The proposed merger of a leading cable operation and a telephone company signaled a new era in the American communications industry.
The proposed merger of Bell Atlantic Corporation and Tele-Communications Inc. (TCI) in 1993 was one of the largest and most complicated deals of its kind in the history of American business. The deal, announced by James G. Cullen, president of Bell Atlantic, was valued at $26 billion, second only to the buyout of RJR Nabisco by Kohlberg Kravis Roberts in 1989. The merger would have involved two large commercial operations in different areas—telephone communications and cable television—that had been brought closer together by advances in communications technology. The rapid development of digital transmission technology made it possible to send both sound and images along wires and thus to bring a wide range of entertainment and services into the home. Bell Atlantic and TCI positioned themselves to take advantage of this opportunity. Although the plan ultimately fell through, the proposed merger signaled a new era for telecommunications companies.
Bell Atlantic was one of the “Baby Bell”
James G. Cullen (right), president of Bell Atlantic, listens as Tele-Communications Inc. (TCI) chief executive officer John C. Malone (via telescreen) announces from New York City that Bell Atlantic has agreed to buy TCI. The deal was valued at $26 billion.
Although telephone services remained profitable business ventures in the 1980’s, communications technology was developing rapidly and bringing new challenges to telephone companies. Bell Atlantic earned a reputation as the most innovative of the Baby Bells by moving quickly into cellular phone operation, computer services, and fiber-optic communications. The company was also an innovator in telephone services, introducing features such as caller ID and paging.
The most important development in communications technology in the 1980’s was satellite-delivered television programming, which transferred cable television
Telephone and cable television companies both ran wires into the homes of their subscribers. During the 1980’s, the capabilities of wired communications soared exponentially as fiber-optic cable
With these resources at hand, Malone of TCI and Raymond W. Smith, the chair of Bell Atlantic, were determined to lead the movement into wired interactive communications, but each realized that his company could not go it alone. Bell Atlantic had expertise in operating advanced communications networks but did not have access to programming, which would be essential if the telephone company was to compete with television companies in providing home entertainment. TCI had control of several organizations that produced television programming but lacked the finances to expand into new areas. It also lacked the technical expertise required to deal in a broad range of information and communications services over a wired network.
In 1989, Smith predicted that the telephone companies would diversify into cable services by utilizing their fiber-optic networks and suggested that telephone and cable companies should work together. Smith decided that the only way for Bell Atlantic to move into the next phase of the communications business was to ally with a cable television operator. Malone recognized that he could not push TCI into the field of wired communications without the support of a telephone company. In a deal announced on October 13, 1993, the two companies agreed to merge in an exchange of shares. Bell Atlantic would acquire TCI and its programming arm, Liberty Media, for about $12 billion and would assume more than $9 billion in TCI’s debt.
The new Bell Atlantic would have the capability to offer an unprecedented number of services to the home consumer. In addition to normal telephone communications, it could provide video telephone calls and a new type of wireless phone service, called Personal Communications Services, that would employ the cable system of TCI. The fiber-optic cables of Bell Atlantic could carry video games, interactive media contained in entertainment and information computer software, films, music, news, and the broad spectrum of cable programming. It could also provide interactive shopping services through TCI’s Home Shopping Network.
Bell Atlantic had ambitions to become a source of programming for the new networks of telecommunications. It developed an electronic navigation system called Stargazer to guide television viewers through the host of options provided by cable and fiber-optic networks. Viewers would receive access to banking, education, shopping, and entertainment services. Bell Atlantic also discussed new sources of entertainment with the Walt Disney organization, Paramount Pictures, and Home Box Office. The new Bell Atlantic was conceived as the pioneer multimedia company, bringing together information processing, communications, and entertainment media.
The announcement of the merger came as a shock to the business community. The planning had been carried out in secret, and it was widely believed in the cable industry that John Malone would never concede control of his company. The news caused elation in some quarters and despair in others. A new industrial giant with assets of $60 billion and a stake in two vital technologies was heralded as a breakthrough that would open the way to the new “telecomedia” industry of the twenty-first century. Wall Street was enthusiastic about the merger, and the share prices of both companies rose. In contrast, several members of Congress voiced opposition to what they saw as an excessively large company, pointing out that it would serve one-fourth of all American households and have substantial monopoly power. Many legislators and consumer advocates warned that the electronic “information superhighway” of the future would fall prey to narrow commercial interests.
The proposed merger of Bell Atlantic and TCI was notable for the size of the deal and the ambitions of the new company, but other telephone companies had pursued the strategy of forging links with cable television in the United States and Europe, although on a much smaller scale. Merger plans were made during a flurry of acquisitions by the Baby Bell companies. Nynex Corporation
The struggle for Paramount provided a symbolic image of the new era of electronic entertainment. Paramount Pictures
TCI became part of this struggle because it owned a large share of QVC. It agreed to invest $500 million in QVC to help finance the acquisition of Paramount. Liberty Media Corporation also owned the Home Shopping Network, which was involved in negotiations with QVC to merge all cable shopping services into one organization. The Bell Atlantic-TCI merger presented some regulatory problems for QVC in its struggle to take over Paramount, and subsequently TCI withdrew its support. This opened the door for BellSouth to become QVC’s partner in this venture.
By far the most important barriers to the merger of Bell Atlantic and TCI were regulatory issues that would have to be resolved before the two companies could combine. Several government bodies had jurisdiction over the services that would be affected by the merger, ranging from the Federal Communications Commission to the Justice Department. The proposed merger posed a question of monopoly: An organization reaching into millions of homes, with a presence in fifty-nine of the nation’s top one hundred markets, could easily act in restraint of trade. Bell Atlantic and TCI together would control the gateway to more than 40 percent of American homes. Any entrepreneur with plans to set up a new entertainment or news channel would need to acknowledge the company’s power.
More complex issues surrounded the activities of cable television operators, which were governed by the 1984 Cable Act,
Regulations concerning communications had not stayed abreast of the technology, and there was widespread belief in both Congress and the business community that regulations would have to be rewritten to suit the new order in information technology. Bell Atlantic achieved an important precedent when a federal court declared a provision of the 1984 Cable Act unconstitutional and allowed Bell Atlantic to offer video programs to its subscribers. Other legal barriers to telephone companies moving into cable were expected to be relaxed as new definitions of what constitutes a telecommunications company emerged.
Virulent opposition to this process from some members of Congress and consumer groups meant that Bell Atlantic and TCI faced a difficult fight. The telephone and cable services were both high-profile monopolies in the eyes of the public, and there was a strong belief that both overcharged for their services. Subscribers of Bell Atlantic and TCI expressed fears that their bills would increase to pay for the merger and that there would be no way to keep accounting for telephone and cable operations separate. Senator Howard Metzenbaum,
Advocates of the national “information superhighway” of electronic data were dismayed at the union of telephone and cable interests, which would give those business interests control of telecommunications in the United States. When Vice President Al Gore
The development of digital technology was supposed to encourage competition by giving cable television and telephone companies the means to compete with one another. This capability remained even though the merger of Bell Atlantic and TCI fell through. Bell Atlantic showed that it could use both copper telephone lines and the new fiber-optic cables to transmit television programming and thus compete with cable companies. Several cable operators successfully used their existing networks to provide interactive communications to their subscribers. Time Warner and Viacom planned to develop this technology, with or without the support of telephone companies.
Fiber-optic wiring was not the exclusive preserve of telephone companies and could easily be operated by other users. In addition to media and communications companies, the computer and software industries were eager to enter the world of interactive communications. Microsoft,
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Evans, David, ed. Breaking Up Bell: Essays on Industrial Organization and Regulation. New York: North-Holland, 1983. Collection of scholarly articles on regulation of the telephone industry describes the legal boundaries governing operation of telephone services. -
Kneale, Dennis, Johnnie L. Roberts, and Laura Landro. “Plugging In: Bell Atlantic and TCI Are Poised to Shape New Interactive World.” The Wall Street Journal, October 14, 1993, p. Al. Discusses the businesses in which the merged new firm would compete. -
Landler, Mark, Bart Ziegler, Mark Lewyn, and Leah Nathans Spiro. “Bell-Ringer! How Bell Atlantic and TCI Hooked Up—And What It Means for the Information Age.” BusinessWeek, October 25, 1993, 32-36. Details the planning of the merger and suggests likely responses by competitors. Informative concerning financial aspects of the merger; presents statistics on the firms involved. -
McMaster, Susan E. The Telecommunications Industry. Westport, Conn.: Greenwood Press, 2002. Presents a concise history of the industry from the invention of the telephone in 1875 to the beginning of the twenty-first century. Includes discussion of the breakup of the Bell system and the mergers and technology changes that have influenced the industry. -
Markoff, John. “Phone-Cable Deal May Offer Vehicle for Data Expressway.” The New York Times, October 14, 1993, pp. Al, C6. Discusses how TCI and Bell Atlantic could implement the idea of an information superhighway. Includes a map showing areas in which the companies operated as of the date of the merger announcement. A chart shows other major media deals of 1993. -
Sugawara, Sandra, and Paul Farhi. “Merger to Create a Media Giant: $26 Billion Bell Atlantic-TCI Deal Is a Vision of TV’s Future.” The Washington Post, October 14, 1993, pp. A1, A8. Discusses basics of the merger deal, focusing on antitrust issues. An accompanying article focuses on Smith and Malone. -
Tunstall, W. Brooke. Disconnecting Parties: Managing the Bell System Break-Up. New York: McGraw-Hill, 1985. An employee of the Bell system describes the breakup and provides information about the origins and corporate culture of Bell Atlantic.
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