In one giant step, Malone and Smith, both colorful and contentious figures, leaped past their rivals. “Acceleration isn’t the word for it,” said David Cleevely, a Cambridge, England-based consultant. “They’ve just switched on the warp engines.” They’re also taking a multibillion-dollar gamble, betting that regulations will come tumbling down and consumers will fork over more money for all the services the multimedia magicians can contemplate. You’ve heard the pitch. It’s the day when your “smart” television will let you play “Jeopardy” with your cousin in Seattle, choose whether to watch the series from behind home plate or first base, and cruise the video mall with a handheld credit card.
If that picture still looks a little fuzzy, it’s not bothering Malone or Smith. Neither of these guys is shy about risk; Malone, chief executive of Tele-Communications Inc., has played close to the net with regulators and technology for years. Smith, chairman of Bell Atlantic, keeps poker chips in his desk drawer as a reminder of the game that taught him to prioritize. Last week, both were trumpeting their confidence in a vision other people have barely gotten their minds around. Their new company, they promised, will “make fife better and simpler”, and, into the bargain, create new jobs and secure U.S. leadership.
But listen carefully. This is the sound of a product being sold. You don’t have to understand “digital media” or “fiber optics” to be cautious. Anyone who’s groaned over their cable bill or cursed the phone company is equipped to be skeptical about combining such behemoths. This is “a double whammy for consumers,” said Howard Metzenbaum, chairman of the Senate antitrust subcommittee, who set hearings to begin this week. “They could face overcharges for both cable TV and local phone service.” Others in Congress say the proposed merger illustrates a natural momentum in the industry that will protect consumers. “Government [should] get off dead center and change policies that have been overtaken by time,” said Sen. John Danforth.
But skeptics also worry about access to the electronic paradise and about privacy once you’re in it. Bell Atlantic, which serves the mid-Atlantic U.S. region, and TCI, for example, are betting that they will one day be allowed to combine all their assets, giving them the delivery system, the cable channels and the programming on those channels. Then there are the really big-picture fears. When our forebears exulted over the first railroad, Model T or crank-up telephone, they didn’t imagine acid rain, drive-by shootings or obscene phone calls. “We have no idea,” warned industry consultant Mark Stahlman in a recent speech, “what will happen to education, religion, work, sex and human relationships in cyberspace.”
Amid last week’s euphoria, there was little time for such angst. Malone and Smith, who’d been talking–with extraordinary secrecy–since May, went public Wednesday in a theater at New York’s trendy Macklowe Hotel. The fights dimmed, the music rolled and a video sympathized with how hard it is to cope with change at “lightning speed.”
The new company, said the mergermeisters, will help simplify things. The deal itself, however, is terribly complex, a series of transactions designed to weave through existing regulations, or kick into place once rules are waived or eliminated. It won’t begin to be consummated until the second half of next year. In essence, the agreement will blend technology and assets, so that phone lines are “enhanced” with video and cable networks to provide two-way communication. Between the merged company and a joint venture created to bypass regulations, the two companies will reach 40 percent of U.S. cable homes, and hold wireless and cellular phone services and cable channels ranging from the QVC homeshopping network to the Discovery Channel. If these two enterprises are ultimately merged, the deal would equal $33 billion, including the $10 billion in TCI debt Bell Atlantic would assume. Smith will remain at the helm and Malone will head up programming activities and new ventures. He and TCI’s semiretired chairman, Bob Magness, would hold about a 4 percent stake.
Wall Street was delighted with the news, and sent flying the stocks of dozens of companies–from high-tech firms to film studios–that are expected to splash profitably in this big mud puddle. Meanwhile, the hot battle to buy Paramount Communications lost its spotlight. Bidders QVC and Viacom are expected to announce new moves soon, but Malone is one of QVC’s backers, and last week’s news raised new questions about possible alliances.
That contest and the TCI-Bell Atlantic deal, though, are about the same thing: a frantic mating dance, expected to last for years, as every company with communications connections scrambles for partners. “It’s like the oil business in the late 1800s,” says Peter Black, founder of CD-ROM maker Xiphias. “No one knows yet how to refine it or distribute it, but the smart guys are spending their money buying the geological rights.”
By every account, Malone and Smith are consummate “smart guys.” While Malone built his empire from barely nothing and Smith climbed a long corporate ladder, both are considered aggressive, ambitious leaders who saw the future more clearly than their competitors. John C. Malone, 52, is a Yale engineering and economics student who went on to get a Ph.D. and travel through Bell Labs and consulting firm McKinsey before taking over an unfashionable little cable company and creating TCI. It now serves more than 10 million homes, giving it one in five U.S. cable subscribers. He is uniformly labeled “brilliant,” often by executives who’ve just emerged, shaking their heads, from a meeting or negotiation.
Inside TCI, Malone is seen as a visionary with heart, loyal to well-paid employees (many will be millionaires when the merger is completed) who can come to work in jeans, take risks and not worry about hierarchy or titles. TCI’s modest Denver headquarters was bought in a fire sale from government regulators selling off foreclosed property. Malone’s own offices are decorated in what he calls “early Holiday Inn,” and he often leaves them to go home for lunch. Malone is intensely private, rarely inviting even associates to visit.
But this persona stands in contrast to his image outside TCI. Malone has a reputation as a blunt, ruthless opportunist, who regularly pushes up against the line of law and ethics. In a now notorious quote, Al Gore, who was then a senator, called him “Darth Vader,” a godfather of the cable cosa nostra. He has been sued and investigated repeatedly by those (most recently Viacom) alleging that he has taken advantage of customers, railroaded suppliers or thwarted competitors. He has prevailed in almost all challenges.
One top industry executive says he remembers Malone telling him how much power he has over Ted Turner since he bought a stake in Turner’s company when it was overloaded with debt. Now, Malone bragged, Turner couldn’t spend more than $2 million–peanuts in this business–without permission. Pressing his thumb on the table, Malone reportedly declared, “I’ve got him right where I want him.” Malone wouldn’t comment on that story, but he is clearly proud of his entrepreneurial superiority and role as maverick. (Perhaps that explains his love of iconoclast Rush Limbaugh.) Even during last week’s talks with analysts and reporters, Malone couldn’t resist jabbing Smith about his company being an “old cow” and “stuck in the mud.”
It’s probably no surprise, then, that Ray Smith will be the new company’s spokesman, diplomat and public persona. Smith, 56, is a rare case: an insider who took a company steeped in tradition, routine and regulated conformity, and turned it around. Bell Atlantic was the first of the Baby Bells to introduce Caller ID and other services. It laid more fiber-optic cable last year than the entire cable industry combined. And Smith, with the help of renowned litigator Laurence Tribe, challenged the 1984 Cable Act as unconstitutional, winning approval to offer cable service in its territories. “This is not your father’s phone company,” says Fergus Shiel, an analyst with Fidelity Investments.
Smith joined Ma Bell in 1959 and climbed steadily, all the while keeping up his vocations in playwriting and acting. He turned stodgy “Bellhead” culture upside down by traveling the country to visit employees, creating “champions” who get budgets to pursue risky projects and insisting that every top manager, including himself, have a “coach” to keep him on track. On his desk sits a sign with the 1960s slogan “Be Here Now”; in this case a warning not to get stuck in the past. “There was no future for us as a telephone company,” he told NEWSWEEK last week. But with TCI, “it’s the perfect information-age marriage.”
To get an idea why so many are toasting this union, imagine for a moment that your television, VCR and computer operated with the same flexible, on-demand ease of your telephone, which lets you call anyone, anywhere, at any time. Digital technology translates sound, text and video into the same computerized stream. Fiber-optic cable transmits huge masses of it, and good old telephony allows the dialogue. Marketers and moguls love spinning out scenarios that should make consumers’ and investors’ mouths water. A composite sketch:
You come home from work and grab the remote. As You putter around, removing tie or pantyhose, and occasionally checking the picture, your personal video navigator brings you up to date. You find out what TV shows the kids watched after school, and hear a reminder from the florist: it’s time to send Aunt Agnes’s birthday bouquet; how about this arrangement? You look at a copy of Tommy’s report card, issued that day, and a list of movies you could watch that night, based on how much you loved “The Age of Innocence.” You click on the beef bourguignon how-to that you selected this morning; you’ve got all the ingredients because the program automatically taxed a list to Safeway, which delivered.
RUDIMENTARY VERSIONS OF these services are already up and running, from Arlington, Va., where Bell Atlantic’s Stargazer gives subscribers access to an electronic shopping mall, to Littleton, Colo., where 400 homes have an early, crude version of “video on demand”–the idea of a video store inside your TV.
But it will be five years or more before the full-service fantasy is realized, and there isn’t enough of a track record to evaluate the promise, or the problems. The most obvious is competition. Last week’s deal follows alliances that include Time Warner–which owns cable systems and channels–and US West; AT&T and McCaw Cellular; and BellSouth’s plan announced last week to buy a stake in Prime Management. Firms like Bell Atlantic already own parts of industries that are expected to be their “competitors”: wireless and cellular communications.
With this deal, millions of “households across the country have lost the prospect of competition between two formidable rivals,” argues Mark Cooper, research director for the Consumer Federation of America. Metzenbaum was already considering legislation that would limit the share of the electronics communications market any one company could control. Last week, Edward Markey, chair of the House telecommunications subcommittee, said he would propose a rule that would bar cable or phone companies from buying each other within their own territories. Without regulation, argues Cooper, it’s “like letting a private entity control” a stretch of interstate. “Nobody allows a private highway. Why a private information highway?”
But in an era of privatization, such ideas are discussed. And the administration, eager to see the information superhighways develop, knows it can’t build the routes itself, as Eisenhower built those made of concrete. Smith and Malone paid a call on Gore Wednesday, who later issued a benign statement. Unless antitrust intervenes, the administration seems likely to approve. Even if the will to regulate was there, it could be tough to pull off. Congress is already holding hearings on why its new cable-rate legislation seems to have yielded higher cable rates. With the industry changing so fast, how can regulators keep up?
Malone and Smith argue that their deal is pro-competitive, because it will accelerate development of the industry and give consumers new choices. Meanwhile, they are going out of their way to allay fears, agreeing to spin off TCI cable properties in Bell Atlantic territories.
Legislators will be urged to look at England, where TCI and US West already run a combined cable-telephone service, TeleWest. Customers have seen some rates drop–by buying into optional cable channels. Still, when telephone companies go into more risky businesses, customers may well be uneasy “about whether the comfortable old telephone service still is as comfortable or as reliable,” says consultant Cleevely (page 44).
Other watchdogs warn that smaller companies and the public may lose access to the airwaves. And the whole panoply of services could prove too costly for some consumers to afford or for companies to provide, in situations analogous to those today where remote areas aren’t served by an airline or train. In one court skirmish, Malone beat back charges that he bought The Learning Channel on the cheap by threatening to banish it from TCI.
Most worrisome to some are the threats to privacy. “This is a quantum leap” in the collection and centralization of personal data, says Evan Hendricks, publisher of Privacy Times. He notes that Bell Atlantic, which pushed Caller ID programs over concerns about privacy, is the first to move.
So, suppose it all works out. Regulations fade away, competition increases, consumers love the Stuff, and someone manages to safeguard privacy and produce quality programming. Don’t get too excited, warns Maryann Keller, an auto analyst who’s an expert on the decline of General Motors. She was featured on a guest panel in New York last week that, coincidentally, analyzed “the disease of bigness.” The telephone industry was revitalized, she said, when Ma Bell was broken up. If General Motors had been broken up, as it once feared, said Keller, “we’d have a healthier car industry today.” Do we believe in new, better giants? Watch out, she says, for the moment when “almightiness really sets in.” All the same, Malone and Smith plan to cash in while they can.
