RIVALS-TURNED-PARTNERS Alliances form for digital revolution

THE BALTIMORE SUN

The biggest alliance of the digital revolution, so far, was hatched over a lunch of burritos and enchiladas.

On one side of the table sat Dennis Patrick, an executive with Time Warner, the world's biggest media and entertainment company and the nation's second-largest cable provider. On the other side was his friend, Laird Walker, a vice president for US West, a regional phone company based in Colorado.

On March 5, 1992, as they split a plate of black bean nachos at the Austin Grill in Washington, D.C., the phone and cable industries were thought to be fierce rivals: The cable industry was looking to offer some form of phone service over its networks; phone companies were fighting for the right to deliver video programming over their lines.

But by the time the key lime pie arrived, Mr. Walker and Mr. Patrick had decided cooperation might be better than competition. Or, as Mr. Walker put it, "The information marketplace is so huge it didn't need to be a win-lose proposition."

That realization led to more than a year of intense negotiations -- and a deal, announced in May, in which US West will invest $2.5 billion in Time Warner.

The two companies agreed to build a $5 billion television system that would serve subscribers in about 30 states with digital, interactive telecommunications services -- the on-demand movies, personal home shopping, picture telephone, video games, video everything that promises to deliver the ultimate couch-potato experience.

The Time Warner-US West partnership -- a high-stakes union of rivals -- is the most striking example of a deal-making frenzy that has swept corporate America.

Partnerships are announced almost daily, pairing such unlikely couples as the old Ma Bell (American Telephone & Telegraph) with MTV's parent (Viacom); a department store chain (Macy's) and a cable TV giant (Cablevision Systems); and two cutthroat computer competitors (Apple and International Business Machines Corp.).

Driving these joint ventures is a belief gripping executives from California's Silicon Valley and Hollywood to New York and Fort Lauderdale, Fla.: They're on the crest of a technological wave that can carry them into the 21st century -- or crush them.

What may be shaping up is a clash of technology titans -- mega-teams of computer, telephone, entertainment and cable companies, each hoping to carve up the emerging markets by using each other's expertise. The outcome could determine what services become available and how quickly; how costly they are for consumers and how profitable for investors; and whether they are regulated closely, like phone service, or loosely, like cable.

"I think every cable company is talking to every telephone company,"says Charles Dolan, a cable industry pioneer and chairman of Cablevision, which has systems on Long Island and in New York City. "We have talked to many of the phone companies about what we can do to complement each other. We don't think of them as competitors."

Stanford Levin, economics professor at Southern Illinois University at Edwardsville and a phone company consultant, said, "You've got a situation where the lines between telephone service and cable service and information services and things they keep promising us are blurred."

The potential is for a historic realignment of whole industries. For entertainment, publishing and retail businesses, interactive services offer great peril and great opportunity.

Some companies may be doomed to extinction unless they dream up new businesses. Who needs a video store when you can tap into thousands of movies at any time through your television? Will newspapers go electronic, or will many just disappear?

'Virtual reality'

Today's home-shopping channels -- which already generate more than $2 billion in sales a year -- will be transformed when programmers can take viewers into department stores, let them browse through the housewares department and order a frying pan to be delivered the next day. The idea of an out-of-body shopping experience through "virtual reality," as experienced by Boopsie of the "Doonesbury" cartoon strip, may not be all that far-fetched in a few years. The movie industry is experimenting with interactivity -- "I'm Your Man," a film whose plot is shaped by the audience, played in New York City last winter. And companies like Time Warner see a gold mine in recycling their vast archives for home use.

"These libraries are already there and paid for," said Bob Pittman, a Time Warner executive who created MTV. "All the revenue that comes in goes to the bottom line."

Tom Pardun, president of US West's multimedia communications group, predicts that nationwide there will be a lot of experimentation in

1994 and initial rollouts of interactive services in 1995; by 1997 and 1998, he thinks, interactive technology will be largely in place for most viewers.

Meanwhile, there are fortunes to be made:

* Intel, the leading maker of computer chips, teamed up in April with Microsoft, the leading software company, and General Instrument Corp., a maker of cable controller equipment, to produce a next-generation converter box. This box, which would let televisions translate huge flows of digital programming, may turn out to be basically a hand-held personal computer.

* That possibility hasn't been missed by the computer makers. Apple's joint venture with IBM, known as Kaleida Labs, has in turn teamed up with Motorola and Scientific-Atlanta to develop software and hardware for delivering interactive and multimedia services to homes.

* Tele-Communications Inc., the nation's largest cable system, is creating new programming with 20th Century-Fox and invested $100 million in Carolco Pictures to ensure access to first-run movies for pay-per-view.

But as corporate wedding notices fill the business pages, some fear that not all the alliances are made in heaven.

"People are racing to get deals in place before society wakes up and understands what's going on," said John Sculley, chairman of Apple Computer, which has made its share of alliances. What's going on, in Mr. Sculley's view, is that the world's biggest businesses are teaming up to create effective monopolies that will dictate the shape and scope of the Information Revolution.

This could "inhibit the benefits of these breakthrough technologies for literally decades," he said.

But that view is countered by Nathan Myhrvold, a Microsoft executive who helps forge strategic alliances.

"An open, widely accessible system is essential to success," he said. "Anybody who tries to win with a closed proprietary system which limits the ability of entrepreneurs to create new products and services will lose in the competitive marketplace."

The marketplace, in fact, has turned into a strikingly fluid dance of competition and cooperation, with cable and phone companies setting the pace. Partners in one arena may try to trip each other up in another arena.

rTC That's because phone and cable companies are assessing their strengths city by city, choosing mutually beneficial alliances in one place and declaring war in another.

"What will appear across this country is a patchwork of different companies providing different services in a different way," said Ray Smith, chief executive officer of Bell Atlantic, the Baby Bell serving the mid-Atlantic and parent of Chesapeake & Potomac Telephone Co. of Maryland.

Mr. Smith said consumers will benefit from having "two robust service competitors" in most markets.

"It will be very difficult five years from now to say who is the telephone company, who is the cable company and who is the information company," he said. "Everyone will have a choice."

Phone company pragmatism

Bell Atlantic exemplifies the pragmatic phone company approach. It's working with Sammons Communications, the cable operator in Northern New Jersey, to provide video services; farther south, in Dover Township, it's competing against Adelphia, the dominant provider, through an alliance with FutureVision, an outside cable programmer.

And finally, by starting its own programming operation, it is preparing for the day when it can offer TV in its own area.

More than anything else, what's driving the phone companies into alliances with cable companies is the federal ban that prohibits phone companies from providing video programming directly to subscribers in their own service areas.

US West, for instance, can't operate cable in its 14-state region, but it can own or invest in a cable system (such as Time Warner's) -- elsewhere.

St. Louis-based Southwestern Bell tried another approach, buying two cable systems near Washington, D.C.

As for the cable companies, they want to benefit from the phone companies' leading-edge computer technology. Powerful computers, known as switches, will be the building blocks of interactive television, allowing thousands of viewers to make spur-of-the-moment choices all at once.

Cable companies fear that if phone companies could provide cable in their own service areas, they would set artificially low prices, subsidized by local phone service, and push cable companies out of business.

But first the federal ban on phone companies providing local cable service would have to be lifted. That could happen in court or Congress in the next few years.

ABOUT THIS SERIES

Yesterday: Television, telephones and computers converge to form an information revolution

Today: Companies join forces, seeking a fortune in information technology

MA Tomorrow: Will information revolution strip users of privacy?

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