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Digital revolution blurs industry lines to consumers' benefit

THE BALTIMORE SUN

The Digital Revolution has reached Glasgow, Ky.

In this small town 100 miles south of Louisville, the local electric utility has installed a two-way monitoring system that can conserve electricity by automatically shutting off water heaters and taking other load-reducing steps.

The same network can deliver video images, news and information. So, in 1990, the Glasgow Electric Board became the town's second cable-TV provider, feeding broadcasts to about 1,800 residents for a fee. In response, the original cable company slashed rates and unsuccessfully asked a court to evict the utility from its turf.

And with the aid of digital electronics, the utility began offering telephone service to some of its employees last year and plans to expand the service to the city's school district. "It's technically feasible and legally doable," says William Ray, the utility's chief.

All this illustrates how the lines are blurring among four huge industries: computers, consumer electronics, communications and entertainment. The relentless spread of digital electronics -- converting information, sound, video, text and images into a single stream of ones and zeros that can be decoded by similar electronic hardware -- is stepping up competition, forcing strange alliances and undermining once-lucrative businesses. Consumers seem sure to get new services and lower prices.

Operators of telephone, television, cellular and satellite systems like digital because it vastly increases clarity and capacity and can improve security. Creators of music, movies, books and pictures benefit because digital allows their product to be transferred readily to a variety of packages and reproduced more cheaply. Makers of consumer-electronic equipment find digital saves money by providing a common underlying technology.

Which industries or companies will benefit most from the invasions of each other's turf isn't clear, however. "You can sit inside one of these industries and think you're immune, but these other industries are coming at you," says Robert Lucky, executive director of research at American Telephone & Telegraph Co.'s Bell Labs.

It sure looks that way. Cable-TV carriers and consumer-electronics makers are buying movie and music producers. Satellite TV and data networks are being launched by a defense contractor, a computer maker and a media company. U.S. telephone companies own cable systems abroad and are itching to buy them at home. Software companies are acquiring images and data for use in their products, and publishers are packaging books in electronic form.

"Everybody is in everybody's business today," says Craig McCaw, chairman of McCaw Cellular Communications Inc., the nation's largest cellular carrier. The free-for-all could redraw the corporate landscape -- if government regulations, industry divisions and technical problems don't bar the way.

Obliterating the rules

Government, which has long tried to separate the fields of broadcasting, telecommunications and information, is relaxing its grip. Last October, a federal court approved plans by regional telephone companies to offer electronic data and shopping services over their lines. The Federal Communications Commission is encouraging phone companies to enter the broadcasting business and cable providers to offer wireless telephony.

However, regulators, concerned about rising prices for cable and the effect of changes on newspapers and other media, still might hit the brakes; already the Senate has passed a bill permitting municipalities to regulate rates for basic cable services. But in the end, "technology is going to obliterate the current regulatory structure," asserts Stag Newman, a strategist with Pacific Telesis.

Industry's failure to get its act together also is delaying the Digital Age. Self-interest has spawned a proliferation of electronic standards, making integration of digital media cumbersome or impossible and penalizing consumers for buying one hardware system instead of another. Already there are competing formats for compact-disk players; disks made for one system can't play on another. And an electronic game designed for Nintendo can't play on a Sega or Atari.

Compressing data

Technical hurdles also are worrisome, though not insurmountable. The most vexing are to find ways to compress data, especially motion pictures and medical images, so that less expensive processing and communications hardware is required. Another tricky problem: what to do with predigital data, mainly text, photographs, film and music. Today, most information products, such as music and newspapers, are translated into computer-readable form during their production. But older material must be converted into electronic form, a process that currently is expensive, time-consuming and not always accurate.

Despite these obstacles, the convergence of digital industries brings unusual opportunities. U.S. companies, for instance, may get a fresh shot at consumer electronics, a sprawling industry that until recently was widely considered irretrievably lost to the Japanese.

'Get it back'

"Here is our opportunity to get it back," says James Clark, chairman of Silicon Graphics Inc., of Mountain View, Calif. The reason for optimism: The United States is strong in computers. Since music, video and text are going digital, the devices that will store, record and play this material will essentially be computers in handy packages.

So, the spread of digital electronics could reverse decades of decline in U.S. competitiveness. Just a few years ago, the United States seemed doomed to trail Japan in advanced digital television but now appears to have leapfrogged into the lead.

In electronic-game hardware, where Nintendo is king, a product being planned by Apple Computer Inc. is raising hopes of an American resurgence. And while Sony Corp. is still leading the way in electronic books and camcorders, Hewlett-Packard Co. has beaten the Japanese to the punch with a palm-sized electronic spreadsheet.

In communications, digital electronics is fostering creation of new networks that can serve as highways for bits of information. Three types of networks are emerging. One is based on satellites, a second on the fiber and coaxial cables belonging to telephone and cable-TV companies, and a third on cellular and other radio technologies. Alfred Sikes, the FCC chairman, expects all three to flourish. That's because of the extensive equipment and networks already in place; the desire of some companies to run networks; and the benefit to the public from expanded competition.

"I like the idea of competing networks," says Richard Snelling, executive vice president, network, of Southern Bell, a unit of BellSouth Corp. "Even though it squanders resources to an extent, it promotes innovation." He adds, however, that the convergence of once-distinct industries is "going to create a lot of chaos."

It also will hurt some industries. The losers may include:

* Network television. "Over the air" broadcasters will be squeezed by vast video libraries stored electronically and obtained by satellite or on disks. Cable TV will become more threatening as providers expand channel capacity and quality through digital circuitry. Just as pre-recorded music reduced the audience for radio, new ways of obtaining video entertainment may change the economics of TV by squeezing out commercials. However, the networks also expect to go digital. They "are a long way from dead," says John Malone, chief executive of Tele-Communications Inc.

* Service companies. Digital electronics will usher in a fresh round of automation, wiping out entire classes of service workers much as computers wiped out many factory and clerical jobs. As the quality of documents sent by fax machines and electronic mail improves, express mail concerns will lose customers. In addition, suppliers of all kinds will get by with fewer workers as ubiquitous sensors, sending wireless messages to central computers, streamline the process of restocking store shelves or reading utility meters.

* Video-rental stores. Digital electronics will make renting a movie as simple as changing a TV channel or dialing the telephone. No more late-night trips to a video store, says Nolan Bushnell, a pioneer in electronic entertainment. Already trying to stave off obsolescence, Blockbuster Entertainment Corp. has started promoting for-purchase movies and recently decided to sell titles stored on compact disks.

* Personal-computer makers. General-purpose PCs are likely to be supplanted by "information appliances" requiring little training. "Even the exceptional users still spend more time on their tools than solving problems they're meant to solve," says John Young, chief executive of Hewlett-Packard. "That isn't right."

* Newspaper publishers. Weakened by a slump in advertising, newspapers now face competition from telephone companies. One big fear: Phone companies could skim classified advertising, the most profitable section of most metropolitan papers. Dow Jones & Co., publisher of the Wall Street Journal, already runs electronic data services. MediaNews Group Inc., which publishes 72 newspapers, is talking with phone companies about supplying editorial material and selling audio ads.

The looming digital transformation has many companies struggling for ways to best defend their turf -- and fretting more about cannibals from other industries than about traditional rivals. "I'm more afraid of the data providers -- Dow Jones, Reuters, McGraw-Hill -- than I am of my data base software

rivals," says Lawrence Ellison, chief executive officer of Oracle Corp., a supplier of data base software.

Eastman Kodak Co. illustrates how companies try to avoid being blindsided by rivals. In June, Kodak plans to sell a digital system that takes film negatives and converts them into images stored on compact disks. The disks will be prepared by photo developers and playable on home computers. Kodak hopes to lessen its dependence on film, but "it is also a defensive program," says Scott Brownstein, manager of digital-imaging development.

Racing digital cameras

Kodak's "Photo CD" plan is in a race against all-digital cameras, which capture images on semiconductor chips. These cameras, made by Sony, Canon and others since the mid-1980s, are gradually improving in quality, though digital pictures still pale in comparison to those from film cameras. In addition, the digital cameras are costly right now. But they produce pictures instantly, and the images can be sliced and diced electronically. So, the long-term threat to film is serious, and Kodak really has to respond, says Eugene Glazer, an analyst at Dean Witter Reynolds.

But protecting the film business is expensive -- and risky. Mr. Glazer estimates that Kodak will spend hundreds of millions of dollars to launch Photo CD; the company declines to estimate the cost. And consumers may not bite because they would need a special CD player and perhaps a computer, plus a camera.

Mr. Brownstein says Photo CD, to be successful, has to grab only a tiny percentage of the 60 billion photos taken each year. But even then, Kodak may only delay the inevitable triumph of digital electronics, where advances are being fueled by billions of dollars invested annually by dozens of major concerns.

Kodak's plight shows the dangers of going it alone. Alliances are one way to hold off the cannibals. Examples abound. BellSouth BTC is working with consumer-electronics king Sony on a new type of wireless phone system. Oracle and McCaw Cellular are testing a broadcast service that aims to strip data traffic from traditional telephone carriers.

Rivals' alliance

Probably the best-known alliance brings together Sony, Apple and Motorola Inc. Though rivals in some areas, the three are joining forces to go after the nascent market for pocket-size cellular phones that double as electronic note pads. Each

company is contributing different pieces of the technology -- Apple, software; Sony, manufacturing and design; and Motorola, chips and communications know-how.

These alliances are just the beginning. "You're going to see a whole different world of relationships between industries and companies that you never thought would do things together," says John Sculley, Apple's chief executive officer. Some companies, however, are trying on their own to span the expanse of digital software and hardware, networks and content.

'Digital manager'

"There's nobody in News Corp. who would call themselves a digital manager, but that's our approach," says John B. Evans, executive vice president of News Corp. News Corp. owns TV Guide, publisher HarperCollins, Fox TV, a computerized map company, a European satellite broadcast network, and many newspapers and magazines.

A few years ago, it was inconceivable that a single corporation could pursue all or even most of the digital permutations. But that was before a slew of acquisitions by News Corp.; the merger of Time Inc. and Warner Communications, Sony's acquisition of the enormous music and movie holdings of Columbia Pictures, and Matsushita Electric Works Ltd.'s purchase of MCA and its similar operations.

So far, these deals have produced only modest results. News Corp. and Time-Warner Inc. are constrained by debt, and the two Japanese giants have yet to reap the benefits of marrying hardware with "soft" entertainment content. But "rightly or wrongly," AT&T;'s Mr. Lucky says, these deals "may have set the trend."

Reprinted with permission of The Wall Street Journal, 1992, Dow Jones and Co. All rights reserved.

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