1
Overview

Digital convergence—combining computing, communications, and entertainment—is taking shape in the form of new kinds of business and consumer products (goods and services) and new business ventures and alliances. It has become a regular topic in the business, trade, and mass media, yet it remains hard to define and hard to interpret in terms of its ultimate technical, business, and societal ramifications. The very term ''convergence" is itself a source of confusion and ambiguity; see Box 1.1. As Samuel Ginn, former chairman and chief executive officer of Pacific Telesis Group, observed at the colloquium that served as a basis for this report,

The whole term "convergence" continues to take on new meanings. Originally, we thought it was the combination of media and telecommunications. Then we discovered that set[-top] devices were a key part of that convergence, and then we understood that storage technology was important, and indeed, semiconductor manufacturing, and then the whole applications arena and the programming arena. Now, we understand that games and transactions and retail firms are all a part of this convergence. So this whole idea continues to evolve.

As a result, the true nature of digital convergence may not be reflected accurately by either its advocates or the popular media. Illustrating the swings in opinion, sample headlines and news story themes between mid-1993 and mid-1994 included "Multimedia Is Growing by Leaps and Bounds"; "Race for Multimedia Crown Speeding Up: Companies Team to Get Jump on Interactive Services"; "Merger to Create a Media Giant"; "With Merger's Failure, an Industry Seeks a Leader"; and "Hurdles Slow Information 'Superhypeway.'"



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1 Overview Digital convergence—combining computing, communications, and entertainment—is taking shape in the form of new kinds of business and consumer products (goods and services) and new business ventures and alliances. It has become a regular topic in the business, trade, and mass media, yet it remains hard to define and hard to interpret in terms of its ultimate technical, business, and societal ramifications. The very term ''convergence" is itself a source of confusion and ambiguity; see Box 1.1. As Samuel Ginn, former chairman and chief executive officer of Pacific Telesis Group, observed at the colloquium that served as a basis for this report, The whole term "convergence" continues to take on new meanings. Originally, we thought it was the combination of media and telecommunications. Then we discovered that set[-top] devices were a key part of that convergence, and then we understood that storage technology was important, and indeed, semiconductor manufacturing, and then the whole applications arena and the programming arena. Now, we understand that games and transactions and retail firms are all a part of this convergence. So this whole idea continues to evolve. As a result, the true nature of digital convergence may not be reflected accurately by either its advocates or the popular media. Illustrating the swings in opinion, sample headlines and news story themes between mid-1993 and mid-1994 included "Multimedia Is Growing by Leaps and Bounds"; "Race for Multimedia Crown Speeding Up: Companies Team to Get Jump on Interactive Services"; "Merger to Create a Media Giant"; "With Merger's Failure, an Industry Seeks a Leader"; and "Hurdles Slow Information 'Superhypeway.'"

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Box 1.1 Meaning of Convergence We have been applying the term "convergence" to the major information, electronics, and communications industries with increasing fervor for over three decades, going back to the work and ideas coming out of Harvard University, the Massachusetts Institute of Technology, and other places in the 1960s. It is time to deal more gingerly with the term. What do we really mean by convergence? What is it shorthand for? A flurry of mergers and alliances? The common use of bits? Or is there something more fundamental to it than that? Jacob Bronowski warned of the classical error of regarding a scientific law as only shorthand for its instances. His caveat may apply here. In mathematics, convergence is the property or process of approaching a limiting value. That meaning of the term appears the exact opposite of the wildfire of innovation expected from the convergence of industries dealt with in this report. In physiology, convergence refers to a coordinated turning of the eyes inward to focus on an object at close range. Once again, we are confronted with a meaning that is antithetic to the far-reaching and long-range changes in thinking and behavior that we all expect. In biology, convergence refers to the adaptive evolution of superficially similar structures in unrelated species exposed to similar environments. This meaning may be closer to what digital convergence may entail. More superficially, convergence may simply mean a meeting ground, or a process of coming together, for example, a place where two rivers join. SOURCE: Adapted from Martin Greenberger, University of California at Los Angeles, personal communication, July 30, 1994. Underlying digital convergence are advances in computer hardware, telecommunications systems, and software. The unifying element is digital technology, which reduces all information to a binary code of 1s and 0s. Whereas computers and software have been digital for decades, audio and video technologies have only recently begun to go digital. Once information has a digital representation, different forms can be blended together (although digitization is not sufficient for such integration, which depends on the structures imposed on the bits) and, eventually, transmitted by wire, fiber, or wireless means. Thus, digitized material can be defined by what it does rather than the medium on which it is transported, stored, or used. Moreover, digital devices can be programmed, something that allows them to be more than passive receivers of information. A current realization of digital convergence is associated with "interactive multimedia" products; see Box 1.2. Digital convergence could build on, blend, and redirect the functions, products, and cultures of many existing industries. Although sales figures for existing industries are neither directly comparable nor additive, they give an indication of the potential economic impact: catalogue shopping ($70 billion in current annual U.S. revenues; WWD, 1994),1 broadcast advertising (currently $27 billion; Turner,

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Box 1.2 Defining Interactive Multimedia "Multimedia" usually refers to a blend of various forms of media (text, graphics, sound, video) in a digital format, but the meaning of the term varies. Multimedia computing, for example, often combines numerical data, graphics, animation, and audio, or some subset of these elements. Multimedia as a term has also been used to include interactive television and related services, such as video on demand, remote learning, home shopping, and teleconferencing. It may involve generation of content from existing basic material (as in the generation of video games using movie images and story lines, a movie aftermarket) as well as new content; the emphasis is on the composition of the media and their interaction with the content. "Interactive" products are sometimes treated as a subset of multimedia. Whether so categorized or addressed separately, interactivity is regarded by some analysts as the pivotal feature of the new technologies. Interactive technologies emphasize the active involvement of the user, as opposed to more passive reception of content, as via conventional broadcast media. Interactive technologies range from remote control devices (e.g., for television operation) at the low end to, at the high end, virtual reality, which may involve visual and perhaps tactile and auditory immersion in a three-dimensional computer-generated "artificial world" permitting multiuser actions and interactions. Interactivity has been gaining attention because of evidence that it can enhance education and training, on the one hand, and because it is stimulating growth of such leisure activities as games, on the other. Thus, the Internet is often offered by those familiar with it as a model for interactive communication and as a laboratory for interactive applications of digital convergence, from "newsgroups'' and information-access services to multiplayer games. It is already moving to support two-way digital services with high-quality sound, animated visuals, and other elements, themselves the ingredients for products being developed or piloted by cable system operators, telephone companies, information service providers, hardware and software vendors, and other companies. Robert Stein, a founder of the Voyager Company, said he never uses the "M word" because the combination of multiple media per se is already available on television and in movies. "I'm much more interested in the interaction, the relationship between the reader and the material, and the author and the reader, than I am in just the simple aggregate," Stein said. "Eventually, we're going to go past the aggregate. We're actually going to invent something new, although I think that is still decades away." 1993a), home video (currently $12 billion; Turner, 1993a), information services (currently $9 billion; Turner, 1993a), video games (currently $6.5 billion; Tetzeli, 1993; Pereira, 1994), consumer electronics, including TVs, VCRs, audio equipment, blank tapes, and accessories (currently $40 billion to $55 billion; Sims, 1994), and recorded music (currently $10 billion; Newman, 1994). Unknown are the new markets that digital convergence may spawn. The commercialization of the Internet and the growth of on-line services illustrate some of the possibilities. However, near-term markets tend to be overestimated or at least misestimated:

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estimates of the near-term market for interactive media (e.g., CD-ROM applications) range widely from $4 billion to $14 billion annually by 1995. Projecting the fate of new markets is notoriously hard, given their small origins and uncertain prospects.2 A key indicator is the experience of on-line services (internal and inter-enterprise) in the business domain: computerized reservation services for airlines, legal and financial database services, 800-number help-lines, 900-number services, and others have become profitable. These services may use a somewhat different mix of media (e.g., they place a heavy emphasis on telephones), but they appear to offer an analogous experience base. A note of caution comes from the rocky experience of on-line services aimed at households; despite growth and new entries, such services have had difficulty arriving at user interfaces, pricing schemes, and product and service packages that would generate consistent profits.3 Computer-based services aimed at the mass market generally may become more successful, given astute marketing and management decisions as well as the expanding base in household equipment: about 95 percent of U.S. households have telephones; most households have television sets, and industry analysts estimate that up to 40 percent of all households will have interactive television in the next decade (Schwarz, 1993); over 30 million have personal computers today, and over 10 million of those have CD-ROM drives.4 Anecdotal evidence suggests that the latter part of 1994 saw a surge in computer systems for the home, attesting both to greater interest in digital convergence products and to an expansion of the customer base from the technically sophisticated to more neophytes (Markoff, 1995b). This upgrading of home equipment could constitute a turning point for educational products, suggested Nancy Stover of YourChoice TV in a late-1994 interview. Shortages of capital in schools and homes have constrained the educational technology market for decades, but now there is a greater prospect of teachers and students having access from their homes to technology and content. Cautioned Stephen Case of America Online in another late-1994 interview, "Despite all the articles you now read, 5 percent of houses subscribe to an on-line service and 95 percent don't. So there's still a lot of opportunity for growth." The information infrastructure is the broadest concept that builds on the evolving mix of goods and services that embody various aspects of digital convergence. It has been described as "all of the facilities and instrumentalities engaged in delivering and disseminating information throughout the nation," including facilities under public and private control for the mass media (traditionally broadcasting, cable television, and newspapers); point-to-point communications (traditionally telephone and telegraph); and associated information appliances.5 In the present report, the term "infrastructure" is used in this general sense to include all types of information technologies, with emphasis on delivery

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systems (including set-top and other access-facilitating devices as well as communications facilities). Digital convergence is important to industrial competitiveness. Computing, telecommunications, and entertainment are singular examples of U.S. strength in export as well as domestic markets—entertainment alone generates some $6 billion in export revenue, the fourth largest source of exports (behind defense, aircraft, and agriculture), with Hollywood producing 85 percent of the world's exports of theatrical and television programs (Flaherty, 1994). They also represent activities that transcend the specific industries identified by the supply of associated goods and services—the economic impacts of computing and communications show up in the performance of those who use these technologies, and much that falls under more mundane labels, such as news, can be seen as—and, increasingly, is packaged as—entertainment. Entertainment adds emphasis on creation of content to the more basic themes of productivity and other economic benefits characteristic of earlier discussions of computing and communications technologies. To help gain perspective on the impact of digital convergence on U.S. competitiveness, the Computer Science and Telecommunications Board of the National Research Council sponsored a one-day colloquium in June 1993. The colloquium examined how digital convergence was taking shape and what economic, social, and legal issues are arising as a result of this set of changes in technology and associated industries. Participants included representatives of the computer, telecommunications, and entertainment industries; diverse government agencies; the Congress; academia; trade associations; and the media—stakeholders and independent analysts participated.6 The steering committee sought to construct colloquium panels with a more diverse set of perspectives than those typically aired in today's press or in other venues such as industry conferences and academic conferences. This report presents the principal insights and perspectives offered by colloquium participants. It relates colloquium discussions to events and observations that developed over the ensuing year and a half. Supplementary materials were used to augment or amplify points made by the participants and are referenced. In addition, selected colloquium participants and other experts were interviewed in mid-to late-1994 to assess whether (and if so, how) views had changed. The colloquium steering committee, through its deliberations before and after the event, completed the interpretation of key issues. Due to the limited time and space available, this report provides only an introduction to this very complex topic. However, the content is selected and organized with the intent of framing issues relevant to public policy. The remainder of this chapter describes the state of digital convergence, including visions of the future, new private-sector alliances, and the emergence of public- and private-sector efforts to foster advances in information infrastructure. Chapter 2 outlines directions in technology and aspects of the entertainment

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industry. Chapter 3 addresses social issues that shape and derive from digital convergence. Chapter 4 outlines policy issues and obstacles related to promoting competitiveness and the evolution of the information infrastructure. VISIONS AND REALITY The early forms of interactive multimedia are only the primitive precursors of diverse technologies that even now are transforming the way many Americans live and work. Colloquium participants offered an assortment of visions and insights into how to realize the potential of such technologies. Richard Notebaert, chairman of Ameritech Corporation, outlined a vision of broad-based benefits. Noting that 40 million personal computers were shipped in 1992, Notebaert said these "islands of intelligence" need to be interconnected so that their capabilities can be exploited fully. The availability of low-cost, high-quality digital scanners means that information from libraries, shopping malls, catalogues, and government agencies can be digitized and made available to all, he said. "What we need to do is take the technology that is available and exploit it to be part of the solution side of societal ills in this country." Economist and author George Gilder predicted that small, portable devices with computing and communications capabilities will become indispensable. "The most common personal computer of the next decade is going to be a digital cellular phone," he said. "It's going to be as mobile as a watch, as personal as a wallet. It will recognize speech, navigate streets. It will collect your mail, open your door, and do a great variety of functions that we can't really anticipate today. And there will be a great variety of these PDAs [personal digital assistants]." Ginn, now head of a Pacific Telesis spinoff, AirTouch Communications,7 showed a Pacific Telesis video depicting life in the year 2005, when the average citizen may have access to video telephones, PDAs, long-distance medical care and education, electronic yellow pages, and electronic libraries. Like most colloquium participants, Ginn remarked on the difficulties and uncertainties associated with realizing the various visions of the benefits promised by digital convergence. Economist and economic historian Paul David of Stanford University observed that visions, while constructive, can blind people to near-term, practical impediments to implementing technological advances: Private investors and public decision makers are correct in thinking that they disregard at their peril the real hazards of a condition … described as technological presbyopia. … It's a form of far-sightedness which, in this case, makes it impossible to focus clearly on the existence of many immediate problems. It causes the sufferer to gaze too exclusively on the imagined bounties of a distant future. And to do so risks overlooking how long it will likely take to get from here to there, especially when the "there" is defined in terms of the acceptance of novel, complex consumer goods by mass markets or the pervasive adoption

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of distributors' systems of production, which require significant investments in fixed capital assets by many parties. David's caution reflects the history of technological innovation, described by Anthony Oettinger (1993) as an "anarchic, apparently tail-chasing, yet evolutionary process" that generates both ecstasies and agonies: The heroic and dedicated early adopters who dwell at the frontier outposts of innovation combine new tools, new information conventions, and new skills to create apparent wonders. The entrepreneurial imaginations fired up by the wonders of the early adopters promise those wonders to the prosaic, fickle old-time dwellers of the comfortable hinterlands as a wealth of new applications that never could have existed within the old confines. Hence the ecstasy. But some products and services will be ripe, others only hype. Some products and services will be ripe but unwanted. Others will be seen as too complex; still others as too simple. And the ones successful at the expense of someone else's market often enrage the losers into political action that changes the rules of the marketplace. Hence the agony. We are in the midst of a long period of experimentation aimed largely at determining what technological possibilities are also economically viable. The experimentation evident today continues a long-term process; since the early 1980s there have been many "wired city" projects in many locations that did not work as planned yet generated significant incremental accomplishments in terms of infrastructure development and insight into demand for different kinds of entertainment (Dutton et al., 1987). Consistent with history and despite considerable and often highly publicized market testing and formation of new ventures, the telephone, cable, and entertainment industries still concentrate their resources on traditional technologies. Their caution is due in part to uncertainty over where wealth will be generated—uncertainties that themselves reflect economic, legal, and regulatory as well as technical developments and conditions. Will there be a central component of the evolving information infrastructure, and if so, will it be a telephone, computer, cable, or wireless network, or perhaps some combination? Will information services catering to the masses ever be profitable, or will significant public investment and private contributions be needed to assure both public access and the flow of public-service information for which markets may never fully develop? The more elusive questions pertain to what people might pay to do with emerging technologies—the word "content" becomes a kind of fetish naming this empty space without beginning to fill it. It is impossible to predict, for example, what new forms of content may emerge; new possibilities for delivering content provide greater assurance for predicting that some new forms may not be centrally generated and packaged for consumers (as is common today).

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NEW PRODUCTS AND ALLIANCES: INDUSTRIAL CONVERGENCE? Each of the principal industries associated with digital convergence is characterized by different processes of technological and product evolution. The computing and communications industries focus on delivery and tend to be technology-driven, although recent ventures and acquisitions by Microsoft Corporation, including its acquisition of the rights to display a number of famous artistic images, illustrate the possibility for new, direct combinations of content, communications, and computing that are motivated by the computer industry (hardware and software) culture.8 Meanwhile, the entertainment industry, with more control over content as well as a growing emphasis on delivery channels, regards both computing and communications as tools or means to an end. Whether or when an audience large enough to be economically viable will emerge to consume the new services and programs is unknown. As a Viacom executive was quoted as saying, "The technology is all there. What's missing is the consumer and exactly what the consumer wants and what they'll pay for."9 Although a flurry of industry announcements following the colloquium made it seem as if developments were accelerating through 1993 and early 1994,10 subsequent events, including the failures of proposed alliances and delays in delivery of planned products, illustrated the perhaps obvious point that true, fundamental change takes time. Most startling of all was the announcement in October 1993 that Bell Atlantic Corporation, another regional Bell company, planned to buy Tele-Communications Inc. (TCI), the largest U.S. cable company, which would constitute one of the largest corporate mergers ever. The proposed merger received considerable fanfare; typical if breathless were remarks from an article in the New York Times (Fabrikant, 1993): The merger is of stunning significance because it creates a gargantuan company with both the financial wherewithal and the management skills to chase the holy grail of home information and entertainment possibilities: a vast panoply of programming and information offerings that are available at the flick of a wrist whenever a consumer wants to see them. The two companies' plans were not consummated, leading to wholesale reassessment in the media, by investment analysts, and in the business community generally about the merits of such deals. The later demise of plans by Southwestern Bell Corporation and Cox Enterprises Inc. further underscored questions about cable-telephone company alliances (Ziegler and Robichaux, 1994). Quoting again from Ginn's remarks at the colloquium, My sense is that as we begin to sort these things out, we're going to have about five years of utter confusion. You're going to see a lot of alliances. You're going to see some divorces. You're going to see the industry sort itself out among people who provide programming, who provide telecommunications, who provide cable, who provide the underlying technology to offer these services. There will be a lot of experimentation.

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Steven Wildman, director of the Program in Telecommunications Science at Northwestern University, suggested in a late-1994 interview that the many approaches and separations between potential business partners reflect a pattern of movement that companies hope will leave them in the right place once that becomes apparent. The shifting industrial landscape reflects several underlying trends. Most obviously, given their large size, telephone companies are scrambling for growth opportunities and diversification. The traditional telephone business is stagnant at perhaps a 3 percent growth rate, and these companies face possible loss of customers and/or profitability as their traditional monopolies vanish and as problems of excess capacity—constraining profitability—persist or grow. The telephone network has been relatively low cost in part because of slow depreciation, which may not be consistent with the rapid depreciation needed to deploy multiple advances in the information infrastructure, and the relatively high levels of automation and standardization of installation, maintenance, service order fulfillment, and other operations may be difficult to sustain in an environment with rapidly changing and more diverse technologies, services, and applications. Similarly, broadcasters are facing challenges from digital direct broadcast satellite and soon-to-be-digital cable and fiber television services.11 Meanwhile, the cable industry is fragmented—some 11,000 systems owned by some 1,700 independent operators are spread across the country, lacking scale economies for effective competition against telephone companies in many instances (Samuels, 1994b). It is hard to predict the result of a situation in which, for example, both regulated and nonregulated providers of voice and video services seek to use the same technology and serve the same target markets, despite differences in approaches to standards, market share, pricing, and so on. Despite the raising of expectations and ambitions in many quarters, the mere fact that new business activity or alliances have been launched does not mean that industries are truly converging; that would require significant shifts in industry cultures that will take a long time to achieve, as well as changes in fundamental technologies and in consumer behavior. Although much of the discussion about digital convergence seems to focus on the development of a delivery infrastructure for entertainment and other products, many challenges remain for joining the diverse cultures of computing, communications, and entertainment to make as well as deliver globally competitive products.12 As Wildman observed when interviewed, at the very least evolution and adaption are likely within each segment in response to new tools, product concepts, and distribution possibilities. How may dissimilar industries, which must cooperate on research and development and agree on how to implement technical solutions in standards, be joined? The computing, communications, and entertainment industries—themselves aggregates of rather different component industries—share certain characteristics, such as rapid growth in selected areas, but they are quite different in terms of structure, size, regulatory tradition, corporate culture, and the expertise they can contribute to digital convergence. For example, in terms of approach to

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information services, the telephone industry focuses on installing intelligence at the heart of the network. By contrast, the computer industry focuses on developing computer-based devices that can use intelligence at the periphery of networks—an orientation epitomized in the design and use of the multinational computer network known as the Internet, which is itself an application of the underlying telephone circuits in its backbone and various access networks. Nevertheless, like the computer industry, the telecommunications industry and several segments of the entertainment industry have for years depended on computer-based equipment and software for a variety of operations. This internalization of common technological elements is fundamental to manifestations of convergence in product, process, and corporate innovations. To hedge their bets, some companies, such as AT&T, have invested in virtually every emerging information technology, although not all of the investments or plans have endured.13 (AT&T is even getting back into the local telephone business, having purchased McCaw Cellular Communications, the largest U.S. cellular company; see The Economist, 1993a). However, very few companies have the resources to hedge so broadly. Others pursuing a vertical integration strategy may focus on specific segments. Sony Corporation, for example, has emphasized creating software and making machines to bring it into the home, but not the transmission of the programming (Lubove and Weinberg, 1993). By contrast, Time Warner and NewsCorp have investments in both programming and delivery systems. Some of the joint ventures bring together all three industries—telecommunications, computers, and entertainment—for example, the formation of Prodigy Services by IBM and Sears. Another example is the diverse and international group of computing and communication companies that invested in General Magic Inc. to develop software for wireless communicators.14 Some alliances demonstrate how technology is lowering the boundaries between industries. US WEST Inc. put down $2.5 billion for a 25 percent share of Time Warner Entertainment (a unit of Time Warner), and NYNEX Corporation invested $1.2 billion in Viacom Inc. (Washington Post, 1993). Although there has been conspicuous activity among telephone companies buying into cable systems outside their service areas, interaction between telephone and cable companies underscores how what is technically possible becomes confounded by what is legally feasible and economically attractive (Kim and Wloszczyna, 1993). The Time Warner Full Service Network experiment illustrates the complicating factor of evolving technology. The day before the colloquium, cable operator and entertainment supplier Time Warner Inc. and high-performance workstation maker Silicon Graphics Inc. announced a joint field trial to deliver video-on-demand services in Orlando, Florida—a major two-way interactive network implementation. Several months later, however, the partners announced delays attributed to technological difficulties associated with developing the necessary software and combining computing and cable technologies in an arrangement

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involving video servers and special set-top boxes (developed by Scientific-Atlanta Inc.; Robichaux and Clark, 1994). Actual service began in December 1994 (Shapiro, 1994). The electronic game arena may be a bellwether for a variety of corporate and product developments. Electronic games are increasingly available over networks, but the principal market has been for access through special platforms (e.g., Nintendo and Sega systems) and on general-purpose devices, including personal computers and CD-ROM players, plus various hybrid devices, such as that offered by 3DO.15 AT&T, Time Warner, and Matsushita Electric Industrial Company backed the company 3DO, which in early 1993 unveiled its design for an "interactive multiplayer," a CD-based machine that hooks up to a television set and combines graphics, text, and high-quality sound. The 3DO venture epitomizes the uncertainties characterizing the digital convergence marketplace. Although over 300 software developers were estimated to have begun developing programs for the 3DO platform, a new type of game system challenging others that were already established, were available at a substantially lower initial system cost, and offered yet more software was risky. In late 1994, 3DO scaled back significantly.16 Some observers have questioned the wisdom of huge investments in a multimedia future that has yet to prove its market value. This caution surfaced in corporate finance circles early in 1994 in the wake of the termination of the Bell Atlantic/TCI merger plans (Ziegler, 1994c). The telephone industry in particular, having built its reputation on conservative reliability, is seen by some to be abandoning its core business and character, assuming the style of Hollywood movie studios in gambling on huge payoffs in unknown territory.17 Observed Robert Lucky of Bell Communications Research in a late-1994 interview, In the past 3 years the telco role has gone from doing nothing to doing everything, to something in the middle right now. … So far, the telcos have not been terribly successful or aggressive, I'd say, in cutting deals with the content providers, so that their role has been more that of providing a delivery vehicle. But what's changed in these last 3 years is the reality of telcos being in the video delivery business. … If you went back 10 years to the breakup of AT&T, nobody saw entertainment as the big plum where the big bucks were. But it's only in the last 3 to 5 years that suddenly that has become the place where the new opportunities are. Currently, ventures appear to be small relative to the telephone companies' size, and not especially integrated into core operations or operating styles; similarly, cable company-based ventures appear to extend more traditional business patterns for the most part (Markoff, 1993). An added complication is the difficulty in assessing what the real investment requirements may be. The discussion of the anticipated improvements in network (facilities) aspects alone, which imply huge investments in physical plant (cable and switching), marks a contrast with the investment associated with distributing

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information in print forms, commented John Blair of the Raytheon Corporation at the colloquium. High initial fixed costs, noted Paul David, are characteristic of the economics of network industries. On the other hand, as noted by Lucky, industry estimates for the cost of installing fiber have fallen over time—apparently due to the combined effects of competition and political jockeying. CONCLUSION Numerous obstacles must be surmounted in developing and assuring access to new information technologies, as well as in promoting positive consequences of their use over negative ones. Some of the problems are technical: for example, high-bandwidth, two-way communications systems are neither cheap nor widely available; there is a multiplicity of standards for representing raw information, while lack of consensus exists on standards for integrating services across different systems, a problem that threatens to grow as new interfaces proliferate. New technical bottlenecks are appearing, since video- and image-rich interactive communications require new systems, communications, and storage architectures. On the other hand, technologists and industry analysts agree that the most critical problems are nontechnological, and also more diffuse. Digital convergence is generating a host of economic, regulatory, legal, cultural, and social issues. The atmosphere in which these issues must be resolved is chaotic and volatile; the rise of expectations for and the ultimate failure of proposed telecommunications reform legislation during the 103d Congress is but one illustration of the uncertain policy environment—itself affected by disagreements between companies, industry groups, and various other interests. This report puts the technological and business trends associated with digital convergence into a large framework. It seeks to advance what must be a long-term process of relating commoditization and convergence of digital electronics, communications, and entertainment products to changes in the nature of the economy and the social fabric. The intention is to provide a sense of the scope and the pace of changes transforming a set of important industries, identify some of the potential short- and long-term social and economic impacts, and frame the policy issues and dilemmas that are going to have to be resolved for all of us, whether directly or indirectly involved. NOTES 1.   According to one estimate, home shopping via television, which has $3 billion in annual sales (after some 10 years), could reach $25 billion per year by the end of the decade if the shift to sales of up-scale products succeeds. This is still only a fraction of the $245 billion in apparel and jewelry sales realized in 1993 but will likely be retail's

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    fastest-growing sector. Obstacles include high return rates from dissatisfied customers and the possibility that only commodity items will sell over TV, not higher-quality items (McMurray, 1994). The medium is still dominated by down-scale products such as off-brand jewelry and clothing. A first hurdle for new networks is obtaining channel space on cable systems (Reilly, 1994). 2.   A Dataquest survey found that 45 percent of 200 firms had annual revenues under $100,000; 90 percent had fewer than 50 employees (Kruger, 1994). 3.   See Weber (1994). News articles differ considerably in how on-line service subscribership is reported—Prodigy Services, for example, is reported as having between 1 million and 2 million customers—but they do point consistently to negligible profits among the larger firms, including Prodigy, CompuServe, GEnie, and America Online (Lewis, 1994a,b; Ziegler, 1994b; Samuels, 1994c; Washington Post, 1995). On the other hand, smaller, niche-oriented on-line services, such as the Well, are reportedly profitable. 4.   By the end of 1993, the installed base of CD-ROM drives in U.S. homes was 7 million and was projected to reach 16 million by the end of 1994 (Samuels, 1994a). 5.   Egan and Wildman (1992) citing NTIA (1991). 6.   Due to a scheduling conflict with a major industry conference, no representatives of the cable television industry were able to attend the colloquium; their perspectives on key issues were solicited in the months following the meeting. 7.   The spinoff was approved by California regulators in November 1993 (Sims, 1993). 8.   See Hudson (1995). See also Zachary (1994): Microsoft announced plans to buy Softimage (Montreal), a leading supplier of movie special-effects tools, for $130 million in stock. ''In a recent interview, Microsoft Chairman William Gates said that the company was vigorously pursuing growth opportunities in the so-called multimedia field, where sound, images, and moving pictures are meshed together with the help of computers and software." 9.   "The hard part is figuring out just which of these and a plethora of other services people want—and how to design them so they are as easy to use as television and yet bring improvements that are tangible enough so that people will pay for them" (Andrews, 1993). 10.   The trade newsletter Digital Media identified 348 alliances in multimedia services (Laderman et al., 1993). 11.   In Flaherty (1994) the senior vice president for technology at CBS described progress toward HDTV. CBS is also reported to be the first network to begin conversion to digital broadcasting. CBS plans to use Hewlett Packard video broadcast servers, including software that controls scheduling commercials and programming (McCoy, 1994). 12.   Executives from at least two entertainment conglomerates (Walt Disney Co. and MCA) have expressed disdain for interactive media, and even among the players committed to some level of development there is a persistent assumption that the new technology will displace traditional forms of entertainment. Executives made the same assumption 20 years ago, when they took manufacturers of video cassette recorders to the U.S. Supreme Court with the argument that the traditional movie business would end if customers could view movies at home. That construct requires a belief that consumers are trapped in a compartmentalized universe where it is inconceivable to go to a movie theater and rent a video, play a video game and read a novel. Meanwhile, regional

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    rivalries have emerged among multimedia communities: Los Angeles argues pop culture is key, New York sees publishing and information as models, San Francisco is technically oriented, and Seattle follows Microsoft's lead (Shrage, 1994). 13.   AT&T's Consumer Products Group dropped plans to market a modem (called "The Edge") designed to connect Sega game players' equipment via phone. Earlier, AT&T had dropped plans for 3DO-compatible gear. "AT&T executives said Consumer Products will aim its investments instead at 3 product areas: digital wireless phones, where it has been deficient against mounting competition; phones for foreign markets; and intelligent phones for the home that the company plans to begin marketing next year" (Keller, 1994). 14.   Investors include Apple Computer, Motorola Inc., Sony Corp., AT&T, Matsushita Electric Industrial Co. (owner of MCA Inc. and its Universal Studios), and Philips Electronics NV. See Hill and Yamada (1993). 15.   Video games are now about a $6.5 billion business. Lee isgur, of a San Francisco investment bank: "You can talk all you want about the electronic highway and video on demand, but the only place anyone has ever sold anything interactive is in games." Over the past seven years, Nintendo and Sega have sold [over] 64 million machines in the United States. Their tack is to sell hardware cheap and license the software (classic bundling). See Tetzeli (1993). 16.   The saga of 3DO is chronicled in The Economist (1993b) and in Turner (1993b). See also Pitta (1993), Carlton (1994d), King (1994), and Markoff (1994). 17.   The enormous risk of venturing into this unknown territory, particularly in collaboration with Hollywood executives, can be illustrated by a review of foreseeable changes in the entertainment business. Established entertainment centers (i.e., Los Angeles, New York) are no longer secure in their hegemony. In the next few decades, they will find that the dominance associated with physical concentrations of specialists, facilities, and mystique will be subject to profound change in the developing digital convergence matrix. Location-independent communities, improving microprocessor-based production tools and methods, and the rapid dissemination of many skills in expanding world markets, all undermine centrality. Just as "Detroit" is a metaphor, so it will be with "Hollywood" also. As fresh waves of creative people struggle for access to the ballooning field, they will be far less bound to past organizational structures and practices (e.g., major studios, unions, traditional communities of the like-minded). Although this industry has a century's experience with change and readjustment, digital convergence exacerbates the process by another order of magnitude. The increasing pressure of new recruits and the human resources conflicts they engender will increase the level of disorder just enough to suggest a new chapter on chaos theory. Meanwhile, it is clear that the corporate culture interface has been a low-priority topic in planning for digital convergence. Sooner or later, computer and telephone companies will have to confront the implications of collaborating with entertainment moguls whose market studies have all the reliability of the average shaman's chicken bone readings, in spite of the Armani suits.