And for his next trick
In America, Rupert Murdoch is considered a magician. David Bowen looks at his MCI deal
Sunday 14 May 1995
So when he announced last week that he had linked up with MCI, the US long-distance phone operator, the telecoms, media and entertainment industries went wild. They had long been waiting for the first real multimedia empire to be assembled, and Mr Murdoch gave every impression that it had arrived.
"Until today no one has put together the right building blocks - programming, network intelligence, distribution and merchandising - to offer new media services on a global scale," he said.
The deal has two parts. MCI is paying $2bn (£1.28bn) for a 13.5 per cent stake in News Corporation, making it the biggest outside shareholder. The two comp- anies are also putting $200m each into a new joint venture that will try to exploit the multimedia potential triggered by linking one of the world's biggest "content" owners with a large phone company. To underline the scale of the project the new group's working name is WWJV - World Wide Joint Venture. BT, which owns 20 per cent of MCI, is not playing a direct role in WWJV, but adds weight to an already punchy combination.
At first sight, it seemed the multimedia empire really had arrived. News Corporation's vast library of "software" - which includes films, television programmes and data - would whizz around America on MCI's fibre optical networks, while abroad they would travel on the lines run by Concert, a BT/MCI joint venture.
But as media and telecom watchers got to grips with the deal, they decided there was less to it than met the eye. For one thing, the joint venture was aimed at businesses, not homes. "I don't think it's very significant in its own right," says Robert Boyle, chairman of Coopers & Lybrand's media group in London. "It's just one more signpost on the road to the convergence of technologies."
The $400m being put into WWJV "is not a lot in this world", he adds. To say that it has created the Information Superhighway is "baloney".
James Dodd, an analyst with Kleinwort Benson, sees the deal's logic as primarily financial. "These extremely cash-rich telephone companies have made enormous, and enormously erratic, investments," he says. Ever since BT paid $4.3bn for its stake in MCI, the US group has been looking for somewhere to reinvest it, he says. It tried to join up with cable operators and wireless telephony companies but, Mr Dodd points out, "each time it was frustrated in its attempt to spend several billion dollars".
News Corp was more than happy to take MCI's money, though. "Murdoch has been looking for someone who would pay a ridiculous amount for some of his assets," one New York analyst claims. But does MCI really believe it will be able, in MCI chairman Bert Roberts's words, "to provide broadband networks and direct broadcast capabilities virtually anywhere in the world"? Or does it just think News Corporation is a good investment? Mr Dodd is sceptical. "Whether there will be any chance to enhance the value above that of an investment is uncertain," he argues.
The logic from Mr Murdoch's point of view is much easier to see. He has got $2bn without ceding significant control of the company (MCI's shareholding is surrounded with restrictions on what it does with the stake). And he knew just what he was going to do with his money - the day after the MCI deal, he made an offer to take over Silvio Berlusconi's television network in Italy.
Nevertheless, the buzz around multimedia refuses to die down. The Internet is a real enough phenomenon, so is the CD-Rom. Home shopping by computer is taking off - trials of interactive television, video-on-demand and the like are continuing around the world. And businesses are manoeuvring frantically to be in the right place when the Information Superhighway is finally built.
But that raises the multi-billion dollar question: will the superhighway be built, and if so, when?
The Information Superhighway has a number of more-or-less vague definitions. The most useful is to equate it with a full "broadband" network. An ordinary domestic telephone line consists of a "twisted pair" of thin copper wires: it can carry speech and a certain amount of data. But it cannot normally carry the services that are associated with the multimedia revolution: video-on-demand, videophone, home shopping and so on. It can just about bring the Internet into people's homes, but fearfully slowly. By replacing the copper wire with fibre optic cable, or even with thick copper "co- axial" cable, all these restraints are removed: a typical optical fibre can carry 250,000 times more information than a twisted pair, which it why it is called a broadband link.
When every house has optical fibre, everyone will be able to receive and send an almost infinite amount of data down the line. That is when the Information Superhighway will have arrived.
The MCI deal will not create it, because MCI's optical fibre network gets nowhere near anyone's sitting room. As one of the three long-distance providers (the others are AT&T and Sprint), Americans can choose it to carry their calls. But the beginning and the end of each long distance call goes through networks operated by the Baby Bell regional phone companies, and these still use twisted pairs. What the deal does show is that any deal that smacks of multimedia generates enormous excitement. Ever since it became possible to convert any sort of media - pictures, sound, film, graphics, text - into a string of binary digits, business has been wondering how to reorganise to take advantage of multimedia.
Digitalisation does to these media what heat does to metal - it turns it into a flexible mass of homogeneous data that can be "poured" down a telephone or television cable. Suddenly industries that had always considered themselves separate - computers, telecoms, media - realised they would have to come together. Owners of films, pictures, books and the like found their properties became much more valuable if they were digitalised, because they could then be distributed electronically. Owners of the "pipelines", the phone and cable television companies, wondered how to upgrade their pipes, and also contemplated buying content providers. And the computer industry saw there would be enormous opportunities providing the hardware and software to make the system work.
There has been a raft of attempted multimedia-driven deals in the past three years, though the completion rate has not been good. The lowest success record has been on deals between cable and telecom companies in the US. Bell Atlantic, the east coast Baby Bell, and TCI, the biggest cable company, tried and failed to merge. If they had, they would have formed one of the biggest in the US. Southwestern Bell and Cox Enterprises, another cable group, also failed to consummate a proposed $4.9bn partnership.
Because Baby Bells and cable companies are "pipeline" operators and will eventually become direct rivals as multimedia suppliers, they decided to get together early to avoid cut-throat competition later. But the deals collapsed, partly because of regulatory problems, partly because the cultures of the two sides failed to mesh.
In terms of numbers rather than value, though, the real action has been in deals with content providers. As the channels of distribution proliferate, demand for content will explode: if video-on-demand - films down telephone lines - takes off, owners of popular movies will see their royalties rocket. That is why Hollywood studios are so highly valued. In 1993, Paramount was sold to Viacom for $10bn after a bid battle that forced the price up by $1.8bn. In relative terms, even more spectacular prices have been paid for computer game producers - more and more games will become available on-line. Pearson paid £310m, 70 times historic earnings, for a Californian games company.
This could explain MCI's keenness to buy into News Corporation, the biggest contents provider in the world, but as Mr Boyle points out, "MCI doesn't have exclusivity on News Corp's content".
Nevertheless, there does seem to be a vague, barely rational desire among tycoons to become the first vertically integrated multimedia giant with their own Information Superhighway. When Sumner Redstone, head of Viacom, bought Paramount, he said he wanted to create "a global media powerhouse of unparalleled proportions". As Viacom was a big cable company, the addition of Paramount seemed indeed to create a pipeline-and-content company. But in January this year, Viacom sold its cable operations to clear some of its debts: Mr Redstone's ambitious plan appears already to have fallen foul of economic reality.
Is Mr Roberts the next candidate for the imperial crown? If he can make the link to people's homes, perhaps by buying a cable company, perhaps by tapping alternative technology such as wireless or satellite, he will be able to make a plausible claim to it.
The joker, as always, is Mr Murdoch. In some ways he is already the multimedia king: he has satellite in Europe and Asia, a television network and film company in the US, newspapers all over the place. He said last week that the Information Superhighway was 15 years away in Europe and the US, and 50 in the rest of the world. But he is not the sort of man to brag about his plans. Maybe WWJV will, after all, turn out to be the potentate's big leap forward.
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