Computer-Mediated Communication Magazine / Volume 1, Number 4 / August 1, 1994 / Page 8

Digital Convergence is a Crock

by Bill Hulley (

When you sit down and take a close look, you will find the digital convergence, like its less reputable astrological cousin, is fun to talk about as long as you understand that it means nothing in the physical universe that you inhabit. If however, you start to believe the convergence is a real, happening event that will cause real happening things in this world, you will make decisions about how you work, live, invest and play that will cost you untold grief in the years to come.

Because the digital convergence is a crock...

An interesting crock, a press-release-making and share-price-hiking crock, a great source material for hooked-in politicians crock, a cocktail discussion hipness-major-bonus-points crock, but a crock nonetheless. The need for a "digital convergence" can be buried with a hundred different shovels but let me toss you three of the handiest ones:

The customers don't care--sorry but they don't. In trial after trial, big companies throw big bucks into interactive TV, v-text, video-on-demand and other trials in affluent communities with plenty of spare disposable income, and in trial after trial, customers don't use the product. They don't like it, they don't care about it even when they get it for free, and they certainly don't have an interest in paying for it even though they have money to waste on such stuff.

They don't want it for good reason--what they use now works. People watch television, they talk on the phone, they work on their computers. The tools and toys they have for each of these tasks work just fine, so why would they change? You know, a telephone does what it does pretty well, has a well understood user interface and is amazingly reliable. When I compare that to Windows NT, Plain Old Telephone Service (POTS) starts to look pretty good well into the 21st century.

The target industries are structurally incompatible--yup, regulated industries with huge installed capital assets don't really have much in common with hit-driven, brain-powered software producers.

Over and over and over, big slow-growth companies lift their big heavy corporate noses from the grindstone that has profitably, if boringly, provided for their existence for the last ten or fifteen year and discovered a shiny new object called synergy.

Synergy, that fountain of newer, faster growth and, boy oh boy, bigger management paychecks. The big guys can see it, its out there, they know--that synergy thing, never more than a quarter and the next acquisition or two away--and it looks like a pretty good way to speed up the buck-making machine.

So the big old, heavily-invested in bricks and mortar and wires and trucks juggernaut, often loaded with more cashflow than good management sense tries to go out and buy itself some small company with a brain-powered growth rate. And usually finds out, after spending a ton or two of hundred dollar bills, writing off three or four acquisitions and firing a platoon's worth of top management, that small companies have high growth rates because they're, well, small and yes, that different industry segments exist for a reason. Yup, its true--differences in culture, channels, costs and customer needs drive the creation of fundamentally different structures for doing business.

What do the big guys learn (and then forget again after that platoon's worth of firing happens) by the end of each cycle of synergy driven buying, merging and purging? Well, mostly that even if the person that buys phone service from you uses a computer too, there is no reason to imagine that she can't wait to buy one of your nifty, we-just-acquired-the-division, multimedia encyclopedias from you just because you're the phone company.

The capital markets won't pay for it to happen--usually in the short run, and always, without fail, in the long run, capital markets adjust rates of return paid on investments to eliminate the effects of aggregating unlike businesses. Sometimes it takes a while, as it did for the synergy and and the conglomerate growth multiple waves in the sixties or the LBO wave in the 80s, but eventually capital markets integrate enough information to figure out that a company with cable and content divisions should get paid differently for the each cash stream. Hell, it usually takes hardly any time at all.

Most investors are already pretty smart so when you get a zillion of them in one room like you do on any given morning at the NYSE, the collective investor hive conciousness figures out pretty quick what's a crock and what's not.

The managers of TCI and Bell Atlantic and QVC and Paramount and Blockbuster found this out after they announced they had discovered the grail of renewed growth and boundless markets and called it the "digital convergence." The capital markets did the right thing, as it always does; it picked up those management teams by the scruff of their collective collars and told them that digital convergence was a stupid idea using the simplest means possible. It trashed the value of all of their stock options. Of course, most of the managers, big, fat, growth-driven paychecks dancing in their dreams, ignored the message; see the above paragraph on structural incompatibility for the most likely outcome of such hubris.

Buying the idea that a few huge monolithic conglomerates will converge to run a single wire to all the homes, build all the boxes and supply all the info-stuff is about as silly as sitting in a field and waiting for the earth to shake apart because the planets are aligned. On the other hand, you can make some neat bets on how Things Will Be if you take the digital convergence for what it is -- a handy dandy metaphor that the United States is developing a multiple mode, densely interconnected communications and information network that will be owned and operated by dozens or hundreds of companies, supplied by thousands of content providers and based on whatever affordable delivery mechanisms that make sense to content users. My personal bet is that providing real products for real paying customers is going to make a whole bunch more money than putting two or three huge infrastructure providers together under one management team and declaring the result a one-stop shop for content and transport.

Bill Hulley is a venture capitalist and General Partner of Fostin Capital Partners. He is an active investor in information technology and telecommunications and serves as a Director in several privately-held companies.

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