least among equals.

Although both Bell Atlantic and TCI disingenuously blamed cable rate hikes by the Federal Communications Commission for undoing the deal, its failure had far more to do with shareholder skittishness, clashing corporate cultures and the daunting logistics of putting together a merger of such magnitude, let alone making it work.

"A merger takes a lot longer to execute, it hedges people's bets, and if you pick the wrong company, you are really saddled, maybe finished," said Tumolillo.

That lesson hasn't been lost on major companies, many of whom have realized that they can enjoy the benefits of a business relationship without the disadvantages of an outright pairing.

"Merging cultures and business systems is very difficult and very tricky, to the extent it may be advantageous not to try," said Dwight Allen, associate national director of telecommunications and electronic services with Deloitte & Touche. "You don't necessarily have to merge, there are an array of possible ways to get this kind of synergy."

Witness the programming venture between Walt Disney and the Baby Bells such as Ameritech, BellSouth and SBC. Bell Atlantic is taking a different tack to realize its video ambitions as well, as evidenced by its programming alliance with NYNEX, Pacific Telesis and Hollywood ?ber-agent Michael Ovitz. The high-tech horizon is littered with dozens of other "strategic alliances" geared to suit each party without constraining them from pursuing other deals. Indeed, two recent high-profile deals dominated the headlines with nary a mention of the word "merger."

Last month, long distance carrier MCI agreed to invest upward of $2 billion for what may amount to 13.5 percent of Rupert Murdoch's News Corp., a media conglomerate with a global treasure chest of content. One week later, television network NBC announced it would supply Microsoft with programming for the software juggernaut's forthcoming online service, the Microsoft Network.

"We will see more of these strange alliances with people moving in a variety of directions that five years ago would have been bizarre, but that will become increasingly commonplace," said Tumolillo.

The financial details of the NBC/Microsoft pact were withheld, but NBC executives said Microsoft forked over a "modest" payment to cover some of the network's costs in the venture, which will include joint development of multimedia content. Although NBC has agreed to pull its property from competing online services for "a period of time," Microsoft chairman Bill Gates said he is free to cultivate similar relationships with other networks.

MCI and News Corp., meanwhile, intend to create a $400 million joint venture to distribute News Corp.'s business-oriented content over MCI's international network and its growing array of information and Internet services. Both MCI and News Corp. are free to seek other dance partners, and given the nature of either company, won't be shy on that score. MCI, in fact, already enjoys a relationship and joint venture with British Telecom, which owns 20 percent of MCI, and whose own global network factors heavily in MCI and News Corp.'s plans.

Dr. Joseph Kraemer, managing director of EDS' communications and electronics industries consulting practice, said both deals point to a definite trend among major players searching for a middle ground between ad-hoc cooperation and outright acquisition.

Although smaller fish, especially those with patented technologies, will continue to be gobbled up, big fish occupying the same niche on the food chain have realized it makes more sense to cultivate a number of alliances rather than trying to swallow each other.

So in addition to the expected flowering of technological innovation, Kraemer added, convergence will also engender a good deal of corporate experimentation as companies seek to forge mutually satisfying relationships while preserving their independence.

"We know that partnerships are necessary, but the exact form may vary," said Kraemer. "You've got to have some skin in the game, but you don't have to give up a separate existence."

Companies, Kraemer added, often have multiple motives for entering into alliances, with profit not necessarily being paramount. Partnerships, he said, offer participants scale, expanded geographic coverage, market intelligence and technological know-how, and may preempt potential competition as well.

"There are a number of reasons to do this, not all are to make money," Kraemer said.

H. Brain Thompson, chairman and CEO of LCI International, one of the telecom industry's fastest-growing long distance carriers, however, sees no reason to engage in any kind of convergence activities, at least, not for a long time.

"I've been trying very hard to find consumers who want to watch 'Melrose Place' on their PCs," said Thompson. "When the infobahn gets here, and it could be 25 to 30 years, LCI will be there, but POTS (plain old telephone service) will soon be a $200 billion consolidated industry. So LCI will not pursue the information highway, multimedia, etc. in the next few weeks."


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