WHAT THAT MERGER MEANS FOR YOU The wiring together of cable and telephone by Bell Atlantic and TCI will be good news for consumers and U.S. competitiveness.
By John Huey and Andrew Kupfer REPORTER ASSOCIATES Jane Furth and John Wyatt

(FORTUNE Magazine) – NOW THAT the initial shock waves from that oh-so-sexy $32 billion Bell Atlantic-TCI deal have subsided, the best way to understand its implications -- for the economy, for society, for your business, for you -- is to stop thinking about it in terms of the Eighties paradigm: the swashbuckling, ultrarisky business deal. True, it was the bold stroke of two captains of industry bent on securing their share of whatever booty washes ashore when the interactive age finally arrives. That's okay as a story line, but it's no Barbarians at the Gate. Think of this as the first deal of the Nineties. As compelling as the personalities are, they are virtually irrelevant. This was a deal driven by the inexorable advance of technology that is going to change the way we live and work as surely as did the advent of the television, the jet plane, and the personal computer. That advance will continue and will spawn deal after deal based on the same underlying digital dynamics. The decision by the most aggressive telephone operating company in the U.S. to acquire the nation's largest cable TV company was an information-age coupling -- more effect than cause, more a defense than an offense, and having to do more with things coming together than falling apart. The most immediate effect of the merger is that it slams home this stunning truth: Ways of communication we all grew up with are going by the boards. The information highway -- formerly just a hazy image on the distant horizon of the 21st century -- is coming into focus as a radically different, computer- driven communications infrastructure. Sure, the deal stirs up critical questions that remain unanswered -- how, for example, can all this be regulated wisely? -- but it clears up more than it muddles. Some truths that are now apparent:

-- The superhighway will pave over distinctions between phone and cable companies. In the process the neat mental boxes into which consumers, regulators, and investors segregate broadcasting, cable TV, and telephone service will disappear. Also, forget the ''500 channel'' fantasy. You won't experience the brave new world that way. Your TV and your computer will connect to the outside in much the same way that telephones do now: directly and instantly via powerful switches to any programming or information source or any other TV or computer. They won't be limited to 500 channels. So cable TV companies will either transform themselves into telephone companies with the capacity of transmitting video, or be swallowed by them. Says Gerald Levin, CEO of Time Warner, the No. 2 cable operator, which earlier this year signed up US West for a $2.5 billion strategic investment: ''The central symbol of all that is going on is the switch. We're all going to end up with phone companies as partners.'' Levin stresses, however, that Time Warner's strategy centers on owning copyrights to products that will travel along the highway. -- The interactive future is still miles away. Much of the hardware and software needed to operate all the multimedia bells and whistles you've been promised doesn't yet exist. But it will. The computer industry functions best when it can focus on some stiff challenge, and this is perhaps its stiffest yet. ''We believe the notion of the information highway is the future of Microsoft,'' says Nathan Myhrvold, technology guru of Bill Gates' software giant. ''It's the future of computing. It's the future of communications, and it's the future of software.''

-- Convergence will be the buzzword for the rest of the decade. This isn't just about cable and telephone hopping into bed together. It's about the cultures and corporations of major industries -- telecommunications (including the long-distance companies), cable, computer, entertainment, consumer electronics, publishing, and even retailing -- combining into one mega- industry that will provide information, entertainment, goods, and services to your home and office. The pace of change, and the attendant chaos, will rival that which followed the collapse of the Berlin Wall.

-- Get ready for all sorts of weird corporate marriages. In retrospect it's hard to believe that way back in 1989 the idea of Time Inc. combining with Warner Communications seemed radical to so many people. Or Sony buying Columbia. Or Matsushita buying MCA. And today it seems equally difficult to fathom that some company called QVC -- known mostly for selling cubic zirconia rings on late-night cable TV -- is waging a highly credible takeover bid for entertainment giant Paramount. All this is just the beginning. When the dust settles, there will probably be eight to ten major operators on the highway, some earning their way mainly by collecting tolls for the use of their networks, others more by providing ''content.'' Many of these operators will likely be grownup Baby Bells; don't be surprised to find General Electric or IBM weighing in as a partner. Bell Atlantic is now clearly the front-runner. US West, in its alliance with Time Warner, is also a major contender. (FORTUNE is published by a unit of the $13-billion-a-year Time Warner empire.) But other players will soon emerge. ''Right now everybody is talking to everybody,'' says John Clendenin, CEO of BellSouth Corp., a Baby Bell. In an interview a few months ago, Bell Atlantic CEO Raymond Smith used exactly the same phrase.

-- Today's regulatory system will go the way of the vacuum tube. Bell Atlantic will probably be able to complete its acquisition of TCI. But the deal must run a gauntlet that includes an antitrust review by the Justice Department and the scrutiny of Judge Harold Greene, America's telecommunications pope, who oversees the consent decree that broke up AT&T in 1984 and created the Baby Bells. In addition, regulatory commissions in virtually every state are likely to raise objections; consumer advocates such as Ralph Nader will weigh in early and often. A key issue will be that of ''universal service.'' Phone companies today are required to provide basic services to every customer in their region at the same price, regardless of the cost of installation, which can be relatively high in remote areas and crowded city centers. Cable companies don't have to. But none of these hurdles are likely to stop the almost orgasmic momentum of this technology-driven synthesis.

-- Maybe too much TV watching really has made America stronger. Backers of the deal make a strong case that it's good for U.S. competitiveness in the global marketplace. Says Daniel Akerson, CEO of General Instrument, a $1-billion-a- year maker of cable TV equipment in Chicago: ''Nobody is even close to the U.S. in communications. We're ten years ahead of Europe, and in five years we'll be 15 years ahead. We're five years ahead of Japan, and in five years we'll be ten years ahead.'' It wasn't patriotism that drove Bell Atlantic and Tele-Communications Inc. into each other's arms. Although Bell Atlantic had been the most aggressive of the Baby Bells in adding video technology, Smith felt that unless he made a daring move, his Philadelphia company would be picked apart by vultures. Cable operators had announced plans to soup up their networks and start offering telephone service, which would cut into revenues Bell Atlantic receives from AT&T, MCI, and Sprint for completing long-distance calls. And AT&T threatened Bell Atlantic's lucrative cellular telephone business with its recent purchase of McCaw. Meanwhile, TCI probably lacked the wherewithal to jump into the information age by itself. The Englewood, Colorado, company was strapped with a $10 billion debt load and facing a potential drop in revenues as a result of the 1992 Cable Television Consumer Protection and Competition Act, which regulates the rates cable operators charge. Bell Atlantic will supply the huge sums necessary to upgrade TCI's networks. The deal also gives TCI, generally regarded as the industry leader in political ineptitude, a smart Washington ally. TCI has regularly enraged television programmers and their Washington friends. It has used its size to get as much as possible from other cable operators for carrying programming in which it has a financial stake, such as CNN and TBS. It has occasionally denied cable TV programmers, such as the Learning Channel, access to cable systems it owns. And it has done so arrogantly, led by a CEO who seems to have a cutting remark for every occasion. Says the owner of a small Midwestern cable system: ''John Malone is single-handedly responsible for the 1992 Cable Act.'' The smartness of the merger notwithstanding, some observers note that Bell Atlantic paid handsomely for its acquisition. The common stocks of TCI and its sister company Liberty Media together were selling for about $16.2 billion just before the deal was announced. Although key particulars remain to be determined, Bell Atlantic could end up paying close to $22 billion for the equity. That's a 35% premium. But even at such a rich price, the deal probably adds up for Bell Atlantic. According to Eastern Management Group, a consulting firm in Parsippany, New Jersey, the company would have commissioned a ''make or buy'' analysis before deciding on the purchase. To replicate TCI's cable network with telephone technology would have cost some $23 billion and taken between six and 20 years. And when that work was done, Bell Atlantic would still have had to lure cable customers away from TCI. Says Eastern's David Yedwab: ''The make or buy was a no-brainer decision. The only surprise is that Bell Atlantic was the first phone company to make an aggressive move on buying TCI.'' The Bell Atlantic-TCI combination makes economic sense even without the proliferation of digital technology, since it guarantees access to millions of American households. That's a good thing, because the digital future could be five or more years away. Says Levin of Time Warner, which is developing an ambitious digital interactive pilot project in its Orlando, Florida, cable system: ''There is a fixation out there with the architecture and the words of interactive multimedia, but no appreciation for the degree of difficulty in delivering it technically, or for the development of the software that will stimulate the consumer marketplace.'' ONE OF THE FEW sure-fire market bets would seem to be video on demand, or the virtual VCR, a system through which a viewer could summon a movie, stored digitally in the cable supplier's central office or an independent video warehouse, and stop it, start it, rewind, or fast forward it at will. Such a system could make the video rental business -- a $13-billion-a-year market -- obsolete. But creating a virtual VCR for millions of viewers at low cost is a vexing challenge for computer designers. Conventional mainframes can handle only 50 to 100 movie viewers at the same time. The job will probably require new kinds of supercomputers. In the long run, to justify the billions invested, the builders of the information highway will have to reap huge gains. Some profits will flow from video telephony, home shopping, full-motion video games, and interactive information systems. But the biggest money probably lies in some service or form of entertainment that hasn't yet been invented. The more immediate stumbling block on the way to interactive realization is the amazingly rococo regulatory structure that oversees the U.S. cable TV and telecommunications industries. Because they grew up at different times and under completely different circumstances, the industries are regulated in ways that, in light of the Bell Atlantic and other mergers, seem increasingly nonsensical. Soon, for example, TV signals and telephone calls will be digital, passing through wires in the ones and zeros of computer language. Yet current rules would treat digital bitstreams differently if one carried a voice signal and another video. And even signals of the same type would be regulated differently if one came from a cable company and the other from a telephone company. Adding to the regulatory confusion is the pressure by AT&T to compete for local phone service, and by the Baby Bells to compete in the long-distance arena. One ideological issue -- that of universal service -- is certain to dominate the political debate. Says Edward Markey, the Massachusetts Democrat who chairs the House Energy and Commerce Committee's Telecommunications and Finance panel: ''We have to ensure that we don't divide the country along lines of access to information and create a society of information-rich and information-poor. Every American should have an upgrade from the telephone wire that's gone into every home over the last 60 years.'' Till now, most people have supported the universal-service doctrine, in the belief that connecting everyone to the network has served a higher purpose of nation building. But how to distribute fairly the burden of providing universal service in the new competitive world? Lawmakers are not likely to make owners of cable TV systems spread their networks to every nook and cranny of America just because the networks start carrying phone calls. A better way might be to have communications companies contribute to a special fund, from which the companies can draw when they hook up remote, high-cost customers. Poor people might receive vouchers for lifeline services, paid for by the fund. Also of concern to lawmakers and regulators: how to ensure competition during this era of rapid consolidation. Congress will probably require that every household have access to service from at least two carriers -- for now, a phone company and a cable company, and eventually, rival phone-cable hybrids. For all the excitement they've begun to generate among investors, the new wireless services for phone calls and data transmission probably won't qualify as competition. Americans increasingly will use cellular phones and other wireless devices when on the go, but when they're at home or in the office, wire will still be king. Wires are more resistant to interference, and the wireless radio spectrum is chopped into channels too small to carry high- quality video. BELL ATLANTIC'S acquisition of TCI, along with other power alliances in the communications industry, changes the prospects for many companies. Small cable operators will both win and lose. They will become more valuable as properties to be acquired, but by themselves they will be less important. Says David Yedwab of Eastern Management: ''If I owned a cable company right now, I'd put out a FOR SALE sign and give the listing to the local realtor.'' So-called alternative telephone companies such as Teleport Communications Group and MFS Telecom, which enable business customers to bypass the local telephone company, will become less of a factor as powerful new cable/ telephone companies emerge in major markets. Teleport is already owned by cable companies. AT&T and other long-distance companies, by contrast, are sitting pretty. A plugged-in populace will mean more traffic on their networks. AT&T will sell information-highway gear to cable and telephone companies -- switches, video compression equipment, operating support systems, and software. AT&T also will market digital services that use its own switches and computers. And local competition should save AT&T some of the access charges it pays regional phone companies to complete long-distance calls. Last year such charges amounted to $18 billion, fully 70% of AT&T's telecommunications service expenses. Broadcasters will continue to have a tough time negotiating with cable companies but should see relief in the long run. CBS, for example, was recently forced to let cable operators retransmit its programs for free. Since cable companies have virtually no competition in their markets, CBS had to go along if it wanted its shows to reach cable customers. Now TCI is becoming part of a company with even more negotiating clout. But eventually each market will have more than one company with a video pipeline into the home, and that will increase broadcasters' bargaining power: If Bell Atlantic-TCI won't cough up retransmission fees for CBS shows in, say, Westchester County, New York, and Skokie, Illinois, perhaps Nynex and Ameritech will. ALL THIS CHANGE represents a maturing of the cable industry. In the process something of the industry's bad-boy spirit, personified by swaggerers like John Malone, is likely to fade. A big city today might have a balkanized cable grid with eight or nine operators that each use different technology. In the future, though, if customers of different cable companies are to communicate with each other, the industry will have to adopt common standards. Says Eli Noam, a former member of New York State's Public Service Commission who directs the Institute for Tele-Information at Columbia University: ''Precisely because they will become end-to-end carriers that can do all sorts of things, they will have to cooperate and collaborate with each other.'' Once that happens, consumers should be winners too -- provided that regulators free the market for devices such as set-top boxes that attach to the network. Common cable standards would mean that consumers could buy any set-top box and use it to connect their phones, faxes, modems, and so on to the information highway. Just as they own the telephone wires in their houses today, they will own the conduits that carry voice and video images in the digital future. Two wires -- one owned by the descendant of today's telephone company and the other by the descendant of today's cable company -- will carry . signals to the side of each house, and the powerful consumer will pick and choose between them to link the household to the whole world.


Faced with growing competition from cable rivals, whose wire is a splendid way to distribute voice and data as well as video, America's regional telephone companies are making love, not war. But much of the most valuable real estate has already been claimed. The areas in red (right) account for 33% of the 58 million U.S. cable subscribers.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: BELL ATLANTICS'S OUTSIZE BET The phone companies' intial forays into cable were timid. Then along came Bell Atlantic. Its proposed merger is the biggest bid for turf on the info highway since Time Inc.'s $14 billion purchase of Warner Communications in 1989.