Wall Street is turning back flips about the looming 1980s-style takeover battle over Paramount Communications Inc. The protag onists are Paramount's Martin S. Davis, who played the 1980s take over game with abandon, and is now the target; Davis' proposed friendly merger partner, Sumner M. Redstone's Viacom, the creator of MTV, and the hostile bidder, QVC Network, Barry Diller's cable home-shopping network, backed by cable mogul John C. Malone, head of Tele-Communications Inc., as well as Comcast Corp., another television and cable powerhouse.
It's a striking cast of characters, and the deal is certainly big--the top price on the table late last week, was QVC's $10.1-billion cash and stock offer. And it will surely get bigger; the bidding war has only just started and other industry heavyweights--including Ted Turner, Capital Cities/ABC and several "Baby Bells"--are sniffing around the fringes of the battlefield.
Even better, some of the players are motivated by true personal animosity. Diller, who put the Fox TV network on the media map, was forced out of Paramount by Davis a decade ago. It's no secret that he would love to return the favor as soon as he takes over as Davis' boss--altogether ideal stuff for a Paramount made-for-television movie.
Beneath the soap opera scenario, however, lies some solid business logic--at least according to current conventional wisdom. There is so much interest in Paramount because it is one of the last independent media companies, and media--particularly any company that can lay claim, however remotely, to the mantra "multimedia"--is a hot property today.
Railroads were the engine of industrial growth in the latter 19th Century, steel and automobiles in the first half of the 20th. Computers have dominated for the past 20 years, and now, for the rest of the 20th Century, "interactive multimedia" communications--sound, images, data coming at you all at once and, presumably, streaming back from you at the same time--is where the action is.
In the past few years, there has been a wave of alliances, partnerships and acqui-sitions--often among some truly alien bedfellows--as big companies and small scramble for a seat before the boat leaves the dock. Time Warner has a partnership with almost everybody, as do IBM and Apple, most astonishingly with each other. Baby Bells and cable companies, bitter enemies for the past decade, are forming alliances. AT&T;, Apple, IBM, the Baby Bells and the Japanese consumer electronics giants, like Sony and Matsushita, are investing, often as partners, in a gaggle of Silicon Valley start-ups, like General Magic and 3DO.
What is fueling this feverish activity is the gradual merger of computer and communications technology. Traditional communications, like over-the-air TV, or the telephone, are "analog" technologies--that is, electromagnetic waves imitate the pattern of the image or the sound they are transmitting, just as the wiggles of the needle in a record player mimic the wave pattern of the music being reproduced. Inevitably, analog signals are prone to interference--the dust in the record groove--and, like TV signals, can degrade badly with distance.
Computers are a "digital" technology, that is, strings of 1s and 0s code instructions for the computer, or for a sound speaker, or a TV screen. The advantage of digital technology is that it is so crisp and precise--there is no needle hiss on a compact disc. The disadvantage is that the amount of data required to store pictures or sound is huge. Just a few seconds of movie-quality video take up far more storage space than is available, for example, on the hard disk of the average personal computer; transmitting digital pictures over a phone line was inconceivable until very recently.
But just within the past few years, a series of brilliant technical advances have made digital communications cost-effective for the first time. Many major companies already have lifelike video conferencing. It is possible, or soon will be, to send moving pictures over phone lines.
A traditional analog signal, like a radio wave, is a onetime thing; it is beamed out to the universe and is gone. A digital signal can be captured and stored. Once captured it can be easily changed--in a "virtual reality" movie, you can become part of the plot, interacting with the characters. Game manufacturers and entertainment companies, predictably, are salivating at the prospects. Industry spokesmen speak high-mindedly of the opportunities for, say, education, pretending not to notice the gold mine in high-tech pornography.
So something important is going on, and Wall Street is right to be excited. But it's one thing to know there are grounds for excitement, in general, and quite another to know that any particular deal makes sense.
The truth is, nobody knows when or how the multimedia revolution will happen. To take just one example, cable companies believe that being able to pipe 500 or 1,000 or even more channels into a home will give them an unbeatable advantage. Cable easily accommodates video data rates and will leave plenty of room for viewers to talk back--say, to buy things, participate in game shows or ask questions in a video classroom.
The telephone companies point out, however, that cable companies, just like traditional broadcasters, are stuck with a hub-and-spoke system--the cable company at the hub can send signals out to consumers and consumers can send them back to the hub, but consumers can't contact each other.
Telephone technology is about switching. Individuals, or businesses, or game vendors, or whoever, can connect individually to each other. You could call up the shopping catalogue from the only pet store in the world that sells platypuses, or choose to watch any movie whenever you wanted. Cable companies, in the meantime, are working on a variety of technical gymnastics with wireless systems to give them a switching capability, too.
Finally, many analysts argue that it will be the software that counts--that is, who owns the movies or games rather than who owns the carrier system. That same logic, of course, is what led Sony and Matsushita to throw away billions of dollars on American movie studios.
On its own, the Paramount deal may be a good one at the current price range. The company owns lots of movies and TV re-run rights that will generate revenues for a long time. But when prices start escalating because of some frothy "multimedia" rhetoric, shareholders should remember there were good reasons why the leveraged-buyout craze ended, and start worrying about their wallets.