IMPACT OF THE BELL ATLANTIC / TCI DEAL : Who’s Transforming Whom, and to What End?

When it comes to being brilliant, bold and visionary, Bell Atlantic’s proposed multibillion-dollar acquisition of John Malone’s Tele- Communications Inc. is eerily reminiscent of another technology-driven mega-corporate marriage: General Motors’ 1984 acquisition of Ross Perot’s EDS.

In fact, Bell Atlantic Chairman Ray Smith may soon find himself feeling an awful lot as former GM Chairman Roger Smith felt after the staid auto giant purchased Perot’s hot-shot computer services company.

Both Perot and Malone are ruthlessly effective entrepreneurs who don’t hesitate to play hardball. But where Perot is publicly outspoken to the point of ubiquity, Malone’s corporate machinations could have inspired Machiavelli to write a sequel to “The Prince.”

Reportedly, even Malone’s partners on QVC Network’s $9.6-billion bid for Paramount Communications were unaware of his Bell Atlantic maneuverings.

Just as Ross Perot wanted to use EDS to redesign and rewire GM’s massively dysfunctional nervous system, John Malone has wanted to redesign and rewire the nation’s technologically constrained telecommunications networks. Up until the Bell Atlantic announcement, TCI was his preferred medium for transforming the media.

So when it comes to building all those digitally interactive multimedia networks of the future, is Smith’s Bell Atlantic buying TCI with the idea of turning it into a high-bandwidth programming extension of the telephone system? Or does Malone look at Bell Atlantic’s massive telecommunications infrastructure and see the critical-mass medium for his own interactive ambitions?

In other words, is this acquisition about transforming a cable company into a telephone company, or making the telephone company a lot more like cable? Who gets to be the architect of that transformation?

The single most provocative question about the future of this acquisition may well be: What will John Malone be doing in three years? Everybody knows where the technology is going; but when push comes to shove, it’s the people who matter.

Presumably, Malone isn’t selling the nation’s biggest and most powerful cable company to become chief eunuch in Bell Atlantic’s multimedia harem. Similarly, Smith--unquestionably the most aggressive of the seven Baby Bell CEOs--isn’t buying TCI to accelerate his early retirement.

The technologies of cable and telephone may indeed be converging. However, that does not inherently mean the business culture of cable is converging with the business culture of the Baby Bells. A Malone couldn’t have risen to the top of a Baby Bell any more than a Smith could have built a TCI.

This acquisition is a multibillion-dollar bet that technological convergence can drive cultural convergence to create a company capable of providing the next generation of network media.

What’s so ironic about the Bell Atlantic/TCI move is that the former so recently won a landmark court ruling freeing it to transmit video and interactive programming over its own phone lines. What’s more, Bell Atlantic has been surprisingly successful in showing that new data-compression technologies actually make it possible for the local phone lines to rival cable as a video transmission medium.

The other Baby Bells are also actively exploring how they can turn the “local loop” into the equivalent of a cable TV video distribution center. Indeed, the network architecture of the telephone companies offers greater flexibility than the network architectures of the cable companies. That’s one of the key reasons why companies such as TCI and Time Warner have announced they will spend billions to rebuild their systems.

So at precisely the moment when Bell Atlantic has the video technology and legal freedom to rival cable, it chooses to go out and buy the nation’s biggest cable company. Clearly, there is a lot more going on here than the promise of new media technology.

Even if the phone and cable technologies don’t readily mix, Bell Atlantic/TCI is now a networking giant that rivals AT&T; in size, scope and programming content.

Indeed, this move strikes at the heart of one of AT&T;’s vulnerabilities. AT&T; now pays more than $14 billion a year in local access fees to the Baby Bells. For years, pundits have talked about how AT&T; could use cable companies to bypass the local phone companies. If the Baby Bells all tie up with cable operators, AT&T; bypass options may shrivel. Indeed, rumors were hot that AT&T; once explored an investment in TCI.

Of course, this move puts enormous pressure on the other Baby Bells to do something dramatic. Even more significantly, this is a move that must completely stun the global competition in Europe and Asia. There is nothing that would be comparable in size or scope to TCI/Bell Atlantic on either continent--where the traditional telecommunications and cable markets are still struggling to figure out how to best address technological change.

But the fundamental question here about this acquisition is whether market forces will create more and better choices for consumers or whether these industry convergences do little but establish multimedia oligopolies that require precisely the sort of reregulation the cable companies managed to bungle themselves into last year.

Ray Smith and John Malone have unquestionably made a gutsy move--but it may well be the government antitrust folks who get the last word on how this speculative market evolves.

Bio: John C. Malone

Malone is chief executive of Denver-based Tele-Communications Inc., the nation’s largest cable TV operator.

Age: 52

Birthplace: Milford, Conn.

Education: Received electrical engineering and economics degrees from Yale University in 1963; master’s degree in industrial management from Johns Hopkins University in 1964; master’s degree in electrical engineering from New York University in 1965; doctorate in operations research from Johns Hopkins in 1967.

Resume: In 1963, joined American Telephone & Telegraph Co.’s Bell Laboratories as economic planner; moved to consulting firm McKinsey & Co. in 1968. Named president of General Instrument Corp.’s Jerrold cable equipment division in 1970; three years later became president and chief executive of Tele-Communications.

Business philosophy: Famous for rapidly accumulating cable assets; now wants TCI to lead the convergence of computer, telephone and television technologies into a single new industry.

Bio: Raymond W. Smith

Smith is chairman and chief executive of Bell Atlantic Corp., a Philadelphia-based telecommunications company that plans to acquire cable TV giant Tele-Communications Inc.

Age: 56

Birthplace: Pittsburgh, Pa.

Education: Received industrial engineering and electrical engineering degrees from Carnegie Mellon University in 1959 and 1960, respectively, and an MBA from the University of Pittsburgh in 1967.

Resume: Joined American Telephone & Telegraph Co.’s old Bell System in Pennsylvania in 1959; was named president of of Bell Telephone Co. of Pennsylvania in 1977. Became president of newly organized Bell Atlantic in 1983 amid the AT&T; breakup; named Bell Atlantic’s chairman and chief executive in 1989. Also a part-time playwright and theatrical director.

Business philosophy: The most aggressive of the Baby Bells’ chief executives at pursuing video services, he is leading a charge to provide interactive TV to Bell Atlantic’s local phone markets.