Doubtful logic from the man in the anorak
Wednesday 23 August 1995
The prospect of a partnership between the billionaire with the anorak and the billionaire with the sharp suits and the celebrity wife might have been dreamt up in Hollywood. Indeed, a deal between Mr Gates, head of Microsoft, the world's largest software developer, and Mr Turner, head of the Atlanta-based news and entertainment conglomerate TBS (and the man who married Jane Fonda) has the undeniable mark of Tinseltown: built on one part hubris, one part lucre and only the last part on strategic logic.
While the deal has yet to be done, all the signs suggest Microsoft will make a large equity investment - perhaps $2bn - in TBS, in exchange for tying up supply of movies and television programmes for the imminently launched Windows '95 and for all kinds of mooted "information highways" that as yet do not exist. We are meant to believe that this makes eminent sense for Mr Gates. As the visionary who made Microsoft into the world's largest software company by knowing all about computers and how people use them, he must surely understand the next stage of the revolution: the new communications-driven epoch where networking is all. It is, however, hard to see how this link-up is going to benefit him.
Clearly he is right in thinking that he needs programming for his nascent distribution system. Whether this justifies buying into one of the programmers is less clear-cut. In it one thing to buy in programming, another to take an equity participation in the company producing it. Moreover, vertical integration - in this case the marriage of content and carriage - is the rock on which so many corporate expansions have foundered. Knowing something about software development is not the same as knowing something about programme making. Mr Gates has been hugely successful in creating a world- beating business. Now it looks as if he is about to commit the classic entrepreneur's mistake - believing he can repeat that success in a wholly different, though admittedly converging, business.
For Mr Turner the logic looks a good deal better, for he has an ulterior motive. His first goal is to get CBS, the US television network. For that, he needs partners and more money, both of which Mr Gates seems ready to provide. Whatever might come of the "interactive alliance" Mr Gates likes to talk about will be mere icing on Mr Turner's cake. More importantly, the man from Atlanta may be able to get his hands on an important television distribution system, to complement his existing satellite and cable outlets.
This mooted deal is reminiscent of the recent link between News Corporation and MCI. Rupert Murdoch got $2bn from the long-distance operator, without losing control of his empire. Whatever comes of the joint venture that the two companies have established to pursue the holy grail of media/telecommunications convergence will be just so much gravy for News Corporation. The real advantage to Mr Murdoch, at least in the medium term, is lower debt and greater flexibility to spend on what he really wants: more television and a stake in the digital TV future.
MCI, for its part, has succumbed to the doubtful logic of "convergence", betting its distribution network will be worth more through a link with News Corp than without. The case has yet to be made, either for MCI or for Microsoft. Mr Turner and Mr Murdoch, wily as they are, stand to gain handsomely. The prospects for their partners look a good deal more doubtful. As Mr Gates squares up for what must surely be one of the most over-hyped product launches of all time - Windows '95 - he might usefully reflect on an old business truism which every new generation of entrepreneurs seems to have difficulty in learning: sticking to your knitting is often the best way of protecting your wealth.
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