Industry alliances are restructuring the communications business. Not least among the reasons is the changing balance between supply and demand, which has turned Public Telephone Operators (PTOs) from subscriber-oriented organizations into consumer-oriented ones.
Competition from alternative networks and communications convergence has made the PTOs look more closely both at ways of increasing their customers' usage of existing networks and of ways in which they could invest in non-traditional, non-local investment opportunities. One of the results has been a dramatic increase in the number of cross-industry alliances.
These alliances allow companies to acquire expertise quickly in areas where they do not have local knowledge, or in domains where they are not legally allowed to compete. They allow costs and risks to be shared, and are perceived as a way of achieving some level of vertical integration.
Broadly speaking, there are four different types of industry alliance taking place:
Another factor in the rush to merge, ally, acquire and incorporate, is the continuing onrush of liberalization. In early August, the US House of Representatives voted in a massive overhaul of the communications law. And in Europe more than US$ 25 billion worth of stock in privatized European phone companies is due to hit the market before the end of 1996.
Furthermore, the information superhighway promises to deliver electronic information, education and entertainment up front. But who will be the people behind it? Telecoms companies? Television networks? Or software houses? Most likely, it will be a mixture.
In spite of the high failure rate amongst mergers, acquisitions, alliances and technology-sharing agreements in the information industry, the information industry continues to believe that the whole is greater than the sum of its parts. And every day brings news of another merger, acquisition, alliance or technology-sharing agreement. But - in spite of the industry's perception today - it may be that the most successful mergers of the future will be between the telecoms companies and customer-facing service providers, such as banks, shops and travel companies.
This year alone has seen an enormous number of deals come to fruition, in every field from multimedia, to information networks, to interactive entertainment.
Major telecoms companies are resisting the changes that would be brought about if the sweeping telecoms reforms passed by the US senate are signed into law, but cable television operators, regional telephone companies and broadcasters will all benefit. Interactive networks costing billions have already been built, and the biggest telephone companies want the world to know it.
In May of this year, America's second-largest long-distance telephone group, MCI Communications, announced plans to invest up to US$ 2 billion in the Australian media giant News Corp. MCI's 13 per cent stake in News Corp is buying more than just movies and TV shows to lure shoppers to MCI's Internet mall, however - the global entertainment and media empire's strategic interests also include the Fox Television network and film studio and direct satellite services in Europe and Asia. The MCI deal adds another key element, linking NewsCorp to a digital network with business and residential customers worldwide through MCI, and its 20 per cent owner British Telecom.
Also in May, AT&T was in direct talks with Time Warner, which operates America's second largest cable network, with more than 11 million subscribers. For Time Warner, an alliance would be a welcome opportunity to recover the cost of network development. Ever since U S WEST bought into the business in September 1993, the company has invested heavily in rebuilding its cable systems to carry phone services and interactive TV. AT&T, which is indirectly supplying interactive-video technology for the project through its Digital Solutions joint venture, could easily become the cable systems missing long-distance link.
Europe's major operators are going global, continuing in the pursuit of the corporate voice and data network business - a market that is thought to be worth up to US$ 25 billion by the year 2000.
A number of important alliances are the latest step in the leading market players' ongoing evolution - from yesterday's national monopoly to tomorrow's global telephone company.
Prominent in the news has been the deal in which Deutsche Telekom and France Telecom plan to buy a 20 per cent stake in Sprint, the number three US long-distance carrier. Industry observers have predicted a powerhouse in the making - with combined revenues of US$ 85 billion in 1994, the three players dwarf the largest US telecoms operator AT&T.
Despite Franco-German claims that the venture will strengthen competition in the European telecommunications sector, the state-owned operators were compelled to satisfy the European Union that the deal would not increase their market dominance at home.
The current agreement, given a green light by US authorities, simultaneously allies the two European carriers with Sprint within the same joint venture, but still remains subject to European regulatory approval later this year.
The privatized British phone giant BT has also been locked into a tight alliance with the second-largest US long-distance company, MCI Communications, since 1993. The pair have signed up Norwegian Telecom, Tele Denmark and Telecom Finland as partners in the Concert joint venture. BT is also involved with partners in practically every other major European country.
AT&T too has recruited local partners to secure a bridgehead in the US$ 160 billion European telecoms market. The Unisource consortium - which involves AT&T with Swedish, Dutch, Swiss and Spanish operators - set up the Iris telecoms joint venture with Générale des Eaux of France in April 1995. The venture gives AT&T access to infrastructure in France - the world's fourth-largest telecommunications market - where partner Générale is set on gaining the number two slot.
AT&T is also involved in the WorldPartners confederation, formed in May 1993, with KDD, Singapore Telecom and other carriers to promote the WorldConnect programme for international travellers.
In Europe, newcomers are teaming up for the attack. Like it or not, by 1999, Europe's telecommunications operators will be facing competition everywhere. Look out for further developments as the next wave of privatization sweeps across Europe. Spain, Italy, Portugal, the Netherlands and Germany all plan to put state-owned operators' stock on the international market soon.
Hermes, a joint venture between the US developer Global Telesystems Group and the Hitrail consortium of 11 European railway companies, including British Rail, SNCF of France and Deutsche Bundesbahn, plans to install a crossborder European communications network by laying fibre optic cable alongside Europe's rail lines. The company will be a so-called carrier's carrier, selling capacity rather than services.
In Germany, Europe's largest national market, the energy group Veba is staking US$ 6.5 billion on its bid to gain 10 per cent of the market. Viag, the industrial conglomerate, set up a joint venture with BT in April, and Daimler-Benz Aerospace is partnered by Canada's Nortel.
Générale des Eaux, which operates one of France's two existing mobile telecoms networks and is also the country's second largest cable television operator, confirmed rumours of a strategic alliance with RWE in May. The energy-based conglomerate RWE, Germany's sixth biggest company, is also talking to AT&T.
And back in France, the construction company Bouygues is working with U S WEST, the UK's Cable & Wireless and Germany's Veba, to build a digital cellular network. In Italy, the computer maker Olivetti has established a mobile network alliance with Bell Atlantic, Pacific Telesis Group, Sweden's Telia and Germany's Mannesmann.
Internet is the nearest thing to the information superhighway in existence today. Although not (yet) an integrated infrastructure, the 'network of networks' nonetheless connects people in 168 countries, and is growing at a phenomenal speed.
Currently reaching about 30 million people and some 5 million individual host computers, the eight-year-old WorldWide Web is taking on-line services into the home, and opening the way toward an interactive future. All of this points to a massive opportunity for the computer software industry.
The shotgun marriage of IBM and Lotus in June was the largest merger in the history of the software industry. One apparent motive was Lotus Notes software, for sharing data and working in groups, a strategic product that might help IBM regain a competitive edge by selling a PC package complete with Internet link and network software.
In a bid to bring interactive video to personal computers in a hurry, chip-makers Intel and leading database suppliers Oracle announced their union in June. the partners will combine Intel-developed communication technologies with Oracle database software for video mail and news on demand. Rather than waiting for faster or upgraded phone or cable-TV systems, the system relies on existing digital telephone service.
Novell's NetWare currently controls two-thirds of the market for software that runs on networked office systems. Along with Lotus, Intel and Xerox, the company features on the list of allies courted by AT&T. Lotus and AT&T, for example, have an agreement to make the Notes application available to businesses using AT&T's public networks.
Hardly out of the limelight over recent months, Microsoft has been signing deals right across the marketplace. The world's largest software company is also tangling with the WorldWide Web - its new Internet service, the Microsoft Network (MSN), is being put in place with the help of AT&T, TCI, Sprint and BT. Earlier this year, however, the US Justice Department threatened to block Microsoft's US$ 2 billion bid for Intuit, whose popular electronic chequebook programme made it a promising partner for on-line banking services.
Interactive networks are racing to catch the customer's eye with electronic banking, electronic shopping and a whole range of other new services.
Faced with increasing competition from cable television and wireless systems, the Baby Bells (the seven regional holding companies - Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis Group, SBC [formely Southwestern Bell] and U S WEST - put together in 1984, when AT&T was split into regional telephone monopolies and a long-distance carrier) are working hard to get into the long distance business.
In a landmark decision in April, Ameritech was granted permission to start long-distance trials in Chicago and Grand Rapids next year, on condition that the company opens the same local markets to competition.
In June, the US Senate went further - voting for the complete overhaul of communications laws that affect roughly one-sixth of the national economy and every American that uses the telephone or watches television. A similar bill was passed in the US House of Representatives in early August.
If it is signed into law, the bill will make it easier for the regional Bells to enter the long distance phone market, will lift ownership restrictions on broadcasters and will make it simpler for local telephone companies to sell video services. But it will also compound the competitive pressure on each and every player.
Buy-ins, buy-outs and test runs are topping the bill, as phone, cable and broadcasting companies prove their audience appeal and their technology to demanding new partners. The media's underlying message is that cooperation and competition co-exist.
Time Warner has trials underway in Orlando, Florida. Bell Atlantic is up and running in Dover Township, New Jersey. And Pacific Telesis Group has announced its plans to invest US$ 16 billion in broadband multimedia network construction.
U S WEST bought out two local cable companies in 1994, bringing with it nearly 500,000 paying customers and a US$ 300 million bill to upgrade the network for cable and multimedia.
TeleWest announced its merger with SBC CableComms on June 8. The US$ 1 billion deal with the UK's fifth biggest operator gives the new venture a potential coverage of 4.1 million homes, well clear of NYNEX at 2.3 million, and close to 25 per cent of the franchised UK cable market.
BellSouth is building a 12,000-user test-bed in Chamblee, Georgia. And the company's North Carolina Information Highway - a broadband network built with partners GTE and Sprint - which started out working with hospitals and universities is due to turn commercial this autumn.
Along with SBC Communications and Ameritech, BellSouth - which is the biggest and most profitable of the Baby Bells - entered a US$ 500 million alliance with Disney in 1994. GTE joined the group in August 1995. The partners want a package of movies on demand, video games, banking and home shopping for their full service network.
Further south, Telmex has invested US$ 8.5 billion in rebuilding Mexico's national digital network, since privatization five years ago. The former state-run operation is also being allowed to take a 49 per cent stake in the Televisa subsidiary Cablevision, and to pursue medium-term plans to provide television programmes and electronic services. But next year the company loses its monopoly, and, starting 1 January 1997, callers will be able to choose between the carrier and four new competitors. Most of the major US players - AT&T, MCI, GTE, Sprint, Motorola and Bell Atlantic - have been forging strategic alliances with local partners in readiness.
And Bell Atlantic, NYNEX and the Pacific Telesis Group last year reportedly bankrolled Hollywood agent Michael Ovitz's Creative Artists Agency to the tune of US$ 300 million. Among the names in his address book: heavyweights like Spielberg, Coppola and William Gates.
Microsoft is involved in a complex series of alliances right across the industry. Among the many: multimedia games development with Hollywood's DreamWorks; interactive television networking with computer-makers and the cable giant TCI; building a network of low orbit satellites with Teledesic Corp; and developing personal communications technology with Ericsson.
European tests are running in France, Spain and Germany, where Deutsche Telekom's multimedia trials are taking place in seven cities and scheduled to run for two-years.
And in Britain, where BT is bringing 2,500 people on-line over existing infrastructure, TeleWest is involved in interactive service trials with Bell Cablemedia and NYNEX-Cablecomms. Tests are underway in East Anglia and in Windsor, where the General Cable subsidiary of France's Générale des Eaux heads another team.
In Belgium, Belgacom launched a nine-month interactive multimedia project over its existing infrastructure in January 1995. The industry-wide initiative ambitiously targeted an interactive television access standard for Europe, but the satellite and cable broadcasters failed to agree on a common starting point.
Telecoms, computers, entertainment and broadcasting are on course for a collision. Apart from the industry pundits, who else is watching? And what are they looking for?
The entertainment industry is a risky business. British Sky Broadcasting, Rupert Murdoch's satellite service, lost US$ 1.2 billion between 1989 and 1993. But largely because Murdoch paid US$ 456 million to telecast Premier League soccer games starting in 1992, BSkyB now has 4 million subscribers. Good news for the media mogul, but a chill warning to the arts programming lobby.
The Murdoch group plans to offer digitally compressed Sky signals sometime next year, increasing the service's 22 channels to 200, practically overnight. With that many choices, it is proposing to offer pay-per-view movies every 15 minutes. But more, as they say, can be less. Consumers will have to choose between digital terrestrial, digital satellite or digital cable - or buy three decoders. Sky's digital decoders, for example, will be satellite specific.
Now multiply out the equation.
So far, the satellite versus cable broadcasting battle has been fought in the name of choice, with each side vying to match the other's channels. In theory, adding voice services to their video content is a very small step for these players but - until now - they were forbidden to do so. Without those legal constraints, the world could have its information superhighway overnight.
But where would that leave the national telephone companies? One version has them in the driving seat, with the latest technology coming on-stream and more direct subscriber connections than any of their entertainment rivals. At the other extreme, some may withdraw from the commercial fray altogether, and reclaim their public utility status.
Even if some of them were to opt out of the race, the superhighway would continue to reach out. After all, the average phone freak is hardly different from the average network surfer or couch potato. So will we all end up watching the telephone, the computer or the television?
Perhaps the personal computer. In most developed nations, the number of households with computers narrowly outweighs the number of cable TV subscribers - although the number of potential subscribers is far higher if you count the number of cable links laid but yet to be connected. And television sales in Europe are climbing at 30 per cent per year, which is certain to generate a healthy-trade in set-top boxes somewhere along the line.
But for sheer weight of numbers, the telephone wins every time. Phone lines still outnumber computers three-to-one in the G7 nations.
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