American Telephone & Multimedia?

It seems hardly a week goes by that Robert M. Kavner, AT&T's executive in charge of multimedia, isn't announcing an investment in some startup. Some of these, such as the stake in EO Inc., are aimed at creating new hardware to accommodate advanced communications. Others, such as the investment in Sierra Network, are designed to introduce the phone company to new markets, such as computer games.

Some of these investments may pay off handsomely one day, but none is likely to alter the future of the $65 billion telecommunications giant. In fact, these deals are just the trimmings around the edges. American Telephone & Telegraph Co. has much bigger plans for its role in the digital multimedia future--that promised nirvana in which vast libraries of movies, games, educational software, and other information will be available at the touch of a remote-control button in the nation's living rooms.

CREATIVE TOUCH. Under a scheme it has never before discussed publicly, AT&T says it is exploring plans to build what could be a clearinghouse for the Information Age. Kavner, an executive vice-president, says the company is studying plans to build a network of digital storage devices around the country. These giant computers, which likely would come from AT&T's NCR Corp. subsidiary, would store movies, television shows, and the information needed to run shopping channels--in other words, all sorts of programming that has been turned into computer code. This programming would be distributed over AT&T's nationwide long-distance network and, through connections to cable-TV companies and local phone systems, to homes, Kavner says.

But AT&T wants to do more than just store and send sequels to Jurassic Park. It wants to help movie studios, retailers, educators, and others develop programming that takes advantage of the new interactive network--for example, by helping them create interactive game channels. It also wants to use its computers to handle customer billing and divvy up royalties and other fees for "content" owners and local distributors. And it's working with software companies, which Kavner declines to identify, to design a screen format to select interactive services from a TV. In effect, AT&T would be a wholesale supplier and service bureau for the two-way video systems planned by cable and phone operators.

Kavner calls it the "missing industry" in the development of the digital era. "We're looking to be in a business that really doesn't exist today: helping those who own content--titles--convert to digital and distribute to their customers through networks," he says. Kavner calls the concept "hosting." AT&T acts as the navigator as these oceans of digital data make their way to homes and offices. "It should be a very good business," he says.

How good? Kavner won't say. What's more, he concedes, the scheme faces many obstacles and has not gotten past the drawing-board phase, even though he has been discussing it with major industry players, including Hollywood's premier dealmaker, Creative Artists Agency Inc. Chief Michael S. Ovitz. The proposal could be shot down, for example, if programming providers such as Hollywood studios don't go along or if the cable-TV or local phone companies decide to form a similar service. And Kavner expects there will be competing video systems. But if AT&T can pull it off, the plan could dramatically boost the traffic over the company's nationwide network--and revenues along with it--and secure its place in the race to build an information superhighway.

The AT&T scheme just might suit cable companies, figures Berge Ayvazian, an analyst at Yankee Group, a telecommunications consulting firm. He says some cable operators are leery about investing millions to develop their own computer "servers" and advanced switching systems to store and distribute digital programming. AT&T's system also would mesh with a video network planned by Teleport Communications Group Inc., a data networking company owned by cable operators, Ayvazian says. Teleport plans to link cable companies within metropolitan areas, allowing them to share digital programming feeds. AT&T's system could plug into Teleport's networks, he says.

"UP AND RUNNING." Kavner's plan also may be a good way to get entertainment programmers to accelerate their drive into the digital age, says Edward D. Horowitz, senior vice-president at Viacom International Inc., which owns cable systems and programming, including MTV. "Right now, servers are millions of dollars," he says. "By providing a server as a service, you're able to take your programming concept and get it up and running much more rapidly." Viacom and AT&T are already testing interactive video using NCR computers in Castro Valley, Calif. Horowitz praises the AT&T technology, but adds that eventually cable operators will want to own the servers that deliver their programs and will want AT&T simply to furnish fiber pipelines to link cable operations around the country.

For AT&T, Kavner's new plan fits nicely with other efforts to dominate the digital age. These include the "personal communicators" made by EO, a company AT&T controls; set-top control boxes for interactive TV designed by 3DO Co., in which AT&T is an investor; and Sierra Network, which AT&T has renamed ImagiNation Network. All these could plug into and get reams of data out of Kavner's digital storehouses.

One thing Kavner says he won't do is compete with customers on content. For example, he dismisses speculation that AT&T is shopping for a movie studio. The seeming exception, his investment in Sierra, was made to create a market for video games played over phone lines. "We're better off serving content people as a customer," he says.

Even if AT&T decides now to go ahead with its plan, it could be years before it gets rolling. One big problem: The phone giant has no control over the "retail" side of the equation--selling services to consumers via local phone companies and cable operators. It may take many years and many billions to upgrade their systems to handle interactive video. Beefing up the long-distance network with server computers may be the simple part. Notes Jerry Taylor, president of MCI Communications Corp.'s consumer division: "The challenge is getting into the home."

RIVAL ROUNDUP. Then there are the potential competitors. Microsoft Corp., for one, is in talks with cable-TV operators about forming a joint venture called CableSoft, which would devise software to control the set-top boxes for interactive TV. IBM is another potential challenger. It tried to set up a distribution system for digital programming a few years ago, but talks with Tele-Communications Inc. (TCI), Time Warner Inc., and others fell through. Still, that doesn't mean that Big Blue, which has the skills and equipment needed to digitize, store, and distribute content, has given up.

Local phone companies have big video plans of their own. One of them, Bell Atlantic Corp., won an important court ruling on Aug. 24 that allows it to package and sell video programming. A U.S. District Court found unconstitutional the provision of the 1984 federal cable law that bans Baby Bells from the video- programming business in their telephone-service areas. If the ruling is upheld, Bell Atlantic plans to offer video programming over both its own regional phone network and via cable and phone companies outside its region. Meanwhile, AT&T's long-distance competitors, chiefly MCI and Sprint Corp., are also capable of adding video servers to their networks. "If MCI took $100 million and bought 100 servers, what would the AT&T edge be?" asks one cable industry executive. MCI's Taylor says the company is considering video services, while Sprint declines to comment.

But AT&T is not going into this new business blindly. It already has begun testing interactive video delivery with cable operators Viacom, TCI, and Time Warner, and it also plans to beef up the ImagiNation Network in order to give it a taste of the "content-hosting" business.

Kavner says AT&T has one big advantage over most potential competitors: It is a relatively neutral party. It doesn't control much content, as do cable companies and Microsoft. And it doesn't control local distribution, as do the cable and local-phone companies. AT&T is using this neutrality to act as a broker: "We're talking to everybody who has content," says Douglas M. Dunn, an AT&T vice-president helping Kavner carry out the scheme.

Kavner says AT&T's plan could be just what is needed to jump-start the information highway. "Will it be one deal at a time, which is what's going on today, or do some of the more significant players need to stand up?" he asks. Clearly, AT&T is willing to stand up--and be counted.

Before it's here, it's on the Bloomberg Terminal.