Cable-Phone Mergers: ‘Synergy’ or Monopoly?

To fully appreciate the genius of US West’s $2.5-billion “multimedia” investment in Time Warner Entertainment, you have to understand CEO Math. If you or I claim that 2 plus 2 equals 5, then we are destined for a tough time in life. When Fortune 500 CEOs assert that 2 plus 2 equals 5, however, it’s called “synergy” and they’re hailed as visionaries.

US West’s Richard McCormick and Time (The Wages of Synergy Is Debt) Warner’s Gerald Levin proclaim that their new media alliance of cable television and telephone wire literally paves the way for the information highways of America’s future.

The multimedia whole, they insist, will be greater than the sum of the conventional media parts. This investment is only the beginning of a grand convergence that will see more cable companies merging into telephone companies. A brave new world of information services--including Time Warner movies and interactive games--will flow through these networks, bringing a happy mixture of profit and customer satisfaction.

Let’s see, the regional Bell operating companies--which have some of the least innovative, most conservative managements around--are going to team up with the cable TV companies--which did such a nifty job of customer service and pricing that they got themselves re-regulated by Congress--and build America’s next great digital medium. Brilliant CEO visions of synergy are wonderful, but what you really need is a genius for implementation. That’s simply not here.

At the regional Bell operating companies, for example, top managers believe that call-waiting and voice mailboxes represent bold technological innovations; it’s simply not in their culture to collaborate synergistically with other companies.

While Time Warner Chairman Levin has a genuine feeling for technological innovation, his company is run more like a media conglomerate than an organization that has figured out how to blend movies, music, magazines and video games into new media revenue streams. The idea that this is a marriage made in multimedia heaven reflects infatuation with media hype more than appreciation of telecommunications market dynamics.

Indeed, you could make just as strong a case that this combination of cable TV companies and telephone giants will retard the development of digital highways. Instead of stimulating competition, investments such as this may actually reduce it.

Remember a few years ago, when the pundits predicted that cable TV and telephone companies would compete with each other to wire the home? Now, it seems, they’re going to get in bed with each other. Is that really what’s best for media consumers? Or does it raise the specter of cartelization, in which these entrenched companies use their proprietary networks to block or limit market access to entrepreneurs?

These companies are understandably less interested in building the digital highways of the future than the digital toll roads--they get to set the tolls and you may have to drive their multimedia vehicles, as well. It would be as if Chrysler, General Motors and Ford got together to privatize the nation’s interstate highway system into a pay-per-drive network. Would that be in the best interest of America’s commuters and truckers?

Now, it’s terrific that these giant companies are confident--or arrogant--enough to believe that they can create and define tomorrow’s multimedia networks. But remember, the regional Bell operating companies and America’s cable companies grew big and profitable under the shelter of public regulation.

These companies didn’t have to compete to succeed--they were both de facto and de jure monopolies. Now we see these monopolies trying to marry each other. Is this what’s best for the public interest? Is this the kind of market structure that promotes entrepreneurial creativity, price competition and innovative services? Or is this the kind of market structure that best protects the interests of established companies?

Given the consumer experience with cable television and local telephone service, it’s not unfair to ask what kind of competitive pressures will generate reasonable prices and innovative services. Don’t forget quality customer service! To what extent will these “tele-cable” networks be interconnected and inter-operable? Maybe we need the same sort of “open architecture” approach to network designs as we see in today’s successful personal computers. So, should there be one standard or many? What portion of these networks will be “common carriers,” and what portions should be proprietary?

The fundamental question here is whether market forces will create more and better choices for consumers or whether these industry convergences will do little but establish a multimedia oligopoly that requires precisely the sort of re-regulation that the cable companies managed to bungle themselves into last year.

The hype and hoopla surrounding the multibillion-dollar US West investment in Time Warner Cable will evaporate the moment both companies discover how difficult it is to translate their visions into compelling, cost-effective network services--or the public discovers just how much the company wants to charge for them.

You can run the numbers any way you want, but even in the El Dorado of Multimedia, 2 plus 2 never equals 5.

Michael Schrage is a writer, consultant and research associate at the Massachusetts Institute of Technology. He writes this column independently for The Times.