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Construction of the information superhighway has shifted from a hyperbolic vision of digital bits and bytes to a pragmatic view of reality bites.

The reality check comes from the collapse of several big financial deals in the telecommunications industry, particularly last week's undoing of a $4.9 billion joint venture between Southwestern Bell Corp. and Cox Enterprises, as well as a federal judge's rejection of AT&T's $12.6 billion bid to acquire McCaw Cellular Communications.

In February, Bell Atlantic Corp. canceled its $33 billion merger deal with Tele-Communications Inc.

But most analysts say the setbacks are more a matter of hot air being released from overinflated business expectations than a sign the superhighway is running out of gas.

"Never mistake a clear view for a short distance," said Paul Saffo, a director at the Institute for the Future, Menlo Park, Calif. "The collapse of these deals marks the end of the frenzied phase of new media. We are now entering the cold reality phase. People no longer will be just writing checks. They will be asking hard questions."

"Frankly, we think this is a good sign," said Rishad Tobaccowala, VP-account director in the Interactive Marketing Group of Leo Burnett USA, Chicago.

"Now people are going to look at it much more pragmatically and consumer-focused. Just because we are entering a revolution, doesn't mean you invest your money in revolutionary ways," Mr. Tobaccowala said.

The telephone industry apparently agrees. Both Bell Atlantic and Southwestern Bell cited a drop in the market values of the cable companies they were venturing with as reasons for scrapping their deals.

Both blamed new Federal Communications Commission cable rate regulations as the reason for those declines.

But William Kennard, general counsel of the FCC, called it a "pretty simplistic" ra-tionalization.

"These are very complex deals, and even before our regulations, they were priced very, very aggressively, more than 11 times cash flow," said Mr. Kennard, until December a communications attorney in Washington. "They both knew that re-regulation was coming. The deals were tremendously aggressively priced, and when they fell apart, they needed a convenient whipping boy. And a regulatory agency is a convenient excuse."

Al Sikes, FCC chairman under the Bush administration and now president of Hearst Corp.'s New Media & Technology Division, said the telephone companies "should have anticipated that there were going to be some changes in cable rate regulation and there should have been a formula on how to deal with that."

Whatever the explanations, the impact on cable values is real, said Jessica Reif, an analyst with Oppenheimer & Co.: "I don't care what the FCC says, I think this is all attributable to the FCC's second cable rate rollback.

"It has sent a signal to the marketplace that the FCC and the Clinton administration are going to be regulating this industry with a heavy hand," Ms. Reif said.

"As a result the value of cable shares has fallen 30% to 40% since their high in October. Billions of dollars in cable company values have been lost," she said.

Others blamed Wall Street for hyping the deals.

"It loves the short-term effect on stock price, but as time went by, the telephone companies realized they were overpaying by a factor of two or three on these deals and they needed an excuse to get out. The FCC's rate regulations provided that excuse," said Fritz Ringling, a principal of consultancy Network Dynamics, New York.

The deals were priced at multiples that were 11 to 12 times cash flow, levels that could be justified in a fast growing, consolidating industry but not in a regulated industry, said one investment banking executive. He suggested that the telephone companies simply didn't have the stomach for such uncertainties.

But even before these deals began collapsing, some rational voices were calling for a slower, more calculated approach to the business.

"People have projected this being a $100 billion market by the end of the century, but it is going to be a much more constrained business that will grow gradually," said Jeffrey Miller of Andersen Consulting, New York.

Andersen recently calculated the amount of time consumers currently spend on activities that are likely to migrate over to the superhighway-including entertainment, education and shopping-at about 3.5 hours per day.

Adding all of the best case scenarios for digital interactive systems proposed to date, Andersen estimated that only about 30 million households would have such services available to them by 1998.

Calculating how much consumers spend on those activities currently, Andersen estimates the market by 1998 would be only about $15 million.

"Our attempt was not to estimate the size of the market, but to put some boundaries around it," Mr. Miller said. "This is the market revenue that we are projecting consumers would pay for activities they currently do that could be transferred over to the superhighway.

"But an important part of the pilot tests will be the need to demonstrate what is the elasticity of that curve and what people are willing to spend per hour on new activities."

Written by Joe Mandese from bureau reports.

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