Fast moves on the media highway

LAST week's dollars 20bn merger of two of America's largest communications companies has redrawn the battle lines in the global media revolution, creating what Wall Street bankers say is a stampede among rivals to find partners.

No fewer than a dozen big telecommunications and entertainment groups have quietly retained investment advisers in the past few days to shortlist potential merger candidates from complementary industries, according to American merger and acquisition specialists.

'With the Bell Atlantic/ Tele-Communications deal, an irresistible logic has taken hold of this market,' one investment banker said. 'It's mate or die. Last week you could be 'strategic allies'. This week, if you're not engaged, you're likely to end up a one-medium spinster in an interactive multi-media world.'

Wall Street has been mesmerised for the past 18 months by talk of 'convergence' - the emergence of one super-industry combining video, telecoms, computing and retailing. But until last Wednesday's announcement, the rivalries were within industries - for example, the two cable television groups, Viacom and TCI, struggling for control of Paramount Communications.

The cable companies, with their television experience, had the edge in programming, while telephone utilities likeBell Atlantic had the advantage financially and in two-way communications, but neither would be in a position to assemble all the components in a national multimedia network for many years to come.

Last week's merger announcement between a telephone operator and a cable operator dramatically accelerates that timetable, at the same time realigning the interests of the many companies around the world that have a stake in this market. They range from the other 'Baby Bells', the Hollywood studios and Silicon Valley, to Japanese video game companies and consumer conglomerates like Sony and Matsushita, to global media businesses as diverse as News Corp, Saatchi & Saatchi and Time Warner.

It may be a good two years before Bell Atlantic can clear all the regulatory hurdles in its path, but with an instant audience of 40 per cent of America's cabled households, what was until recently a media daydream will become a market reality almost overnight.

The social and cultural implications of this new network are huge. Will interactive home entertainment, education and retailing turn the world into 'a T S Elliot wasteland of home- bound high-tech zombies', each watching its own screen in isolation, as Disney's chief executive, Michael Eisner, suggested recently? (With Disney's stake in theme parks and cinema, this is no academic musing.)

Or will it free couch potatoes from the passive slavery of one-way, limited-choice television, 'which exists only so that advertisers can have their messages implanted in as many minds as possible', as TCI's chief executive, John Malone, put it on Wednesday. His new partner, Bell Atlantic's chief executive, Ray Smith, talked about the interactive future of education, warmly recalling how a classroom of glassy-eyed children he visited was transformed by the introduction of an old third-hand computer.

If the public does decide it wants these new services - a big 'if', given the lukewarm reception given interactive multimedia experiments to date - and if consumers are willing to spend significant amounts of money for them, then the potential for their new network is vast. The new medium threatens to bypass now-profitable businesses, transform related industries like marketing and consumer banking, and render others obsolete within a decade.

The list of obvious losers includes video cassette rentals, local travel agents and discount chain stores. But it will inevitably swell to include some of Bell Atlantic's slower-moving Baby Bell cousins and smaller cable groups that don't find partners.

The winners in the long term are potential providers of programming for the new multi-media networks - traditional television producers ranging from Paramount to the UK's Carlton Communications, as well as electronic information publishers, computer software houses, video game producers - like Nintendo, Sega, 3DO and more recently Virgin - libraries, archives, and music companies. (Bill Gates, the chief executive of the software powerhouse Microsoft, brought a list of potential new consumer applications to Mr Malone that was three pages long, single- spaced and densely typed).

Another set of winners are makers of telecoms equipment, from giant switch-makers to firms like General Scientific, which will make television-top controller boxes.

In the short term, however, Wall Street's attention is focused on the cable industry's few eligible bachelors, the half- dozen sizeable franchises that remain unattached now that the two top operators, TCI and Time Warner, are spoken for. Shares of Comcast, Continental Cablevision, and Cablevision Systems have risen by some 20 per cent in the past month alone.

The lure of consolidation is almost irresistible. For the Baby Bells and other big telecoms groups, video services offer returns of double the 15 per cent they earn on basic telephone services. The Bell Atlantic-TCI deal has also given an urgency to the process, encouraging rivals to worry that they will have to pay higher prices for a cable partner or for programming later on. Others worry they may even be frozen out of one of these key markets.

Despite the mad scramble, however, some potential players seem content to remain on the sidelines. Disney, as one might have guessed, believes the studios should focus on production of programming, and need not pre-occupy themselves with owning the means of its distribution. On the other side of the same coin is AT&T, whose strategy 'doesn't hinge on owning a cable company or entertainment company', but instead involves supplying the new industry with long-distance high-capacity transmission and wireless lines, and with the equipment they will use to switch and distribute their services.

Into this category - at least so far - falls BT. The UK telecoms giant is linked with the MCI long-distance network in the US. But it has so far refrained from any investment in the 'traffic' that will supposedly race down America's new 'information superhighway', notes Neil Benedict, an investment banker with Dillon, Read and Company in New York who specialises in media properties.

'They haven't gone into the software or content side of things at all. What BT will do in all of this is of interest to a lot of people.'