As the multimedia tribe gathers for the annual Intermedia conference and exposition in San Jose this week, there will be much to celebrate — and to question.

To be sure, even the most optimistic proponent of interactive multimedia couldn’t have dreamed that the interest in the new medium would have become so frenzied within the past year.

The high-water mark, of course, was Bell Atlantic’s proposed (but ultimately failed) $ 33 billion aquisition of Tele-Communications Inc. The other five cash-laden “Baby Bells” scrambled to keep pace, unveiling plans to either aquire cable companies or build digital superhighways — a process that will take about 10 years and cost an estimated $ 100 billion.

Other corporate heavyweights entered the ring swinging. Time Warner is sparing no expense funding its “full-service” interactive digital cable network, set to debut shortly in Orlando; the Tribune Co. bought Compton’s New Media software publishing company; Microsoft is pouring millions into developing and marketing CD-ROM titles for its new Home line, projecting 100 titles within 18 months; Sony is releasing big budget interactive game versions of its hit movies – using the same sets.

Then there’s the hefty multimedia investments being made by the likes of AT&T , IBM, MCA, GTE, Apple, Philips, Viacom, Sega, SiliconGraphics and the Hearst Corp.

In fact, the mesmerizing attraction of interactive multimedia to corporate America was vividly underscored by Viacom’s recent $ 9.85 billion acquisition of Paramount Communications and bolstered by the $ 8 billion merger with Blockbuster Entertainment and a $ 1.2 billion investment from Nynex Corp.

One of the driving forces behind the exorbitant price Viacom wound up paying for the media company, agree industry executives and Wall Street analysts, wasn’t Paramount’s actual market value, but the potential of its impressive film , TV and video library and publishing catalog represented as a precious source of copyrighted “content” for interactive programming.

And multimedia advocates had further cause to cheer: Sales of CD-ROM hardware and software for personal computers soared past $ 6 billion, achieving a retail sales breakthrough in last year’s fourth quarter; CD-ROM video games, fueled by the success of Sega’s CD-ROM players, are proving to be enormously popular; interactive personal computer on-line services and the Internet attracted unprecedented attention; and Congress appears to be on the verge of passing landmark legislation that would finally establish a legal framework for the new digital communications era.

Caution ahead

But no one believes the road to interactive digital delivery on the “information superhighway” won’t include some jarring potholes. Critical questions include:

  • When — or will — the telephone and cable companies make a return on their massive investments in interactive services? Despite the enormous hype, no one knows if a critical mass of consumers will shell out discretionary dollars for new services — and some early tests reveal extremely limited consumer interest.

  • CD-ROM sales are zooming, but will the medium be the ’90s version of eight-track tapes? And will the plethora of competing CD-ROM platforms paralyze potential growth?

  • While Congress appears set to pass crucial legislation, whose interests will it serve? Supposedly inviolate principals such as “universal access” to interactive digital delivery are already under attack.

The telephone and cable companies, and combinations thereof, which are beginning to invest billions of dollars in digital interactive technology, infrastructure and programming, obviously believe there’s a market for the new services. “The evolution is not risky,” says cable king John Malone, TCI’s president and CEO. “The bulk of the revenues to support this infrastructure already exists.”

Others aren’t so sure. Microsoft chairman Bill Gates has publicly called the early interactivity trials “a joke. They basically will prove exactly the opposite of what they’re supposed to prove, which is: can you get enough monthly activity to justify the fixed cost? And with the kind of limited applications and user interface they have this year, they’ll basically prove they shouldn’t spend the money.”

Gates is still a believer in the long-term future of digital interactivity, but the implementation of the vision remains murky. Nynex vice chairman Fred Salerno and others are convinced a “two-wire” world where cable and telephone companies compete and combine to offer rival delivery systems to the home is inevitable.

But costly technological stumbling blocks remain. One big setback has already pushed the timetable back: In January, TCI said its planned purchase of one million new set-top converters, the key interface between the home viewer and interactive digital delivery, will be delayed by nearly a year because industry technical standards are still being debated.

CD-ROM — Here today…

For all the blue-sky publicity given to the non-existent “information superhighway,” the reality is that sales of CD-ROM hardware and software are the only interactive multimedia sectors making money.

What’s more, the growth curves remain nothing short of phenomenal. Hardware sales are expected to double this year from the present low-end estimate of a three-million-unit installed base. CD-ROM software sales rose by 700% to 2.7 million units last year, according to the Dataquest market research firm, and of the 450 existing CD-ROM titles on the MPC format, says the Multimedia PC Marketing Council, 300 were released last year. Both organizations say the annual percentage increases should be replicated this year.

But a common refrain in multimedia circles is that CD-ROM is merely a “transitional” medium that will fade away as high-bandwidth digital delivery to the home becomes standard.

“CD-ROM is boring, stupid and slow,” says Denise Caruso, the veteran multimedia analyst who recently joined Norman Pearlstine’s Friday Holdings, a new New York-based multimedia holding company. “It’s a way for people to learn how to work with and code high-bandwidth information, but technology is changing too fast to say it will stick around.”

But CD-ROM publishing and retailing executives sharply disagree.

Sony Electronic Publishing president Olaf Olafsson notes that Sony is making a multimillion-dollar investment to open up a new CD-ROM manufacturing plant in Eugene, Ore., this year. “I think CD-ROM is a mass market now,” says Olafsson, “and will contiune to be the medium of choice for consumers. The only question is what will be the content of choice.

“And I’m not afraid CD-ROM will become obsolete when the ‘information superhighway’ arrives. Electronic distribution needs rest and memory. We feel very comfortable with our investment in CD-ROM.”

Philips Media also has a sizable investment in CD-ROM’s future; one that CEO Scott Marden argues is justified. “The installed base will continue to broaden as hardware prices come down and software quality gets better,” Marden says. “The 3-D graphic process will impress people this year, and we’re bringing out 15 digital video movies on CD-ROM. Even with other forms of digital delivery, American consumers love packaged goods — and a well-marketed and merchandised CD-ROM is a terrific mass market packaged good.”

“People like to own stuff,” agrees Compton New Media’s vice president Thomas McGrew, “and a fiber-optic line into the home won’t negate a purchase of a CD-ROM people can put on the shelf.”

Blockbuster’s director of business development, Mike van der Kieft, who is currently conducting a 50-store CD-ROM retail sales and rental test in the San Francisco Bay Area, says, “I don’t think the consumer electronics market will go away from CD-ROM, especially once there’s good branded recognition. It’s a market that should be around for a long time.”

Platform plethora

But what about the fact that consumers are faced with a bewildering choice of competing CD-ROM platforms, including two major PC formats (MPC and Macintosh); several set-top TV players (including the well-funded Philips’ CD-I and 3DO machines); and a slew of game machine players that will have new entries from industry leaders like Sega and Sony next year?

Retailers edging into the software business aren’t happy. “It’s a confusing market for people,” says Tower Records head Russ Soloman. “It’s a huge problem,” adds Blockbuster’s van der Kieft, “and is chilling the market.” What’s more, says Compton’s McGrew, “it’s going to get worse before it gets better.”

But others, such as Philips’ Marden, are more sanguine, expressing confidence that software with cross-platform capability, allowing a disc to play on a variety of machines, will become increasingly commonplace.

And once developers can use authoring tools like Kaleida’s Script X, allowing them to write programs for more than one platform simultaneously, industry executives expect the platform problem to ease.

Winners, losers

The interactive era can’t get into full swing without legislation from Washington. While battles among competing interests — in this case, phone companies, cable companies, broadcasters, programmers and public interest groups — are par for the course as various bills move through Congress, what is surprising is how principles such as “universal access/service” (allowing all citizens access to the flow of digital data and interactive services) are already coming under attack.

In his landmark Los Angeles speech earlier this year, Vice President Al Gore, articulating a sentiment shared by many multimedia enthusiasts — and other politicians — argued that society must not become divided into information “haves and have-nots.”

“It is critically important…,” Gore said, “that all carriers must be obliged to contribute, on an equitable and competitvely neutral basis, to the preservation and advancement of universal service.”

The Wall Street Journal soon ridiculed the idea in a front-page column, declaring the “translation” of Gore’s speech meant “we must tax phone, cable and other information services to subsidize access to the superhighway for everyone.”

Gore “is paving the way for a big new middle-class entitlement program,” the column concluded, “that would increase the government’s drag on the economy for decades to come.”

A similiar line of attack came from Thomas Duesterberg and former FCC chief of staff Peter Pitsch of the Hudson Institute, a conservative think-tank. “Interactive video services cannot, by any stretch of the imagination,” they argued in a syndicated op-ed piece, “be considered a necessity.”

Regulatory reforms should be “more modest,” they continued, “before creating a huge new regulatory entitlement.”

Advocates of universal service see these broadsides as disturbing straws in the wind, signaling a looming battle over the issue in Congress.

Mitchell Kapor, chairman of the Electronic Frontier Foundation, a non-profit group that has emerged as a leading civil-libertarian voice in the digital media community, drew his own battleline by declaring, “Congress should make the proposed mergers (of giant media companies proposing to use cable and telephone resources to build data highways) hinge on detailed commitments to provide affordable services to all Americans.”

But with legislation pending, says one insider, “money is now on the table, and universal service means less of it for the big guys. There will definitely be a fight.”

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