Multimedia is the message: The interactive links between cable, phones, television and software will change our lives, writes David Bowen, and the scent of profits is driving a wave of big mergers

ALEXANDER Graham Bell thought the telephone would be used for listening to concerts. Marconi believed the wireless would be used only by two people talking to each other. Now another great invention, multimedia, has come along and it will be used for . . . well, something that will surely change all our lives.

This, anyway, is the view of those convinced there are billions to be made out of multimedia. John Sculley, until recently head of Apple computers, said the interactive multimedia industry would be worth dollars 3,500bn ( pounds 2,400bn) by 2002. The merger announced recently between Bell Atlantic, the US east coast telephone company, and Tele-Communications Inc, the country's largest cable television operator, has made these big numbers a reality. If approved by Washington, the grouping will have sales of dollars 33bn, putting it sixth in the Fortune 500.

The deal had been foreshadowed by another in May, when US West, the phone company base in Denver, paid dollars 2.5bn for a 25 per cent stake in Time-Warner Entertainment. TWE is a large cable television company as well as owner of Warner Brothers studios and the Home Box Office film channel.

Wall Street and the City are bouncing with excitement. Both deals are clearly based on the belief that the worlds of telecommunications, television and entertainment are bound to elide. If this happens, the logic goes, companies in those sectors should elide, too. Hence the dollar signs in corporate finance eyes.

Analysts believe there will be more deals involving the seven 'Baby Bell' companies, whether or not they make sense. 'If one of the Baby Bells has done something, there is tendency for others to want to do it,' says Keith Mallinson, research director of the Yankee Group Europe consultancy. 'But they have thrown away money on some crazy things in the past.'

Mark Beilby, an analyst with SG Warburg, says there will be 'one or two successful telecom companies and a lot of highly priced acquisitions that the merchant banks will make a lot of money unravelling'.

John Tinker, managing director of Furman Selz in New York, is even more sceptical. 'A lot of the reason for vertical integration is defensive, not aggressive,' he says. 'You buy into a piece of everything and hope to God you don't get left behind.'

The merger buzz is real enough, though, and is not restricted to US companies. Earlier this year, BT tried to take a controlling stake in EDS, the giant software group founded by Ross Perot. EDS specialises in finding ways of using new technology and Les Alberthal, its chief executive, believes multimedia will provide much of its business in the next decade. And when the City editor of the Independent on Sunday suggested a week ago that BT might be interested in buying Thorn-EMI to get hold of its music library, Thorn's shares shot up.

The UK is the most competitive communications market in the world, and the worldwide industry watches it like a hawk. The British were first with mobile phones; now they are the first to be offered telephone services by cable television operators.

Mr Mallinson believes that whatever grand visions of multimedia the Baby Bells may have, the immediate impetus for their recent link-ups came from Britain. 'Everyone in the cable industry is getting extremely excited by the high uptake rates on telephone services in the UK,' he says. 'For an extra 20 per cent on their costs, the companies are getting an 80 per cent increase in their revenues.' As the biggest cable operators in Britain, the Baby Bells are the beneficiaries of this trend. In the US, they would be the victims - links with cable companies make good defensive sense.

SG Warburg has identified 17 'multimedia' mergers across the world in the last three years, with another five pending. They include Reed buying the Dutch publisher Elsevier, Thorn-EMI buying Virgin Music and Reuters buying the television news gatherer Visnews. Other deals involve music publishers or film studios: Hanna-Barbera, United Artists and MCA have all come under the hammer, while Paramount is currently the target of two bidders.

It is hard at first to see what these deals have in common, or why they should be given a 'multimedia' tag. This is partly because multimedia is so difficult to define. To some, it is simply an adjective that describes any company involved in a number of different areas - print, television and book publishing for instance. To others, it means the bringing together of a number of different media - sound, pictures, graphics, text - on to one screen. This second definition is more useful, because it gives a name to the technological changes that are driving the whole process.

The multimedia industry is still an infant, and today's deals are based on an assumption of what it will look like when it grows up. This presumes there will be a mass of 'software' suppliers - owners or producers of films, music, television programmes, magazines, games - who will provide their goods in electronic form to distributors, who will pump them via optical fibre networks into living rooms.

They will be the descendants of today's telephone and cable television companies, but they will no longer provide distinct products. Each householder will typically be offered two competing services: he will choose the one he wants as he might now choose which dairy delivers his milk. At the touch of a remote control or keyboard, he will be able to do his shopping, watch a video, play a computer game, make a videophone call, write a report, look up a word in French or read today's newspapers. That, in the imagination of the would-be multimedia empire builders, is the future.

In this world, Mr Beilby at Warburg believes that suppliers of the raw material will hold the whip hand - which is why potential distributors, such as telecom and cable companies, want to get hold of them. 'Demand for content, such as entertainment software and information, will substantially outstrip supply,' he says. 'The inherent value of that software will inexorably increase.'

Of course, the whole assumption could be false. What if people want to get up and go to the shops? What if they like looking up words in books?

'History takes a dim view of those who poked fun at Marconi and Orville Wright,' says Michael Connors, a director of BZW Investment. 'But those who raised their eyebrows at advocates of rowing balloons to the moon should be permitted a posthumous 'I told you so' to balance the books.' He says he visited a Japanese company involved in building a national optical fibre network and was told by members of the planning department that they had severe doubts about the whole thing. 'Who needs it?' they asked. The 'killer application' for multimedia that will really open the floodgates - the equivalent of broadcasting for radio or the spreadsheet for the personal computer - has yet to be identified.

Nevertheless, the optimists can make a solid case. Pointing to Mr Bell, they can argue that the market will always find a use for technology, and that it is reasonably clear now what equipment will be available in 10 or 15 years. The infant has all its limbs, even if they are hardly well developed.

In particular, they can say that the technology is already available for most of these services - only the money is missing. Even five years ago, they could not have made that claim: for one thing, the computing power was not available to 'digitise' films - turn them into a form in which they can be stored and sent down phone lines.

'It used to take 250 minutes to encode every minute of film,' says Keith Downs, marketing director of multimedia producer 3T base in Manchester. 'Now we are down virtually to real time encoding.'

As a result, 3T is currently filming an interactive version of Cluedo, in which you will be able to go, via your television screen, into the billiard room where you can challenge Prof Plum with his lead piping. Virgin Interactive Entertainment, formerly Virgin Games, is producing a version of the film Demolition Man, in which you are the hero and move with Sylvester Stallone through the plot.

Both these games are off-line, working from CDs or other systems based in the house. But Sean Brennan, sales and marketing director of Virgin Interactive, says: 'We're looking at games that can be used on-line.'

More powerful chips have also speeded up delivery systems. Though the optical fibres were invented in 1966 (by STC in Britain), the signal speed depends on a laser diode that can fire it down the cable. They have recently become much more powerful. At the same time, new technologies not reliant on optical fibre have been developed: BT intends to offer video-on-demand via ADSL, which allows 1,500 kilobytes a second to be transmitted down a copper cable, against the standard 10 kilobytes.

The step from the current boom in off-line products to the next in on-line delivery is not hard to make. The interest of telecom companies is natural. Less obvious is why they feel the need to buy companies rather than services from them.

Though gigantic mergers will grab the headlines, there will be plenty of small-scale activity as companies try to ensure they have access to software. Mr Downs says that television companies are interested in what is going on: an interactive version of Coronation Street could, he says, prove profitable for Granada. At the moment, companies are happy to buy in expertise, but they may one day want closer control of the software producers.

In the US, MCA - itself owned by Matsushita - is looking to acquire interactive games companies, as are several cable companies. 'Games companies used to license films to use,' Mr Brennan says. 'Now there is a lot more co-operation with the studios.' One day, he predicts, the film and the game of the film will be released simultaneously. This would be big business: a blockbuster could sell two million units at pounds 40 each - generating pounds 800m. It is not surprising that the men of finance find multimedia so fascinating.

(Photograph omitted)