Players Club - CEOs talk media at Herb Allen's Sun Valley
'There is no shortage of star power at Mr. Allen's Sun Valley retreats'
By Alex Gove - The Red Herring magazine October 1997

Every July, a covey of private jets descends on Idaho's Friedman Memorial Airport and turns the tarmac into a virtual showroom for corporate aviation.

Then, like the princes of industry that they are, America's top CEOs exit their Venture planes for waiting limousines and travel 14 miles to the tiny ski-ing village of Sun Valley. The occasion is a conference held by Herbert A. Allen, CEO of Allen & Company, a small New York investment bank. While the big activity at Bohemian Grove may be micturating with Henry Kissinger in the woods, there is no shortage of star power at Mr. Allen's Sun Valley retreats: Bill Gates of Microsoft, Andy Grove of Intel, Michael Eisner of Disney, John Malone of TCI, and Warren Buffett of Berkshire Hathaway were just some of the heavy hitters who attended this year's conference.

Mr. Allen requests that his guests refrain from talking to the press about the conference, but perhaps he is asking too much. Like world-class athletes visiting an Olympic village, many of these "players" are rubbing shoulders with an elite that they have been working their whole lives to join. These CEOs may hold the fate of thousands in their hands, but here, even they are starstruck. A weakness for glitz Mr. Allen's chosen do not say a great deal, but this much is known: although the conference is designed to showcase companies and issues from many different industries, media and communications have assumed a more prominent role at Sun Valley in recent years. Part of this is an understandable weakness for glamorous businesses: the people who control the way we communicate have always adopted larger personae than their balance sheets perhaps warrant. But media and communications have also gained an important ally in the Internet. For the first time, entertainment, commerce, and distribution have become virtually interchangeable.

In an interview unrelated to Mr. Allen's gathering, The Red Herring asked Les Vadasz, the man in charge of Intel's investments and acquisitions, whether Intel was still as interested in new media as it had been when it backed such ill-fated ventures as the CAA/Intel Media Lab (see "Showcase to the Stars") and American Cybercast. His initial response--"Absolutely"--was followed by a qualification: "There are other elements of new media. I would consider the evolution of advertising and electronic commerce as a way to interact."

Mr. Vadasz is not the first person to make this observation, but it is provocative. Unlike interactive television, which promised everything and delivered nothing, the Internet and, more specifically, the World Wide Web have opened up a whole new avenue of commercial transactions. More importantly, perhaps, the Internet has made this avenue available to everyone. The telephone companies held the proverbial remote control for the interactive television systems they were developing, but the environment for delivering information and entertainment to the consumer is much more accessible than it once was. Mr. Vadasz's comment underscores not only how far this medium has evolved but how determined Intel and Microsoft are to shape its development.

Delivery boys At Mr. Allen's conference

Mr. Grove, Rupert Murdoch of the News Corporation, Barry Diller of Silver King Communications, Edgar Bronfman of Seagram and Universal, David Geffen of DreamWorks, and Gerald Levin of Time Warner discussed the future of "delivery systems." They reportedly agreed that cable companies held the advantage because the telcos were more concerned with increased competition in the long-distance and local telephone markets than with home entertainment.

But in some ways, the world is no longer so dualistic. As fashionable as cable stocks are these days, cable companies like Time Warner and TCI are short of cash and do not have the $200 to $250 per customer that analysts estimate it will cost to provide Internet access services. Since October of last year, for example, TCI has made an effort to cut down on costs, but it still carries more than $15 billion in debt. Although digital cable looks promising--TCI's investment in '@Home' will surely pay dividends--Mr. Malone is still criticized by investors for the years he spent promulgating the idea of a 500-channel universe. He will be hard-pressed to focus on Internet access in any substantial way. As for Time Warner, the company's second-quarter results were its best in years, but it is carrying a whopping $17 billion in debt that even $5 billion in annual cash flow cannot entirely mitigate.

Although Mr. Levin has said that Time Warner will work with US West and US West subsidiary MediaOne (formerly Continental Cablevision) to develop Internet telephony and Internet access, it only recently mended a bitter dispute with US West, which owns 25.5 percent of Time Warner Entertainment, over ownership of Time Warner's cable assets. Spend wildly, carry a big stick All this turmoil has left a sizable strategic opening for high-tech corporate investors like Intel and Microsoft. In a recent interview with The Herring, WebTV CEO Steve Perlman made no bones about Redmond's designs for the Web: he even compared Microsoft's vision of the Web to interactive television (see "The Bob Tube").

By paying $425 million for WebTV and investing $1 billion in Comcast in June, Microsoft has served notice to the media and communications world that it intends to be a major force in television. This July, Mr. Gates even went so far as to meet with the heads of TCI, Cox Communications, Rogers Communications, and Comcast personally to pitch a new set-top box that uses Windows CE for both analog and digital television sets.

Some observers have said that Microsoft's relationship with NBC is unraveling, and the company has radically changed its plans to develop television-style programming on the Microsoft Network. Nevertheless, it clearly intends to use some of its $15 billion cash reserves to define the new communications medium.

The same can be said of Intel. Although company representatives have openly mocked the cable industry in the past, Intel did invest an amount less than $5 million in '@Home' before it went public in July (Nasdaq: ATHM). Intel has also committed itself to developing other forms of fast Internet access. In addition to embracing ADSL technology, the company has formed a joint venture with Luxembourg's Société Européenne des Satellites to transmit video and other multimedia services to personal computers via satellite. Although Intel has only a minority investment in this venture (which is called European Satellite Multimedia Services), the company has identified fast Internet access as a growth area. "We have actively explored broadband deployment in the past," Mr. Vadasz says, "but we've focused on equipment technology primarily. We will be more active in looking at service companies."

Mr. Vadasz adds that one of Intel's main purposes in investing in satellite services is "to try and accelerate what's happening." He argues that Intel's role as an investor should be a "win-win for everybody." But Microsoft's and Intel's decision to try to shape the development of the media and communications industries obviously makes the established players uneasy.

Pay-Bill-per-view

At the Sun Valley panel on delivery systems, Mr. Grove, who moderated the discussion, was the only person who posited that the PC would play a significant role in the delivery of content to consumers. The rest of the panel members maintained that television would continue to be the primary interface.

It is easy to see why these players don't want to work with Microsoft and Intel. Despite Microsoft's and Intel's protestations that they are only trying to grow the markets for their existing products, few doubt that they will try to exploit any foothold they gain in the industry. In proposing a new operating system for the set-top box, for example, Mr. Gates also reportedly suggested a new revenue model that would allow Microsoft to receive subscription fees for the interactive services it provides, an intrusion that naturally horrified the cable companies.

Today's powers in media and communications naturally take some comfort in the disarray of the high-tech crowd. They also take heart in Microsoft's continued floundering with expensive online content ventures like the Microsoft Network.
But Mr. Grove's fellow panelists may be whistling in the dark. Despite their embrace of transitional technologies like Intercast or Internet TV, broadcasters and cable companies are still essentially using TV as a dumb terminal. And although it is true that Microsoft, Intel, and Compaq have failed to establish a new standard for digital television, high-tech companies can no longer be ignored. With billions of dollars in loose change and the determination to maintain their high growth rates by diversifying into consumer businesses, they will not rest until they have changed the nature of content to suit their business models.
So, with Mr. Gates hawking set-top boxes and Mr. Grove going on about the "connected PC," look for more CEOs wanting to talk about media and communications at next year's Sun Valley gathering. Provided Mr. Gates doesn't invite all of them to Redmond, that is.

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