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INNOVATION / MICHAEL SCHRAGE

Why Phone-Cable Alliances Are Less Than Meets the Eye

October 27, 1994|MICHAEL SCHRAGE | Michael Schrage is a writer, consultant and research associate at the Massachusetts Institute of Technology. He writes this column independently for The Times

You'll have to excuse me, but I'm in the middle of negotiating a "strategic alliance" with a Major Telephone Company. You know the name.

So here's the deal: I am to become a multimedia "content provider" for its global network. This requires me to guarantee a certain volume of voice and data communications through its state-of-the-art digital network. In exchange for this guarantee, this multibillion-dollar telecommunications giant promises that I will get special rates. It also agrees to cover the hard dollar costs associated with the transaction. What's more, a significant portion of my payments go into promised network upgrades that should let me expand the range of content I provide. Now that's synergy!

But here's the best part: The alliance isn't even exclusive. I can still cut deals with other telecommunications companies, and they remain free to offer their network services to other "content providers." Pretty good, eh? I think I've got their number. . . .

All right, perhaps strategic alliance is too highfalutin a phrase for a simple telephone company customer like me. But then, there's also a lot less to most of these strategic alliances than meets the eye. Remember, many of these grand telecommunications deals are brought to you by the same investment bankers for whom the term strategic investor has become a term-of-art for rich sucker . In practice, the single biggest difference between a strategic alliance and a strategic investment is the amount of money involved.

As the Federal Communications Commission deadline for disclosure of wireless partnerships approaches, the flurry--some say frenzy--of telecommunications alliances being announced has less to do with strategy than positioning. There are mayflies that have more weight and endurance than the deals now being cut. Excuse me, but wasn't Sprint trying to marry EDS just a few months ago? Didn't TCI recently insist that its strategic future belonged with Bell Atlantic? Does anybody think cable companies are going to converge any faster with Baby Bells because they share a common wireless license? Get real.

While it's true that opportunity can make for strange bedfellows, it's almost embarrassing how quickly these multibillion-dollar behemoths can turn themselves into the slatterns of telecommunications in a promiscuous attempt to get a piece of a new frequency or--in the case of CAA's Baby Bell studio--a piece of the talent. Please note, by the way, that these deals aren't exclusive either. Strategic alliances are never exclusive; that's at the core of their strategic-ness. You can make book that the telecom companies will be swapping partners through the end of the decade.

As the experience with the cellular phone industry confirms, telecom strategic alliances usually represent little more than companies promising to be better customers for one another: If you make it less expensive to connect to your service, I'll make it less expensive for you to connect to mine. These companies may have bigger phone bills than I do, but the principle remains fundamentally the same.

The simple reality is that these alliances don't matter. They're irrelevant. They are little more than engagements where the lawyers have spent more time negotiating the prenuptial agreements than the prospective partners have discussing how they're going to raise the children. Given that these negotiations have taken place in the darkening shadow of an FCC deadline, these partnerships are really more like green card marriages of convenience--except in this case, you get a frequency instead of residency.

While alliances don't matter, products and services do. The most successful high-technology strategic alliance of the last decade--Microsoft and Intel--was rigorously focused on how to optimize Intel's microprocessors around Microsoft's operating systems and how Microsoft's operating systems could better exploit the computational properties of Intel's silicon. The focus wasn't on the nature of the relationship, but on the collaborative creation of new products. The Intel-Microsoft alliance wasn't designed around the relationship between the two companies, but their respective products.

Similarly, the technical success of the PowerPC microprocessor jointly created by Motorola, Apple and IBM can in large part be traced to the fact that the design of the chip drove the alliance--not the other way around. There is nothing comparable to that in the telecommunications realm.

That is at the core of the problem with strategic alliances: The allies are frequently more concerned with managing their relationships than with generating new products and services. The burdens of coordination ultimately outstrip the benefits of collaboration--if, indeed, collaboration is what they really want.

So why do companies do it? Why do ostensibly smart multibillion-dollar companies forge strategic alliances that they know aren't likely to last? The answer is simple: They're cheap. Entering a strategic alliance is like buying an option. Instead of making a real commitment, these companies are paying a small price for the right to have a commitment.

In other words, they aren't building, they're speculating. Which is fine, but speculation should never be confused with strategy.

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