Focus: Shifting web of digital alliances

THINK OF it as medieval Europe, with shifting combinations of kings, princes, barons, the church and city-states forming into rival leagues and alliances. But this is not about religion or land. It is about control of technology and communications.

Slowly, dimly, the shape of a new corporate world is coming into shape in America and Europe, built around wireless, cable, telephone and satellite. It is at an early stage, but already key figures in the industry have assembled vast webs of intricate alliances, cross-ownership and partnership. Bill Gates of Microsoft, Michael Armstrong of AT&T and John Malone of Liberty Media Group are at the heart of a set of interlocking corporate structures that resemble nothing so much as the Holy Roman Empire. And their influence is rapidly expanding to Britain.

At stake are the "pipes" down which new digital services will go, the software and the boxes that relay and shape them, and their content. As telephony and television move towards digital services, it makes increasingly little difference whether the 1s and 0s that are carried over wireless, cable or telephone lines represent soap operas, e-mail or a conversation with your mother. The race is on to develop the "broadband" channels to shift more information faster. Remember the idea of the "information superhighway"? This is it, or will be.

Microsoft, the software giant based in Washington state, has been leading the dance for the past few weeks. Buoyed by a $20bn (pounds 12.5bn) cash pile, Bill Gates has struck a series of complex deals that put him at the centre of the empire building. Mr Gates is steering the company through the transition from a reliance on personal computers and their software, to the Internet, interactive services and the devices that accompany them. A deal earlier this month gave Microsoft a $5bn stake in AT&T, in exchange for the telecoms behemoth's promise to use Microsoft technology in its set-top boxes.

But why is a telecoms company involved in set-top boxes, the gadgets that drive cable television? Because AT&T, in one of the biggest and most important media deals of the decade, has bought TCI, the second-largest cable company in the US. For AT&T, TCI was the way to link itself to millions of homes across the country and gain access to the local telephone market. Michael Armstrong, AT&T's chairman, is himself working to shift AT&T from being America's long-distance operator into a dominant presence in the local market.

The third partner in this complex alliance is John Malone, who built TCI. He has woven webs of corporate control that give him a finger in every digital pie. TCI had a valuable asset for Armstrong: coaxial cables plugged into 11 million homes.

When AT&T bought TCI, Malone won a unique position. Although Liberty Media is a wholly owned subsidiary of AT&T, it operates autonomously under his control. It has a $5bn cash stockpile, and continues to build on its stakes in entertainment and media companies. Malone's latest big move was to buy an 8 per cent stake in Rupert Murdoch's News Corporation, making him the second biggest shareholder after members of the family.

Together, these three individuals and their companies control a big chunk of what might become the information superhighway. The next battlefront may lie in Britain. Malone already has stakes in Telewest, the second largest cable company in Britain, and Flextech. As part of its deal with AT&T, Microsoft is buying a near 30 per cent stake in Telewest to add to an existing stake in NTL. It is also rumoured to be holding discussions with Cable and Wireless Communications, thus encompassing all three of Britain's leading cable TV companies. Britain - with its newer and more technologically advanced cable network and rising levels of Internet penetration - is the next logical step.

None of these tie-ups is a hard and fast alliance. Each of the individuals involved is smart enough to know that the market changes every few months, and tough enough to go where their own interests take them. Not for nothing are the new alliances referred to as "co-opetition" - a mixture of competition and co-operation.

To understand these somewhat byzantine relationships, consider the deal that gave AT&T control of the MediaOne, the third biggest cable television company in the US. MediaOne was wooed by both AT&T and ComCast, the fourth largest cable company. Microsoft, AOL and MCI WorldCom, the second largest long-distance telephone operator, all circled the deal like feudal barons watching a desirable piece of territory under siege. Each reportedly considered helping ComCast to top AT&T's deal. Microsoft, after all, owns an 11.5 per cent stake in ComCast. But instead, it stood on the sidelines and parlayed that into a tie-up with AT&T itself. Microsoft also gained MediaOne's 29.9 per cent stake in Telewest, and ComCast got two million cable subscribers. The spoils of war, in other words, were shared out.

Not everyone is in on this carve-up. Another army is being assembled around Steve Case and his Virginia-based AOL. While Microsoft, AT&T and Liberty have put their faith in cable, AOL is pushing towards telephone, and in particular Digital Subscriber Lines, new ultra-fast lines. Case has tie-ups with Bell Atlantic and SBC, two of America's local telephone companies; DirecTV, a digital satellite TV provider; Hughes Network Systems and Philips Electronics, which will build set-top boxes; and Network Computer Inc, which will put the software in them. NCI is part-owned by Oracle, another software company that is on the other side of the lines from Microsoft. AOL, in turn, now owns Netscape Communications, the browser rival to Microsoft, and has an alliance with Sun Microsystems, the software company that is permanently at daggers drawn with Mr Gates. If the MS-AT&T-Liberty camp is the Empire, then these are the Rebels.

Not everyone is delighted to see the communications world being sliced into giant baronies. To some, co-opetition looks like collusion. Microsoft is already the subject of a competition case; AT&T and the local telephone companies only emerged as a result of the enforced break up of America's telephone system; and the cable market is starting to look unduly concentrated. There are stirrings in Washington, with a proposed Bill that would guarantee all Internet service providers access to the cable network, regardless of who owns it. The degree of interconnection between the giants is prompting concern that markets are being stitched up.

It is probably too early to judge. None of these deals is the last word. There are other competitors waiting to make their move, including Yahoo, IBM and the other hardware manufacturers, MCI Worldcom and the television networks.

At the moment, the idea of convergence - putting overlapping technologies together - is dominant, as everyone races to get access to consumers and a secure place for their technology. But as the market shifts, it may be that those striking alliances now will start to find their interests diverging again.

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