Attention, Shoppers

Stephen A. Booth is senior editor of Television Digest, a newsletter covering the telecommunications, broadcasting, computer and consumer electronics industries.

Consumers will benefit from telecom mergers

The feeding frenzy continues unabated in the telecommunications industry of phone services and cable TV providers. One outcome of this appetite for acquisition will be a menu of new services for U.S. households that includes electronic shopping--certainly for music and possibly the Shangri-la of video-on-demand.

By now the shock has worn off from AT&T's absorption of TCI and MediaOne, which made the telco the largest U.S. cable carrier with 16 million of the nation's 70 million cable TV households.

Meanwhile, Microsoft co-founder Paul Allen's Charter Communications recently emerged as the No. 4 cable carrier (5.5 million subs) following a closely spaced series of acquisitions. Allen's old partner. Bill Gates, has been spreading Microsoft's largess among the telecom's worthy poor--a billion here to No. 3 Comcast. $5.5 billion there to AT&T Now the software giant is considering a joint bid with Germany's Bertelsmann to acquire the cable assets of Deutsche Telekom, formerly one of Europe's many sleepy state-run telco monopolies that are now publicly traded. For the record. Bertelsmann's media empire ranks just behind Time Warner and Disney with some $18 billion in revenues--and happens to be the 50 percent partner of America Online in Europe.

Had enough? There's plenty more, but you'll need a scorecard to tell the players, and you'd best mark it in pencil as the lineups keep changing. More important, if the purpose behind the various telecom mergers and other alliances seems befuddling, just think of the early development of railroad systems in the United States.

More greenbacks were riding that iron horse than the pay-out from collecting retail passenger fares. The real jackpot was the wealth to be earned in freight--and residuals charged to shippers for warehousing goods in railroad-owned facilities along the right-of-way (even watering fees for cattle driven to the rail depots). Similarly, today's telecom titans envision making fortunes in moving freight electronically. And they plan to collect both ways--from consumers as well as the sellers.

The recurring revenue from "e-tailers" likely will be whatever the traffic can bear. The middleman's take is proprietary information and varies by product category and volume, but even fees in the single-digit percentage range will bring a tidy sum if a mass market emerges in electronic drayage.

In theory at least, the access fees giving consumers entree to the e-mall ought to be reasonable, if only to "aggregate eyeballs" in terms of the older broadcast business model. An extreme example of "reasonable" comes from Europe, where Internet access remains more expensive than in the United States. How about free--that Pavlovian stimulant possibly second only to sex in raising attention levels?

One way to aggregate potential e-commerce customers is to offer no-cost Internet service through a merchant or manufacturer's Web site. The giant Dixons retail chain became the U.K.'s largest Internet service provider by virtue of offering free Web access through its Freeserve site--and is banking on the 1.5 million visitors to purchase an item or two from the gracious host while passing through. Sony plans to follow suit in Germany and the United Kingdom soon with its Friend Factory site, which will sell the company's electronics wares as well as lifestyle products from others. Sony says it hopes to have 5 million subs in three years.

While the communications companies have figured out how they'll benefit from this virtual El Dorado, what's in it for consumers?

Possibly lower product prices, for one thing. E-commerce will rewrite most of the rules of bricks-and-mortar retailing. A top RCA executive relates how a mom-and-pop dealer in the Midwest has, in effect, become a national account owing to online selling. It's possible for such retailers to compete with physical stores in distant markets due to the lower costs of doing business on the Web and, at least for the time being, the allure to out-of-state shoppers of taxfree purchases.

Another fringe benefit comes in the form of instant gratification, at least for some e-commerce commodities. Compared with durable merchandise that still needs to be warehoused and shipped, intellectual property such as music and literature can be distributed electronically for near instantaneous delivery. Companies such as AT&T expect that entertainment will be the sledgehammer driving the biggest stakes in e-commerce--not just the music from garage and alternative bands that are readily available for downloading now, but mainstream acts from major record labels.

The recent alliance among the Bertelsmann and Universal music groups, AT&T and Panasonic parent Matsushita Electric provides a case in point. The record labels, which together account for more than 40 percent of U.S. music sales, will provide the content for AT&T to distribute to the U.S. households that its phone lines and TV cables serve. The music will be compressed for speedy downloads using AT&T's a2b format and encrypted by Matsushita to prevent unauthorized copying or outright piracy.

The deal leverages the core competencies of the partners, according to David Nagel, AT&T's chief technical officer and president of its labs. "Creating a networked digital music industry is akin to creating a new economy," he says. "We need to work together on the infrastructure--the roads, the airports and the utilities."

Scott Dinsdale, chief technical officer at Bertelsmann's BMG Entertainment, doesn't downplay the complexity of building that new economy. He characterizes digital distribution both to retailers and directly to consumers as "a much broader puzzle than most realize" and one that "requires the expertise of many industries."

This isn't the only such deal for music e-commerce in the United States--Sony Music has said it will team with Microsoft to sell tunes online--but it is the first major venture that involves a telecom distributor.

In Japan, meanwhile, Nippon Telephone and Telegraph, the world's largest telco, will test music e-commerce this fall with a consortium of partners that includes music and electronics vendor Victor Co. of Japan (known here as JVC). And this summer, Sony Music in Japan will begin selling singles by satellite, to subscribers of the SkyPerfecTV service. Subscribers will store the music they download on digital MiniDisc recorders connected to their satellite TV receivers.

Satellite distribution also is being used for trials of electronic publishing this summer by a consortium of 140 publishers and booksellers in Japan. For the test, downloads go to kiosks at a variety of merchants including convenience stores, where the literature is stored on diskettes for reading in portable and desktop PCs. But when full-scale service is launched next year, the e-literature could be piped directly to homes, and customers will have the option of storing it on MiniDisc for reading on a paperback-size device with LCD screen.

The two enabling factors for e-commerce in intellectual property will be copyright protection and broad bandwidth.

Various encryption and digital water-marking technologies are already available or under development to prevent unimpeded copying of intellectual property. So are the necessary back-office systems to track royalties and control the use of the material-so-called "digital rights management."

But before c-commerce in entertainment can take off, the right-of-way (60 miles astride the tracks for the pioneering U.S. railroads) needs to be widened to make for easy and swift downloads or streaming.

With today's 56-kilobit-per-second PC modems and twisted-pair copper phone lines, receiving bandwidth-hungry audio files-let alone video-is an experience matched only by watching paint dry The wide but costly T1 telephone pipes accessible to college students and corporate freeloaders won't ever become a fixture in homes. But digital cable modems and DSL (digital subscriber line) phone service will do the trick. One objective of the telecommunications megamergers is to upgrade the physical plants to deploy these links quickly with the e-commerce pot of gold at the end of the line justifying the financial investment.

That investment carries some risk, in the form of competition from broadcasters. Digital telecasts-from local terrestrial stations or satellite services such as DirecTV and EchoStar-are a potential outlet for c-commerce. It's certainly possible, considering the ability of conditional-access "smart card" systems to address (and bill) individual households and the availability of mass-storage recorders for the home in the near future. But given the one-size-fits-all nature of broadcasting, any c-merchandise is likely to be limited to programming for which there's a mass audience.

COPYRIGHT 1999 BPI Communications, Inc.
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