"What's Next in Digital Convergence?" Commonwealth Club 15 June 1994 Denise Caruso Editorial Director Technology & Media "What's next in digital convergence" is the name of today's program, but I think it might be more appropriate to call it, "Dr. Strange Days, Or How I learned to stop worrying and love the chaos." Once upon a time, 'way back at the beginning of the '90s, when multimedia was still defined as anything that required three trips or more to the car, I used to think that order was better than chaos. But now I'm not so sure. Over the years, I've watched computer technology break free of its traditional ties to office automation. Telephone and cable providers, consumer electronics vendors, movie studios and publishers of all sizes and varieties, began to discover the efficiencies and even the artistic benefits of using digital power tools. It didn't take long for them to realize that everything they were doing or creating Ñ compressing digital video, using a word processor to write or edit a book, transmitting data through a digital phone switch, running a manufacturing operation Ñ used the common language of the computer. It didn't take but a heartbeat longer for them to start eyeballing each other's turf. Chaos ensued. Computer and software companies saw no reason they shouldn't become publishers, despite the responsibilities of the First Amendment and the mega-millions of dollars of liability they unwittingly shouldered. Print publishers were already using computers to write and edit their books, newspapers and magazines, and they even used them to physically smear the ink on paper -- so why not eliminate the paper and just sell the bits? Big deal if making perfect, pirated copies -- and perfect copies of perfect copies -- was as easy as a click and drag of the computer's mouse, and computer networks made mass distribution a whole lot easier than filling up boxes and packing them on trucks. Movie studios salivated to tap a crossover market between action flicks and the huge video game market, even though it's been a pretty rough row to hoe, getting folks to make a meaningful connection Ñ and by that, I mean a product compelling enough to get them go out and buy something Ñ between the telling of a story and playing a game. And then there was interactive TV -- was? is? will be? -- which looked like it was going to be a bonanza for everyone, especially for the telephone companies and cable providers who could smell an opportunity to charge through the nose for a new premium service. That was before the Cable Re- regulation Act and before the TCI-Bell Atlantic deal fell apart. And before John Malone wished Reed Hundt dead, as he did -- in jest -- in this month's WIRED. Bonanzas of any kind seem a lot less certain now, except in re-runs. Cautions aside, it was all very exciting, but back then I was grousing that this market, whatever it might be able to become, would implode if all these companies didn't sit down together and agree on some standards. Since the vendors of digital products were out trying to cram proprietary technologies down the throats of consumers who hadn't yet forgotten Betamax, the world had to wait that much longer for viable products, and I was cranky about the delay. But the events of the past six months or so have tempered my longing for an orderly digital universe. I have learned to stop worrying and love the chaos. It's not that I don't see the benefit of standards. Telephones, televisions, compact discs, cameras, music and video cassettes would not be part of our social fabric without various types of standards, from those as simple as the RJ-11 connector for our phone lines, to standards so complex they can describe how to lay down digitized music, text and pictures on an interactive compact disc. In the world of the computer, Microsoft's Windows has become a standard and helped create a vast software and user community. And the vast web of connected servers that we call the Internet grew like a weed in the defense and research communities precisely because its technical specifications were standardized from the get-go. With the Internet Protocols clearly outlined and published, literally anyone who had the money, equipment and desire could -- and did -- join the Internet. Though new industries can be born, they can't grow without standards. But in today's almost random environment of change, a standard doesn't stand a chance. Given this rather uneven state of affairs, what is next in this so-called convergence? Can there be a mass market for interactive TV or other artifacts of information nirvana without standards? Absolutely not. But convergence companies are pouring stunning sums of money into alliances and consortia and joint ventures and acquisitions to try and force the issue, believing that if the alliance is big enough and the partners are powerful enough, they can by sheer willpower, force a *de facto* standard. Unfortunately, most of them are developing proprietary technologies, often with companies whose businesses that they either do not know, do not understand or do not trust. Corporate partnering of one kind or another has become bedroom farce at its most frenetic: everyone's so hot to trot that they couldn't see a real customer need or market opportunity if it bit them on the nose. Such promiscuity can be enervating if you prefer an orderly universe, or if you're watching your stock wobble while companies trade each other like baseball cards. In this environment, the probability of getting cuckolded is very real. Much money and trust will be lost, and many companies will be trampled before this new digital world takes form. But I have decided to embrace the chaos because it is the best force to shape this world as it emerges. Why? Chaos completely flummoxes the existing infrastructure. For the first time in many years, a big company looking for new markets outside its traditional expertise is more at sea than a good startup with a specific technology to sell or product to build. And though startups are generally perceived as high risk, you don't get a lot higher risk than putting megamillions of dollars of shareholder equity on the line to do a Really Big Deal that has a so-so chance of bearing fruit. Chaos is also thrilling to those who want to move beyond the status quo. Today's confusion at the highest levels of most media and technology companies is cracking open their corporate exoskeletons and allowing new opportunities for growth to crawl into the light. Women, for example, are more visibly involved Ñ at very high levels Ñ in creating this new media industry than in any other. A few months ago, I hosted a career day at the American Film Institute for Women in Technology, and nearly all of the panelists agreed that the main reason they had been able to make names for themselves in this new industry was that no one else in their organizations had the faintest idea what was going on. Most of the inspired and enlightened projects I know Ñ far from the status quo of CD- ROM encyclopedias and "twitch" video games Ñ are coming from women. Chaos is also the perfect opportunity to open up public discussion about government's role in this emerging information economy. The conflict between ownership of conduit Ñ meaning, the cable or phone wires Ñ and content, or the movies and programming and services that are transmitted over the wires, will overshadow today's rather prosaic concerns with cross-ownership of cable and telephone companies and competition for local telephony services. Though these are important short-term issues, they are primarily concerned with short-term results, such as keeping the telcos cash-rich and allowing them ways to compete against other RBOCs, long-distance providers and cable, and helping cable keep its monopoly over video programming while getting into high-margin telephony services. The long-term issues about who owns and controls the network, and how, are critical to our future, both economically and as part of the democracy in which we live. We must help society as a whole understand the positive and negative aspects of these powerful technologies, and come to informed consensus about how government should regulate them to keep its citizens safe from exploitation. For example, growing number of citizens are concerned about the free speech and other civil liberties issues that may ensue when a few companies Ñ or government, for that matter Ñ control who and what gets on the network. Individual and corporate privacy is already under siege, with the government's attack on public key encryption and its support for the Clipper chip. (Those of you who didn't see the New York Times this weekend should definitely read Steven Levy's excellent piece in the Magazine section.) Also of vital importance is how to mandate access to the network for vital, non-commercial purposes such as public education and renewing our public libraries, and even more importantly, how to make sure that as many entrepreneurs as possible -- from settop box vendors to "garage band" new media artists -- have access to these networks. The business climate will change every time one of these critical issues is put to the test. These twin spectres -- government involvement and a business landscape that's constantly redrawing itself -- have conspired to make most companies leery of moving forward too quickly. But they are even more unwilling to stand still. The chaos of the moment has left them with few viable choices: Ally, invest or acquire. The making and breaking of alliances has gotten so out of hand that in our office, we call it "alliance fu." It's become the martial art of the 1990s. We've put together a directory that lists hundreds of alliances in the digital media universe. When the activity started a few years back, it sounded like a great idea Ñ get a bunch of companies together and decide on a technology to forge (or more truthfully, FORCE) a standard. But so far, they've proven to be more combative than collaborative. Nearly all the grand public alliances Ñ from General Magic and Kaleida Labs, both of which are plodding along at underwhelming speed, to the now-dead First Cities Ñ are finding that while big partners get you lots of press, managing them is a bit like trying to stuff street cats into a burlap sack. Even if you eventually succeed, you're certain to get bloodied in the process. Other companies, who admittedly don't have either desire or sufficient knowledge to move into new technology areas on their own, are acquiring smaller firms and bringing them inside. If the company is big enough and has sufficient capital to let a company's culture remain unscathed, or if the two companies have complimentary skill sets or products, this tactic can be successful. In fact, there is more mergers-and-acquisitions activity today than there has been since the bad old 1980s. Others, like TCI and AT&T, are making savvy "venture-style" investments and allowing entrepreneurs to grow their own products and cultures without the many pressures of corporate bureaucracies. It's this kind of seed money, more than any alliance or joint venture, that will move forward the state of the art for digital media technologies. True innovation only comes when people with great ideas are free to develop them without interference. And even then, the law of the jungle will hold: the vast majority of these startup ventures will fail or wither away. Most of the work being done now, for example, especially in multimedia and CD-ROM publishing, will go the way of all flesh. It's technically amazing to those of us who know what we're looking at, but consumers still don't like the stuff enough to buy it in quantities. Most of it is being created inside of, or for, large media companies, looking to exploit their existing assets by "repurposing" them -- yuck -- into CD-ROM or other electronic media such as online services. These companies have already lost money on this digital stuff, and they are likely to lose a lot more. The phone companies and cable companies who are selling their shareholders on media-shift applications such as interactive home shopping and video on demand will lose a lot of money for a while, too. There's just not enough evidence that consumers want this stuff enough to pay sufficiently through the nose for it. But if it spurs them to invest billions of dollars in new network infrastructure, I'm not going to say no. It's a dirty job, and somebody's got to do it. Though much of in the short term it will be painful for those involved, in techno-geologic time -- that is to say, a decade from now -- we will look back and see that those failures were the foundation upon which future generations of digital artists and inventors built their new products. The companies that invest in rebuilding infrastructure today will not be sorry 10 years from now. Their investments, and the investments of media companies, will continue to drive down the cost of producing new media, thus allowing a thousand -- million -- flowers to bloom. That finally, that's the most exciting thing that this so-called convergence hath wrought. In case you hadn't noticed, the means of production are in the hands of the people and we aren't giving them back. Everywhere you look, people are using digital production tools Ñ whether to create newsletters, digitize and distribute their photographs online, edit home movies, or create presentations for school. They aren't all professionals, and that's the point. Of course, the proliferation of information -- in the digital sense -- caused by all these creative people has given rise to another, growing problem. Information overload is upon us in spades, and yet another market opportunity exists for someone to invent the navigation systems that help us stay informed but not overwhelmed by the media that engulfs us today. So, in the spirit of the old axiom that "life is hard, then you die," we are destined for chaos for a good long time, so we may as well sit back and enjoy it. Being a big company, or even the biggest will not help; even being really, really smart won't save you from it. The questions still remain: Will deploying new interactive technologies make our lives easier and more enjoyable, or more complex? Will they save us money or make us pay more for technology that jumps through hoops? Will they make us safe from hackers and over-eager marketeers who can't wait to invade the privacy of our living rooms? No matter how many companies join forces, no matter how hard one or two or five powerful corporations try to press their version of the future upon us, the answers to these questions -- what consumers want, and what we will buy -- is still the critical, unknown factor. The evolutionary prize -- survival -- will go to those who figure out how to materialize that most elemental axiom. Thank you.