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CONVERGENCE: FOOLISH EXPECTATIONS AND DASHED HOPES
The media, financial analysts, fund manager and business gurus were all to blame for the wild adventure of convergence, which cost investors billions of dollars, concluded participants in a symposium organised by the Canadian Media Research Consortium and the Centre d'études sur les médias in November 2002 in Montreal.
The Source of the "Mirage" - The Ways of the Future
Professor Yves Rabeau, from the Department of Business Strategy at the Université du Québec à Montréal, launched the debate by recapping the trials of AT&T;, QWest and BCE, three examples of companies driven to a frenzy of acquisitions and mergers in the name of convergence, which, he says, only masked two traditional business strategies: horizontal integration and vertical integration.
AT&T; was the model par excellence of horizontal expansion. It attempted to offer all services: conventional and wireless telephone, and cable. It quickly made a number of acquisitions and got into heavy debt, in the hope that its one-stop strategy of the convergence of technologies within the same enterprise would be a winner.
QWest represented the new hopes. A new enterprise using at once the Internet protocol technology for high-speed data transmission, it quickly built up a network and a strong market capitalisation based on optimistic revenue forecasts. It bought a local conventional phone company, US West, to broaden its client base and create more traffic on its high-performance network. With the introduction of a new culture in an old enterprise, they believed they would generate enough revenue to secure a return on the transaction.
BCE's strategy was the quintessential model of convergence in Canada: connectivity with the Bell network and a subsidiary, Bell Nexia, for high-speed data transmission, the take-over of data processing companies linked to Internet like BCE Emergis (e-commerce) and CGI (systems integration), and the integration of content providers (Globe & Mail, CTV, etc.). It was a typical application of the convergence of the three poles: content, connectivity, and data processing.
The dream did not last long. As soon as it appeared revenue forecasts were not realistic and there was excess production capacity, the market collapsed.
AT&T; split up into three units and assets were sold to pay off the debt. BCE sold some assets. Over the last two years in the communications market, an estimated one trillion dollars in stocks and shares and 500,000 jobs vanished into thin air in North America.
What was the economic logic behind this convergence strategy? Could there have been a more successful convergence strategy? No doubt, said Professor Rabeau, but it would have had to be based on far more realistic forecasts.
History repeats itself and the lessons of the past are forgotten. Such waves of mergers and acquisitions recur from time to time. CEOs believe they have discovered a profitable business model, but in fact vertical integration seldom succeeds. More often than not, it has decreased the shareholders' values. The last wave also ran counter to the basic economic trends since the Internet technology and e-commerce have largely led to the fragmentation of businesses and added-value chains into smaller units that communicate electronically. The wave of mergers that swept the communication industry, therefore, ran counter to what the Internet technology created in other sectors of the economy.
Élie Cohen, Director of Research at the Centre national de la recherche scientifique and professor of economics at the Institut des sciences politiques de Paris, traced the history of the trials and tribulations of Vivendi, the French local community utility manager that attempted to convert almost overnight into a world-wide media giant and convergence icon.
When Jean-Marie Messier arrived at its helm in 1994, the Compagnie générale des eaux (CGE) was on the verge of bankruptcy, a victim of the European real estate bubble of the early '90s. CGE's real estate losses exceeded its assets.
Messier restored the firm's solvency by mutualizing the reserve funds of the various water authorities and charging to them future real estate losses. In passing, he discovered CGE was an unlikely conglomerate of thousands of subsidiaries in an incredible range of services, and he noticed a few interesting nuggets.
His ambition was in communications and the nuggets he spotted were in this area: a mobile phone company called SFR, which he wants to develop; a minority interest in Canal+, which turns in huge profits and has a modern image, and an interest in Havas, both a publisher and an advertising agency.
Such is the situation at the outset: Declining historic activities and development potentialities in activities that Messier has no money to develop. Once he has settled CGE's recapitalization problem, Messier turns his attention to these nuggets.
First, he sets up a fixed phone company, Cégetel, and gets involved in Internet. He makes a very complex financial arrangement, which consists in having outside partners British Telecom, SBC and Mannesmann fund the telecom development. The arrangement enables him to retain management control while holding only 44% of the whole. He also takes control of Havas by forging a series of alliances with shareholders who want to withdraw, and quickly becomes the majority shareholder of Canal+.
We're in 1998. Messier has just formed Vivendi, a large group with an environment division, including CGE's old activities, and a communication division in which he has a phone company that he can't fully benefit from because he's a minority shareholder. He's the controlling shareholder of Canal+, but can't afford to develop it.
He presents himself as a visionary who, in the new world, wants to build a group that will provide all terminals instant access anywhere at any time to any source of information and entertainment. To rationalise his successes and failures, he makes ambitious speeches on convergence with the aim of forming a large multichannel, multiplatform, multicontent group. Without the means to achieve his ambitions, he seizes a series of opportunities.
First, he wants to become an alternative telecom operator. Very soon, he discovers, with the rise in the valuations of telecom operators, both alternative and traditional, that he can't afford to play in the big leagues. Everything he attempts in this area fails.
Then, he tries to become a major Internet operator. He tries with AOL, in vain. With Havas in his portfolio, he talks about content-Internet convergence. His flip-flop does not fool anyone.
He decides to have a go at television. It so happened that Canal+ had just bought NetHold, which operated pay-TV systems in several European countries. This acquisition had made Canal+ the leading pay-TV operator in Europe. However, they faced a touch competitor in Murdoch and BSkyB. Messier tries to squeeze Murdoch. He buys the 20% interest held in BSkyB by the Pathé Group and proposes to Murdoch the grand alliance of European pay-TV. Murdoch agrees, provided it is under his command. Messier cannot accept that. So, it doesn't happen.
On to mid-1999. The financial markets have gone berserk, the valuations of telecom operators are sky high. Everything is moving and Messier finds himself slightly destitute. He then concocts a foolhardy operation that will enable him to get out of the hole and put together a powerful group.
The sequence is the following. Mannesmann buys Orange, a British mobile phone operator. Incensed by Mannesmann's incursion into its territory, Vodaphone launches a take-over bid. Messier instantly sees the advantage he can draw from this confrontation. He forms two groups of negotiators, sends one to deal with Mannesmann, the other with Vodaphone. To Mannesmann, he proposes a straight merger with Vivendi to form the top European telecom group. To Vodaphone, he proposes to create what is called a multi-access portal to become Vizzavi, essentially based on mobile phones, but also available on television through Canal+ with its new G2 terminals.
After hesitating between a telecom and an Internet integration strategy, Messier opts for the latter. He supports Vodaphone, which wins its battle against Mannesmann. The German company is absorbed and, in passing, Messier receives Judas's 30 pieces of silver, the possibility to climb in the capital of Cégetel by retrieving part of Mannesmann's interest.
By late 1999, Messier has become on paper a major Internet player. On paper, because the G2 is not ready and the mobile digital phone is not there either. The very concept of a multimedia portal is pure fiction. But these fictions result in Vivendi's stock being valued at close to 100 billion euros.
It's a dazzling achievement. Within five years, he has multiplied by four or five his company's stock capitalisation. When the AOL-Time Warner merger is announced, Messier decides the time has come to make a major acquisition with the paper money he has on hand. To everyone's surprise, he manages to convince the Bronfman family, the epitome of classic capitalism, to sell him Seagram. The Bronfmans are believed to have made a good deal because Messier offered a 45% premium over Seagram's latest quoted share price. In fact, it doesn't make any sense because he buys tangible assets with grossly inflated paper money.
Messier becomes the head of Vivendi Universal. Oddly, nobody sees how dissymmetric is the construction he has assembled. He owns in Europe a pay-TV operator that is not the ideal vector for Internet, but has no Internet server. In the U.S., he owns the leading music publishing company, but has no distribution channels. He doesn't even have a content aggregator.
With the Seagram transaction completed, Messier goes on to the next stage, the take-over of USA Networks and the search for distribution channels in the U.S. Except that the world has changed in the meantime. September 11 has occurred and the financial markets have brutally turned around. They now ask for real profitability and not promises based on the click of a mouse.
This is the end of the rational part of Vivendi's story. We then enter a largely irrational phase that will speed up the company's bankruptcy.
Seeing himself as the high priest of convergence, Messier decides to settle in the U.S., and within a few months completes a series of wild acquisitions: Worse still, he pays most in cash because Vivendi's stock value has deteriorated. By June 2002, Vivendi's stock is downgraded to the status of junk bond and the company can no longer meet its short-term obligations. Messier is forced to resign on July 2, 2002. The story ends with the revenge of the financial markets, which allowed Messier to exist and grow by overvaluating his assets, but also programmed his downfall.
A panel made up of Jean-Luc Landry, former president of the portfolio management firm Bolton Tremblay, Brian Milner, Globe and Mail financial reporter, and Jean-Guy Rens, senior partner of ScienceTech, an information technology research group, and executive director of the Canadian Alliance of Advanced Technologies (CAAT), sought to answer the main questions asked of the symposium: Who helped create the euphoria? What part did the promises of business gurus, the advice of financial analysts, and the media that relayed them play?
Jean-Luc Landry holds the current theory of portfolio management mainly responsible for the technology bubble. "This theory suggests the market is efficient and that a manager cannot obtain returns higher than the market index. Why? Because investors are rational. Thousands of them assess the future of an enterprise and discount this future today at a common rate. There are then strong chances stock prices will accurately reflect a venture's potential and risk."
Why is it that suddenly everybody is wrong? One of the reasons, he says, is the theory itself. "If the public had suspected the stock market was a huge casino bearing no relation to reality, we would never have had the bubble or the mergers and acquisitions." It's because people believe financial markets are efficient and price shares accurately that they bought stocks and amplified the bubble. Every sector of society had a hand in it except, incidentally, governments.
So, individuals took part in the bubble, just like portfolio managers, analysts and corporations.
Brian Milner is more critical of financial analysts and the media.
In addition to grossly exaggerating their estimates, financial analysts often had conflicts of interest investors were not aware of. The media sinned by omission. "We bought the hype without doing our homework But analysts sinned by commission. They knew what they were doing in many cases." Jack Robin knew what he was doing when he recommended the purchase of WorldCom shares because he was sitting on the board of directors while his colleagues from Solomon were making a fortune with WorldCom's acquisitions and he collected his share of the profits. None of those who followed his recommendations knew this until very recently.
Turning Jean-Marie Messier, Steve Case, Michael Amstrong, Bernie Ebers, and our own Jean Monty into celebrities was a superficial way of covering business. It was exciting, but it would have been better to look into their business models. Had we done that, we would have seen that Vivendi, WorldCom and the rest were houses of cards.
Convergence benefited... bankers, who encouraged CEOs to conclude these transactions and pocketed millions in fees. Analysts provided advice. Journalists played their part by talking up these deals and concepts.
Like analysts, the media focused only on quarterly earnings, and if you do a lot of acquisitions your earnings on paper always look good because you're adding growth to your top line. You post a strong quarter and you get great press every time. It doesn't matter that the numbers aren't actual earnings. "We should have done our homework and, for the longest time, we neglected them," said Milner.
Jean-Guy Rens believes highly unlikely industry executives would even have read the business gurus. "And had they, would their vision of an industry they knew better than anyone have changed?"
The media tend to favour bad news. With digital technology and convergence, they finally had "good" news, and they played it to the hilt. We can't at once attack them for being alarmist and stigmatise them for being enthusiastic once they have something positive to report.
Did they have an impact on executive decisions or did executives' public relations services manipulate the media to inflate the value of their companies? There was no doubt a subtle interaction. The Internet phenomenon itself helped short-circuit the media, and small-time on-line speculators played a role parallel to the media in feeding the frenzy.
With financial analysts, we're getting closer to the core of the issue. They played a direct role in evaluating the economic potential of the digital technology. They falsified the financial analyses of corporations they advised to help them sell their shares at top dollar. But financial analysts could not have fooled the entire investment fund managers' community if these had not been pressed to seek better returns than stock indices.
From then on, the speculative bubble would grow unconstrained until figures were really too disconnected from reality to be credible. Corporations without income were suddenly worth hundreds of millions on the mere promise of future growth. Are financial analysts to blame? Not entirely. They were instrumental in the ruin of millions of investors, but they were not the primary cause of the euphoria.
The source of the euphoria is easy to pinpoint: the U.S. government's decision to privatise Internet in 1995. After the National Science Foundation (NSF) gave up the management of the web to the private sector, reliable figures ceased to be available. After the launch of the first browser, Mosaic, in November 1993, Internet use doubled every three months until April 1995, when the NSF withdrew. Then, we entered a grey zone.
Nobody suspected this rate of growth could go down. They talked of time acceleration, Internet time: in three months, we could do what previously required one year. A sudden intoxication led us to believe we were discovering a new phenomenon.
Could the damage have been avoided? "I have long pondered the responsibility of market fundamentalists and financial analysts. Are the ideological inflexibility of the former and the lack of rigour of the latter enough to explain the euphoria and the ensuing market bubble? I don't believe so. Would the technological factor per se have been sufficient? I'm tempted to answer yes, but I'm not referring only to the excess capacity of the mega networks built thoughtlessly. I'm thinking mainly of the extraordinary rise of information technologies against the relative stagnation of information itself."
The bulk of R&D; investments in the information technology sector has been in hardware. The technological race is exhausting the North American industrial machine, which must renew its infrastructure at a pace that does not allow it to make what has just been bought cost-effective — hence higher debts, instability, bankruptcy. Jean Monty, one of the main Canadian actors of the telecom saga, is now considering a moratorium on hardware R&D;, as he said in a November 2002 interview: "Won't we see a pact between the Nortels of this world, not to reduce the number of laboratories and researchers, but to redirect them toward human activities in need of more research?"
Monty's "dream" refers to a deep imbalance which can only be resolved by a rebalancing of our economic and cultural priorities. If technological success is the main cause of the telecom crisis, it might be appropriate to redirect innovation efforts toward the production of services and contents — in short, toward activities akin to social sciences and artistic creation.
André Préfontaine, president of Médias Transcontinental, explained how his firm resisted the lure of convergence.
Transcontinental's profile seemed to predispose the company to espouse convergence. It is one of the 10 largest commercial printers in North America and the fourth printed press group in Canada. With the purchase of CanWest community newspapers in the Atlantic provinces and Saskatchewan in August 2002, Transcontinental became the only Canadian publisher with a foot in the 10 provinces. Why not add television, radio, cable or Internet portals to its printing and publishing activities?
Transcontinental distanced itself from the convergence model long before the collapse of techno stocks in October 2000, said André Préfontaine. The corporation's game plan rests on four key ideas. First, financial soundness is a prerequisite to sustainable development. Transcontinental is one of the printing and publishing companies with the smallest debt in North America. In periods of economic slowdown, this allows it to make acquisitions at a far better price than in a high-growth period.
Secondly, its development continues to go through printed products. Transcontinental believes circulars, catalogues, newspapers and magazines will remain for a long time key elements of its clients' marketing programs and consumer habits. The company adds complementary services in new information technologies and Internet if need be, but at its clients' pace.
Thirdly, development continues to go through fast-growing niches. Transcontinental is a niche printer and publisher. Acquisitions aim at strengthening its position in a niche, and not at controlling the market.
The fourth key idea is that, instead of purchasing outright the expertise it lacks, Transcontinental would rather forge alliances. It's cheaper, more effective, and more profitable in every regard.
To the idea of convergence, Transcontinental prefers brand management and cross-promotion, that is, to spread its contents in a wide range of media. Cross-promotion extends to television. It did not — and will not — buy a TV network, but formed partnerships with TV networks. And, since it publishes niche magazines, Transcontinental joins with speciality TV channels. "This is what I call small-scale convergence through partnerships," said André Préfontaine.
A panel made up of Hervé Fischer, author of several books on digital technology, Robert Lewis, vice-president of content development at Rogers Media, David Olive, Toronto Star financial reporter, and Michel Tremblay, vice-president, strategy and commercial development at Radio-Canada, wondered whether convergence still had a future.
Hervé Fischer sees a kind of breathing in the economy. There was a diversification fad a while back. The idea was to lessen the risks of economic cycles by being active at once in many different sectors. After the failure of diversification, everyone resumed his primary activity and pruned peripheral sectors where they lacked experience and lost money.
Then, we saw the reverse trend. With the spectacular development of new digital communication technologies, we entered a roaring phase of integrating convergence. Those were the wild years of the digital. The crisis caused by the speculative bubble is barely over and already we hear about a return of technos and telecoms under the sign of divergence.
The crisis caused by the speculative bubble is barely over and already we hear about a return of technos and telecoms under the sign of divergence.
Convergence called first and foremost for the amalgamation of media and contents, with business plans integrating pipes, multitasking software and contents, television, telephone, Internet, cinema, music, publishing, newspapers, education and e-commerce. Technological logic held that social uses would also be convergent, giving rise to a so-called homo convergens untiringly plugged into every screen of life. For this vision supposes we are at the terminal point of these vast groupings, receptive to every message and convergent in our needs and social uses. This notion of homo convergens is sheer utopia, the technological and commercial rationalisation of a wild fantasy that would promptly turn into a nightmare. The awakening is brutal.
Should we seek revenge against the dream become nightmare by being ironical about the digital revolution? It would be a mistake as big as the fad itself, because digitisation is a groundswell that will develop and spread to the entire kaleidoscope of human activities. After the crisis, which brought about a restructuring and consolidation of our digital industries, stock exchanges are beginning to quiver again; Internet connections, e-commerce and on-line banking are increasing; the economy will continue to breathe.
Of course, the return to reality is less seductive than the fireworks of the imagination, but it may be more sustainable. Once convergence is demystified, businesses rediscover the realism of media, which cannot be mixed like a vegetable soup to form a superior media, convergent and universal. The integration of radio, television, newspapers, cell phones and whatnot, presuming it's possible, does not result in added value, a whole that is more than the sum of its parts. Because social customs are not convergent, no more than media and platforms. By definition, social customs are divergent and we cultivate their differences.
The media have added value, not when we put them together, but when we seek to bank on their specificity. The media are like languages and the arts: they influence each other, but the real strength of each, both cultural and commercial, lies in exploiting its own difference. The new business plans will again take into account the inescapable principle of media divergence and the specificity of their contents, social customs and markets.
We are at the point where, after celebrating at a stupendous cost the illusion of convergence, we rediscover that it's in fragmentation and the re-specification of digital uses that we will discover the social uses and, therefore, the markets of NICTs. "Without being a prophet, I don't doubt that the digital economy will bounce back spectacularly, because it is henceforth at the crossroads of human activities," he says.
Robert Lewis noted that Rogers Media did not get carried away by convergence. "We targeted strategic acquisitions, in sports, ethnic radio, women's and trade magazines."
In both English and French, these four areas are the core of Rogers Media's business. The company owns some 60 publications, 43 radio stations, two all-news stations, SportsNet, two multicultural television channels, and the prosperous Shopping Channel, which sells practically everything.
In the spirit of convergence, Rogers Media has created
In short, says Robert Lewis, "we have managed to develop a closer cooperative relationship between our various enterprises, which remain very independent. We have respected their right to keep out of any project. There were obstacles. Chief editors may at times be wary of top management initiatives. There are obvious psychological barriers to overcome, for chief editors especially, toward 'house' projects not of their own devising. We had setbacks, but they were fewer than our successes."
David Olive feels it is too early to be conclusive about the future prospects for convergence. But we know that, in the short term, convergence will be a hostage to the poor financial condition of the newly-enlarged media conglomerates. Convergence has been a losing strategy for shareholders. Add to this difficult birth for convergence the scepticism that has always been directed at media conglomerates and their promised synergies. In theory, at least, there should be undeniable benefits from leveraging the talent, money and distribution power of a converged media enterprise. But so far the initiatives have been modest. Also worrisome is the internal turf rivalry and resistance to change inside these media conglomerates that continue to work against the convergence vision.
"From a creative standpoint, I can't think of a single major journalistic or entertainment initiative made possible by convergence. We're still waiting for the sports documentary that has come about only because Walt Disney owns the ESPN cable network, the Touchstone Pictures film studio and the Anaheim Mighty Ducks. And where is the series of investigative reports on health, science or the environment because CanWest Global owns the Vancouver Sun, the Canada.com web portal and the Global TV outlets in most major Canadian cities?"
The sad reality is that convergence has created debt-laden enterprises that have exhausted their treasuries to pay for take-overs. These enterprises are now in austerity mode..
David Olive remains optimistic that in time the technological advances, particularly in wireless and the Internet, will result in exciting new methods for distributing content, and that journalists and other content creators, as they get used to their new cross-disciplinary vocations, will develop compelling new types of content.
"There's no question that we're in for tough times over the next few years. In the short term, mere survival is the order of the day for the most ambitious convergence players. And I do wonder if we have lost an opportunity to discover what convergence might have yielded if it had been pursued in a more thoughtful, incremental way."
Michel Tremblay recalled that the state-owned corporation was the first large media conglomerate in the country. "But, he added, it was only recently that we began taking advantage of this situation."
Essentially, Radio-Canada's vision hinges on the fact that our key competence is to create distinctive contents that we must offer to Canadians on the platforms of their choice. For now, the CBC and Radio Canada feed more than 15 platforms, without counting the numerous specialised services that carry our programs. Of course, these contents have to be reworked and adapted to fit the new platforms.
The Information Department shows how Radio-Canada creates these synergies and extends their reach. Radio-Canada launched services like Newsworld and RDI some 10 years ago and was one of the pioneers in the use of Internet with Radiocanada.ca and cbc.ca, which have become the most popular Internet sites in their respective markets in Canada.
Radio and television work more closely than ever to increase RC's ability to collect and process information. Gone is the time when the networks operated separately and had very few exchanges. As an example, CBC foreign correspondents now feed television and radio indiscriminately in English and French.
The creation of synergies is not limited to the information sector. The simultaneous broadcast of drama series on both networks shows the corporation's will to achieve the maximum of synergy within our services while creating innovative content.
Partnerships have a strategic importance for the CBC. They serve to better manage the level of risk of new initiatives. Thus were developed speciality services like ARTV, the Documentary Channel and Country Canada.
"As to whether contents synergies have a future," says Michel Tremblay, "the answer is simple: they are inevitable and necessary."
What is to be learned from the Internet experience of the U.S. press?
Steve Outing, from the Poynter Institute of Journalism and interactive media critic at Editor & Publisher, says he's one of the most bullish about how convergence will turn out on the editorial side. "And there are several reasons why. Obviously newspaper circulation has been declining. Hours spent watching television continue to decline. Indeed nearly all media have seen declines."
The big reason, he believes, is news consumer habits are changing. "Take the hypothetical example of a major news event. You could be alerted by your cell phone. Later, you watch television to get further details. Later still, you may visit a Web site and read news comments and analyses. Thus, to a single news, the consumer will react all day long on a variety of platforms. This will become the norm within two, five years at the most."
A beneficial effect of convergence is cross-promotion. It's more and more common to be told in a newscast that further information is available on-line. The number of people actually visiting the sites is staggering. Consumers want to receive contents wherever they are in the format of their choice. The media are forced to respond.
The models for convergence are obviously the bigger ones. But some smaller companies are doing interesting stuff. The Tampa News Center, for example, has created a super desk where they have on-line, print and TV editors all sitting in one room. "I believe this is going to be the model for how many journalists work. News media organisations will publish news to various media formats and there'll just be one set of reporters producing content that will be sliced and diced into various formats." In this world, there will really be more jobs for editors. Already many journalism schools in the U.S. offer mandatory cross-media training programs. The student can specialise in printed journalism, but must learn to write for the other media.
Money-wise, none of the news companies really knows how this is going to turn out. Some fear it's going to cost a lot of money. Most of the people doing it admit they're not making money, but they're not losing any either.
To sum up, in terms of content, convergence is hardly a dead issue in journalism. Readers quite simply are demanding that we in the news business take convergence seriously and continue to do this, because they want to get their information both in the new and the old media.
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