BATTLE FOR REMOTE CONTROL

By John Greenwald

For more than a decade, Robert Redford's Sundance Film Festival has celebrated the latest trends in American independent filmmaking. It was thus a sign of the times that at this year's screenings, the talk was not only about actors, directors and hip new movies, but also about the information superhighway. Gathered in Park City, Utah, in January, the Beautiful People heard the experts talk about two-way media, explored online services and debated the merits of CD-ROM technology. ``It's going to be like a geologic upheaval,'' Redford said. ``We're going to have to sit and watch as the pirates of the high seas lock ships and duke it out.''

Indeed we shall -- and indeed we are, for the battle is already well under way. Seldom have the opportunities for riches seemed so great, or the risks of failure so daunting, as in today's rush to profit from the information revolution. It is a contest that goes beyond who will build and control two- way TV, toward a fundamental reshaping of the communications, information and entertainment industries.

There are technical issues aplenty, such as whether the computer or the television -- or some hybrid -- will be the main electronic link to the home of the 21st century. But the more tantalizing question is just how the information titans will make their money. Spurred by forecasts that the worldwide market for everything from movies on demand to electronic shopping malls could reach $1 trillion within a decade, top corporate strategists are still debating whether they will profit most by distributing digital data, by owning it or by some combination of the two.

``Many corporate and personal fortunes will be won -- and lost,'' says Joseph Kraemer, who follows the communications and electronics industries for EDS Management Consulting Services in Washington. ``The phrase bet the company will be used more often, and with more passion and much more accuracy, than at any other time since World War II.''

Chief among the combatants are the telephone and cable giants that are building rival versions of the information highway. One of these is Bell Atlantic, which plans to spend $11 billion on fiber-optic cable and other equipment to bring two-way TV to 8 million homes by the year 2000. Another is Time Warner, which is neck and neck with TeleCommunications Inc. in the race to be the nation's largest cable company. Time Warner is teaming with U S West to test its notion of a state-of-the-art system in Orlando, Florida, as part of a $5 billion effort to build what the company calls its Full Service Network.

Also jockeying for position are innumerable hardware, software and electronics companies that provide the components for the information highway. They range from giants like Intel, Microsoft, AT&T and IBM to countless smaller companies, some of which may emerge as tomorrow's giants. Dozens of suppliers stand to rake in billions of dollars over the next five years as the telephone and cable companies construct their systems.

The outcome will not be immediate by any means. Completion of the elaborate rewiring project will not come before the turn of the century. Unlike the globe-circling Internet, the interactive interstate is still more concept than reality. It consists today of dozens of scattered trials -- many of them plagued by technical snags -- in which companies are testing their systems and gauging the market for digital goodies.

So far, the early returns have been rather modest. In one test involving 200 homes in the Denver area, U S West, AT&T and TCI found that viewers ordered an average of only 2.5 films a month. But that was over a clunky system in which human attendants pulled videotapes from shelves and ran them on VCRs in response to calls placed by customers. When it is completed, the I-way is supposed to deliver thick bundles of electronic wares that could combine true video on demand with local, long-distance and wireless telephone services, which consumers now buy separately.

Just how these systems will be set up will be worked out not by any single player but by alliances of companies. Cooperation is a necessity, because no single company has the resources to build, program and operate anything as complex as an information highway. There are about half a dozen such confederations. In addition to the Time Warner/U S West/Silicon Graphics partnership, cable giants TCI, Cox and Comcast have joined forces with the long-distance company Sprint to develop a design of a seamless nationwide system for delivering cable and telephone service. Meanwhile, a number of the Baby Bell phone companies have turned to Hollywood. Ameritech, Bell South and Southwestern Bell (now SBC Communications) are teaming up with the Walt Disney Co. to develop and distribute movies, games and other programs to home viewers. Nynex, Bell Atlantic and Pacific Telesis have been talking with superagent Michael Ovitz about forming an alliance to make and distribute films. The idea is to create a coalition, or umbrella, that would enable the telephone companies, with the clout of their 50 million customers, to acquire the programming that will go out over these networks.

But these arrangements can also sow tension and slow progress, because they tend to unite friends and foes alike in potentially uncomfortable situations. Bell Atlantic and U S West are building separate electronic highways, for example, even as the two firms are allied in a project to provide wireless phone service. Time Warner and TCI are archrivals, yet they have teamed with Sega of America to form the Sega Channel, which could go out over the companies' superhighways. Entanglements like these have given rise to a new term: coopetition. Notes communications consultant Jeffrey Kagan: ``It can be very difficult to share secrets with a partner and keep them away from a competitor when they're one and the same company.''

The relationship between the interactive-television model of the I-way and the PC-based Internet is itself complex. The Internet provides free access to a vast array of computer bulletin boards and other services, while interactive systems will charge for every minute that consumers use them. Yet some companies are already charging entry fees for the news and entertainment they put up on the Internet, thereby imposing top-down control on what has been an information freeway. ``Fewer and fewer people are controlling not just entertainment, but information as well,'' frets independent filmmaker John Sayles. ``There'll be a lot of experimentation at first, but then it will come down to a handful of players again.''

The Internet has its own drawbacks as a popular medium. For example, it lacks the fiber-optic and coaxial cable to carry anything like the volume of films and other fare that the electronic highway plans to offer. And since no one owns or oversees the Internet, no large companies have a stake in making the substantial investments needed to upgrade the system. For such reasons, many Net watchers expect the Internet and interactive cable-TV architectures to mesh eventually in some fashion. ``Most people assume that the two worlds are going to intersect,'' says Lotus Development Corp. founder Mitch Kapor. ``But nobody knows when or how that is going to happen.''

For now, many hardware and software suppliers are in the happy position of selling their products to all the combatants in cyberspace. Intel, whose microchips run 80% of the world's 150 million personal computers, hopes to provide the chips for the TV set-top boxes that will translate and control the digital signals flowing over the information highway. The Silicon Valley company also has alliances with more than two dozen partners. Among them: CNN (for two-way TV news) and Bell Atlantic (for video-conferencing hardware).

Microsoft too is seeking a dominant position in the interactive age. Among other projects, it is writing two-way TV software for Hewlett Packard and Silicon Graphics, video-services software for Japan's NTT and satellite- communications software for McCaw Cellular. Microsoft's most ambitious new venture will come out later this year when the company's long-awaited operating system Windows 95 arrives, complete with free software to give users access to the company's new online bulletin board. The bulletin board will allow users to tap into the Internet with a single click of a mouse. With that portal wide open, Microsoft plans to use its $1.5 billion purchase of Intuit, the leading maker of personal-finance software, to enable consumers to make purchases and pay bills on the Microsoft service or at the hundreds of online ``shopping malls'' now springing up on the Internet.

The debate over whether the computer or the TV set will become the principal means of bringing the electronic highway into the home is a game everyone in the information industry plays. One side argues that the familiar ``boob tube'' will hold its ground. ``The TV set will continue to be the dominant home consumer appliance,'' declares Tom Jermoluk, president of Silicon Graphics, which built the microchips for the set-top boxes and huge media servers that are being used to shuttle movies to and from households in Time Warner's Florida test. Others say television will soon be passe. ``There is a critical limitation in set-top boxes,'' argues Theodore Waitt, chief executive of Gateway 2000, which pioneered selling PCs by phone. ``The quality of the picture you get just isn't as good for text-based information as on a computer, and a lot of the information people are going to want will be text-based.''

A third group contends that this dispute is over the wrong question. ``It's trying to take old words and apply them to new products,'' says Microsoft's Bill Gates, who envisions separate devices hooked up to intelligent set-top boxes that are essentially computers. ``It's like asking if you think a car is more like a horse or a bicycle.'' Yet other cybervisionaries say what's most likely to happen is that computers and televisions will continue to serve as complementary, rather than competing, electronic boxes in the home. That way, people could use computers to read E-mail or chat online, and TVs to watch movies or customized news broadcasts.

Some companies are quietly finding ways to link up all these appliances. Motorola created a new unit in January to build equipment that will bring online networks to home computers via TV cables. Motorola plans to test the system this year in a venture with TCI in suburban Chicago. (Comcast is experimenting with a similar system in Philadelphia, using equipment made by Zenith.) Apple, in conjunction with Texas Instruments, will market a tool it calls FireWire, designed to hook all such devices together so they can be operated from a single ``touchpad,'' or remote-control device.

One potential victim of all this convergence seems to be the industry supporting the CD-ROM, which is now the fastest-growing form of multimedia. A single 5-in.-diameter CD-ROM can hold everything from video games to a 21- volume encyclopedia. But within a decade, the millions of bits of information now stored on these discs will probably be piped into homes from video servers. That threat of eventual obsolescence, however, does little to alter projections of almost $10 billion a year in combined CD-ROM hardware and software sales in the interim.

The fates of the TV set and the CD-ROM, plus the ever changing prospect of even newer technologies, are reasons why it is so tough for builders of the information highway to decide what it is they should be selling. Companies that focus on providing Hollywood-packaged films, for example, could find consumers turning to an array of low-budget movies (some of them interactive) produced by small studios or even amateur filmmakers using increasingly available commercial cameras and multimedia kits. But companies that look to profit as distributors run the risk of becoming little more than common carriers, with the danger that their ability to charge for use of their cables and phone lines might somehow be circumscribed.

For such reasons, a number of players are hedging their high-stakes bets by both owning and distributing digital fare. ``This isn't about wires in the ground or boxes with 500 channels,'' says William Reddersen, a senior vice president of Bell South, which knows all about wires, electronic switches and things in the ground. ``This race is being driven by packaging, content, entertainment. The system has to be customer-friendly and fun to use. If you want to play this game, you have to send something entertaining down the pipe.'' That is one notion, at least, on which all of today's aspiring lords of the electronic lanes would surely agree.

With reporting by DAVID S. JACKSON/SAN FRANCISCO, THOMAS MCCARROLL/NEW YORK, JEFFREY RESSNER/PARK CITY AND RICHARD WOODBURY/DENVER