The NewsHour with Jim Lehrer

MR. LEHRER: Good evening. I'm Jim Lehrer. On the NewsHour tonight, new regulations for children's television, Charles Krause interviews the head of the FCC; a gambling fight in California, Spencer Michels reports; then two business stories: the impact of America-On-Line going off-line and full combat over the breakfast cereal market; and life in the United States Senate, David Gergen talks to Warren Rudman. It all follows our summary of the news this Thursday. NEWS SUMMARY

MR. LEHRER: The Federal Communications Commission announced its new rules on children's programming today. They require television stations to air at least three hours per week of educational programming for children 16 and younger. Their rules originated from a White House Conference on Children's Television. We'll have more on this story right after the News Summary. The war over the Republican platform is over. The peace vehicle was an appendix to the strong anti-abortion platform adopted by the party's Platform Committee. Jeffrey Kaye reports from San Diego.

SPOKESMAN: We respectfully submit this platform to the American people. [applause]

MR. KAYE: Following approval of the platform yesterday, representatives of both Patrick Buchanan and Bob Dole declared victory.

PAUL MANAFORT, Dole Campaign: The Dole campaign is very happy with what happened over the course of the last three days. We think you saw the coming together of the Republican Party. As you saw, at the end of the session this afternoon, the Republican Party is united.

MR. KAYE: This morning, Angela "Bay" Buchanan, Patrick Buchanan's sister and campaign manager, said her brother had influenced the platform not just on its strong anti-abortion stance but on a wide variety of social and economic issues.

ANGELA "BAY" BUCHANAN, Chair, Buchanan Campaign: This really is a triumphant week for the Buchanan campaigns of both 92 and 96. Pat ran in both those campaigns. He said that his cause was about capturing the heart and soul of the party. We have done that this week. [applause]

MR. KAYE: The platform approved by the committee appeared to have headed off a threatened floor fight next week over the abortion issue. California Governor Pete Wilson, an abortion rights advocate, announced that Bob Dole had agreed on a deal to publish all rejected amendments in the appendix to the platform. The arrangement guaranteed that abortion rights language would appear as an addendum to the official platform document.

GOV. PETE WILSON, California: This is the accommodation that we sought.

MR. KAYE: But not all abortion rights advocates approved of the deal. Cynthia Thornton of WomanCare said the arrangement was a betrayal.

CYNTHIA THORNTON, WomanCare: American women deserve more than what Bob Dole has given them. Bob Dole asked for tolerance and did not go to the mat for American women. We do not appreciate it.

MR. KAYE: The platform is to be formally adopted by the full convention on Monday.

MR. LEHRER: There was much talk today about Bob Dole selecting Jack Kemp as his running mate. The two men met last night and a variety of sources confirmed the vice presidential nomination was the subject. Kemp is a former congressman and Housing Secretary is known for his strong supply side economic views. He supported Steve Forbes against Dole in the Republican primaries. Forbes spoke about a Dole-Kemp ticket at the U.S. Chamber of Commerce today in Washington.

STEVE FORBES, Former Republican Presidential Candidate: If the rumors are right, there is now a very good chance that he's going to pick or seriously consider picking Jack Kemp for his vice presidential running mate. If he does that, that choice would electrify the convention, obviously energize the party. I guarantee you, it'll excite the country.

MR. LEHRER: President Clinton was in California today. He told a group in Salinas that new statistics showed his administration has been successful in fighting juvenile crime.

PRESIDENT CLINTON: I do have some good news to tell you today. For the first time in seven years violent crime arrests of juveniles went down last year, for the first time in seven years. [applause] Arrests for murder by juveniles went down for the second year in a row by over 15 percent. We are moving in the right direction. We have to do more of what we are doing.

MR. LEHRER: Mr. Clinton said he picked Salinas for today's announcement because the city had used federal funds to reduce youth and gang violence. On the TWA crash story today, the salvage crew brought in a scorched slab of wing along with a piece of the fuselage. They loaded it onto a flatbed truck. It will be taken to the hangar, along with other fragments from the downed plane, to be reconstructed by investigators. One more body was also brought up today. A spokesman for the U.S. Postal Service announced that starting tomorrow, Air Mail packages weighing more than one pound can no longer be dropped into mail boxes. They'll have to be brought to the post office. The new restrictions are designed to increase security for commercial airlines carrying mail. Overseas in Chechnya today, separatist rebels held off advancing Russian troops in the capital of Grozny. We have more in this report from Lawrence McDonnell of Independent Television News.

LAWRENCE McDONNELL, ITN: Throughout the day, Russian troops pushed forward from the outskirts of Grozny, bombarding Chechen positions. With overwhelming fire power, their task was to flush out the rebels and re-take the city. Today the regular army was mobilized to support Interior Ministry troops trapped inside the Chechen capital. But on the front line there was confusion. In the latest fighting, there has been poor coordination between Russian forces and the local militia supposed to work alongside the army proved ineffective against the Chechen fighters. This commander admitted one detachment had run away. "It just disappeared," he said. Inside Grozny, the rebels held their positions, continuing to bombard the government compound in the city center. One source today estimated up to 3,000 Chechens were still fighting for control of Grozny. The Russians used helicopter gun ships to attack rebels around the city, but it was hard for them to pinpoint their positions. They're scattered around the streets in small groups. In the last three days of fighting many have been caught up in the running battles in the streets. The number of casualties continues to grow. The hospitals in Grozny are so full they're turning away all but the most seriously wounded.

MR. LEHRER: And back in this country today, a study in the "New England Journal of Medicine" said bone marrow transplants can cure sickle cell anemia in some children. Researchers aid 3/4 of the patients that underwent that treatment were cured, but they said it is too hazardous and difficult to be widely used. Several million people have sickle cell anemia worldwide, including about 80,000 Americans, most of them black. And that's it for the News Summary tonight. Now it's on to some new television rules, a California gambling story, America On Line goes off line, cereal wars, and a David Gergen dialogue. FOCUS - KIDS' TV

MR. LEHRER: New rules for children's television is first tonight. Charles Krause reports.

MR. KRAUSE: Children's television--should it be an instrument of enlightenment, or just another mode of entertainment? In 1990, Congress seemed to answer that question by passing the Children's Television Act which ordered TV stations across the country to increase the amount of educational children's programming. But there was little enforcement of the new law and no guidance on how many hours of programming were appropriate. Today the Federal Communications Commission announced a new rule calling for three hours per week of regularly scheduled programming specifically designed to educate and inform children. Stations that don't comply could have difficulty getting their licenses renewed. President Clinton announced the deal to require three hours of education programming at a high powered summit of children's broadcasters last week.

PRESIDENT CLINTON: This proposal fulfills the promise of the Children's Television Act that television should serve the educational and informational needs of our young people. It gives broadcasters flexibility on how to meet those needs, and it says to America's parents you are not alone. We are all committed to working with you, to see that education programming for your children makes the grade.

GEORGE JETSON: [Jetsons Cartoon] Morning, Janie. Oh, boy, am I starving. Would you dial my breakfast for me?

MR. KRAUSE: But determining just what is and what is not education is one of the many problems the FCC hasn't addressed. Under the 1990 law, one network claimed that the cartoon program "The Jetsons" fit the bill because it depicted life in the future.

SPOKESMAN: Oh, looks delicious.

MR. KRAUSE: Vice President Gore has also denounced the popular action show "Mighty Morphin Power Rangers" for creating an image of violence that he says is sociopathic. The program's creators, on the other hand, disagree, pointing to Mighty Morphin's multi- ethnic team with strong female characters as positive role models who work for good against evil.

[POWER RANGERS SEGMENT]

MR. KRAUSE: To help resolve the definitional problem, PBS President Ervin Duggan has suggested that television listings be accompanied by icons that would tell parents which programs were, in fact, educational.

ERVIN S. DUGGAN, President, PBS: As that good educationally valuable programming emerges, we are going to need an icon or a label to find programming with that purpose, not a label that says spinach, but one that says kid smart programming that parents can find and that children can find and that means something.

[TV SEGMENT]

MR. KRAUSE: There are some good informational children's programs already on the air. Children's television advocates often point to "Beakman's World" on CBS as a show which attracts the attention of elementary-age children while teaching science concepts.

ACTOR: You know, snot is like sticky glue--traps the dirt and the germs floating in the air.

MR. KRAUSE: But such programs are expensive to produce, and since networks often relegate children's programming to early mornings or afternoon hours, advertisers aren't willing to ante up the same amount of money they'd spend for commercials in prime time. Linda Ellerbee, host a Nickelodeon children's news program, told the President's conference that to produce better programming broadcasters may have to concede some profits.

LINDA ELLERBEE, Lucky Duck Productions: I know that your mission is to make money, but at some times we have to come down to how much is enough, and I think when it comes to kids of America, that the advertisers, as well as the parents and the producers and the broadcasters have an obligation to step up to the plate here.

MR. KRAUSE: Even if producers, broadcasters, advertisers, and parents agree that children need more educational programs, there's still one obstacle that remains--getting children to watch them. We talked to FCC Chairman Reed Hundt about the new rule yesterday afternoon.

MR. KRAUSE: Commissioner Hundt, thank you very much for joining us. Now, once this new rule takes effect, will every station everywhere in the country be required to air three hours of children's programming every week?

REED HUNDT, Chairman, FCC: This rule is going to guarantee that virtually every TV station, almost every single week, gives us three hours of educational TV. We've got a few exception clauses and a few caveats for special circumstances, but the core of what the President was talking about I believe we're going to deliver.

MR. KRAUSE: Now what happens if a station decides it doesn't want to comply with this rule?

REED HUNDT: Well, a station that doesn't want to comply with this rule is going to have a very tough time getting its license renewed, so I don't think that's a category that's going to have very many people in it.

MR. KRAUSE: Do you anticipate, though, there being disputes, questions about what constitutes education television or programming versus what doesn't?

REED HUNDT: It could happen. But I actually doubt that it will happen. I think what we're going to see is that the creative community now has a chance to rise up to this new ethic we're trying to spark and say, look at me, I'm Bill Cosby, I'm Shelley Duvalle, I'm willing to participate in these shows, and I'm willing to make sure that I'm not only capturing the attention of my audience but I'm trying to teach them something. I think that's what we're going to see.

MR. KRAUSE: Now as we know, there has been a continuing debate over what constitutes educational children's programming. How do you define education children's programming?

REED HUNDT: It's a good question, but first we have to have something to define. And what this rule is all about is guaranteeing that there's some shows that you can then evaluate. Now in terms of evaluating those shows, I think we ought to do a number of different things. We ought to have a strict definition here. The show ought to be designed to educate. Secondly, we ought to use outside groups like the Annenberg School to give report cards to broadcasters in the same way that kids get report cards at schools so that if a broadcaster is doing a show and it says it's educational and social scientists at Annenberg give them an F, well, maybe they ought to go back and their own homework on their own show and try to get it an A. I also think we're going to rely on the court of public opinion, teachers and parents. When the broadcasters have to tell you what the show is that is intended to be educational, then they'll have to hear from parents and teachers if the audience thinks that it was really a flimflam game and not really the delivery of a quality product.

MR. KRAUSE: I think I should explain or you should explain when you refer to the Annenberg Group, you're talking about the Annenberg School of Communications at the University of Pennsylvania, correct?

REED HUNDT: I'm talking about the Annenberg Communications Center at the University of Pennsylvania.

MR. KRAUSE: And what exactly--what role might they play in this process?

REED HUNDT: I think that they're the kind of outside group that has expertise in TV and in social science and that can help us all figure out how to invent a new art form, the art of teaching kids.

MR. KRAUSE: And, in fact, they formed a council of sorts that will be doing precisely that.

REED HUNDT: They did exactly that. And we don't have a lot of experience in this country with commercial networks trying to develop the art of teaching kids with television. We've talked about it for decades, but the fight to have a rule that quantifies the public interest and guarantees three hours of educational TV, it's a 26-year fight, and we finally have victory.

MR. KRAUSE: Now you talked about the need for a very strict definition of what constitutes educational television. Is that something that is going to be developed here at the FCC, that definition, or how do you envision that coming about?

REED HUNDT: You'll see it in the two pages of rules. You saw it in what the President said that we ought to put into our rules. We're only talking about three hours a week, so there's no need to have a slack-jawed, ambiguous definition. For three hours, such a small amount, we can afford to have a very strict definition and a very tight focus on what really is designed to educate and is free over the air.

MR. KRAUSE: The Jetsons, which was a cartoon show, I guess, at one point, one of the networks claimed that that was educational.

REED HUNDT: Under the old definition, it was--as Commissioner Chung said--so ambiguous you could drive a truckload of programming through it.

MR. KRAUSE: Well, how will you--what will this new definition do to tighten it up?

REED HUNDT: Well, we're going to change the words. We're going to say that the purpose of the programming has to really be to educate, not just to entertain, not just to pass the time of day. But I have to emphasize I think what we're going to see here is a new ethic to use television to try to teach kids, not all the time, not most of the time, not even a lot of the time, but for three hours a week for every broadcast licensee.

MR. KRAUSE: Do you anticipate many stations trying, though, to get around it?

REED HUNDT: I don't think so. I think that this 26-year fight has had a happy ending in which broadcasters have come into agreement for their purposes. Now, if we had to coerce them, if we had to command them to obey the rule, we'd probably have a lot of difficulty, but we haven't had to do that. Instead, we've had a conversion, and I think that's a lot better.

MR. KRAUSE: What kinds of programs that are aired currently would not qualify under this new educational television definition that you anticipate?

REED HUNDT: Well, I don't think the Washington Redskins, which I watch assiduously every fall, I don't think they'd qualify. But let's be realistic here. We have plenty of entertainment. We have plenty of sports. Everybody knows when you send your kid to school the difference between the playground and the classroom. It's not that hard for people to figure out what is designed to teach and educate and what is designed to entertain. Every single day during the school year 2 million teachers figure this out in their classrooms, so everyone else here can figure it out too.

MR. KRAUSE: But this is a country where First Amendment rights become the subject of lawsuits often and this is an area where the broadcasters have at times claimed that this is an infringement of their First Amendment rights. Do you anticipate that there will be 20 years of lawsuits as you try to define what is and what is not educational, what is and what is not within the bounds that qualify here?

REED HUNDT: Broadcasters have told us that they believe the rule we're going to pass is constitutional. I believe that also, and here's why. We are not prohibiting anyone from teaching anything. We are not going to order a point of view. We are going to be indifferent to the content of the message. We're only going to say one thing: Do something to help teach kids, but what you decide to teach and the way you decide to teach it, and your point of view, that's up to you, and the government is not interfering in that.

MR. KRAUSE: To what extent must parents, in effect, take responsibility? I mean, even if all this programming is available, it doesn't necessarily mean kids are going to watch it.

REED HUNDT: You know, in the ancient years of this debate, the traditional stance of liberals was there's nothing you can do about what's on TV, just turn it off if you don't like it, And the stance of conservatives was let the marketplace give you whatever it gives you, you can't do anything about it. This is a third way. We're seeing that responsibility for selecting shows ought to be in the home, but we're also seeing the people with responsibility ought to be empowered by having the V-chip so they have a little bit of power to choose, by having information so they have the power to choose, and by having something to choose, such as a rule that promotes quality shows. So this is a new way and a third way, and it's sure worth trying.

MR. KRAUSE: Critics of this rule have said that three hours is arbitrary, it's not enough, there ought to be more children's programming required on television. How did this three-hour time- -or how did you arrive at that?

REED HUNDT: It's a modest number. I've never met anyone who thought it was unreasonably high. It's a good place to start. Let's get going with it.

MR. KRAUSE: Mr. Hundt, thank you for joining us.

REED HUNDT: Thank you. FOCUS - A BIG GAMBLE

MR. LEHRER: Now a fight over gambling in California. Spencer Michels reports.

MR. MICHELS: Nearly 30 Indian casinos operate today in California. It's the fastest growing segment of the state's gambling industry. Because the Indian tribes are sovereign nations, their casinos are unregulated by the state and they're fighting to keep it that way. But now some state officials want to go after the mainstay of these casinos--the video slot machine. A room full of those machines operate night and day at the Cache Creek Casino, run by the Rumsey Band of the Wintwon Indians. Video slot machines look almost like the one-armed bandits, which are illegal in California. These machines operate electronically instead of mechanically, with the push of a button. Twelve thousand of them operate in California Indian casinos, and more are added each month. But these machines have come under increasing fire following a state supreme court ruling. The court recently said that a similar kind of video game, Keno, was illegal. Run by the state lottery, Keno was played in stores and restaurants throughout California. Indian gambling is based on a federal law that allows tribes to run any gambling game that is sanctioned elsewhere in the state. Now that Keno has been shut down, the state says Indian video slots are obviously also illegal. Dan Lungren is California attorney general.

DAN LUNGREN, California Attorney General: It's illegal. I don't care if you're an Indian or not Indian. You don't have a right to ignore the law. It's an area of illegality in an industry which has been fraught with peril the past when you don't have sufficient oversight and criminal justice oversight.

MR. MICHELS: Since the state cannot enforce California law on Indian reservations, Lungren wants federal prosecutors to crack down on the slots.

DAN LUNGREN: I've always said, as most law enforcement has said, that when you have the absence of proper regulation, the absence of proper criminal oversight in the area of gambling, where the commodity is money, you are an inviting target for organized crime. And we've been waiting for the Feds to do something for years.

MR. MICHELS: The U.S. Attorney replies he is waiting for clearer instructions from the courts before he moves. The Indians say they think the court instructions are very clear in their favor. They say the court only ruled against Keno because people were betting against the state. If too many people pick the winning numbers, the state could go bankrupt. The Indians claim that since that doesn't apply to their slot machines, they're not covered by the ruling.

MICHAEL LOMBARDI, Indian Casino Manager: The attorney general is dead wrong on this one.

MR. MICHELS: Michael Lombardi manages an Indian casino near Santa Barbara.

MICHAEL LOMBARDI: The California state lottery has established that the use of on-line video terminals and computers is legal in the state of California. That means some form of video gaming on Indian reservations is coming to California, whether the attorney general likes it or not.

MR. MICHELS: Like most gambling battles, the fight over video slots has come to Sacramento, the state capital. Mayor Lombardi and others are lobbying the legislature to legalize the tribal machines. The Indians are big contributors. In fact, they say they are solicited for such contributions. The Cache Creek Casino is no exception. Paula Lorenzo is the Rumsey Band tribal chairwoman.

PAULA LORENZO, Tribal Chairwoman: As a whole, the tribes throughout the state have contributed to campaigns. We haven't ever been asked actually until we started in gambling, in gaming. Umm, no one ever thought about the tribes, and all of a sudden, it's like, well, you got $500 here, $1,000 here.

MR. MICHELS: All told, gambling interests are spending $3.3 million in campaign contributions and lobbying a year. Sometimes they are fighting for legislation in favor of themselves, sometimes against other gambling interests. For example, race track owners, whose business has been declining of late, are pouring money in to allow card rooms at the track and they are spending money to fight against the expansion of casino or video gambling elsewhere. Card rooms like the glitzy Los Vegas-style San Pablo Casino near San Francisco also spend money to bolster their own interests and fight others. This place grosses $90,000 a day from card games alone. In California, card rooms are not allowed to operate slot machines like the Indians do. They'd like either to get permission to have slots or keep the Indians from having them. The owner of this casino, Stanley Friedman, says because of all the competition in gambling, he has no choice but to play the political game.

STANLEY FRIEDMAN, Card Room Owner: Those people in Sacramento have had civics lessons. They're pandering to Indians. They're taking their contributions. They're putting laws through the legislature which they know either won't be signed, or if they are, they'll be challenged and defeated. I mean, there is the quintessential example of what's going on up there that we are basically in the midst of this competitive battle and everybody is being bought.

MR. MICHELS: Even Nevada, the grand daddy of gambling in the U.S., is right in the midst of the fray. Gambling interests from this neighboring state are working hard to curtail gambling in California. They have given seed money to former Highway Patrol Commissioner Maurice Hannigan to form the Foundation on Gambling Abuse to protect their interests.

MAURICE HANNIGAN, Foundation on Gambling Abuse: They have a very tight, regulated process in the state of Nevada, and they don't want to see this spread to other states, where it's unregulated and cause problems in the industry because gambling--and I don't think anybody, including those that are in the industry--will deny that there is a big potential for abuse and criminality when it comes to large flows of money going through establishments.

MR. MICHELS: California assemblyman Philip Isenberg thinks all these contributions will lead to corruption. He wants to limit them by law.

PHILIP ISENBERG, California Assemblyman: This is not like regular Chamber of Commerce activity. The transaction is cash. It has always involved criminal elements, always involved criminal elements. That seems inescapable, always involved serious problems, extortion and bribery of elected officials, and there's no reason to believe we'll be any different.

MR. MICHELS: But Isenberg's attempts to limit gambling contributions have failed time and time again because of the opposition of legislators like Democratic State Senator Richard Polanco. Polanco sees nothing wrong with the money he receives from Indian tribes and quotes former California assembly speaker Jess Unruh.

RICHARD POLANCO, California State Senator: Jess Unruh said it pretty well, that the--you know, if you can't, uh, drink their booze, if you can't enjoy and look em straight in the eye and vote against them, then you're in the wrong business, and I concur with that. A contribution doesn't get any member's vote up here.

PHILIP ISENBERG: I don't have any doubt in the world, whether it's this year or next year or the year following, some of my colleagues will get in trouble. I have no doubt that law enforcement officers, federal and state, are looking at the gambling activities in this legislature and at the local level and considering investigations, if not prosecutions.

RICHARD POLANCO: I don't think it's a question about politics. It's a question about, hey, why do we want to screw with the Indians again? They've come--they've made it--they have resources. They're viable, they're building homes, their health clinics. They have kids now that are going to college. And now we want to come and take--pull the rug from under them? That's not right.

MR. MICHELS: A bill by Sen. Palanco that would have legalized Indian slots died in the legislature, but a similar bill is still alive which Gov. Pete Wilson says he will veto. Meanwhile, many new Indian casinos with slot machines are planned, despite protests from residents who object to gambling in their neighborhoods. The federal appellate court is now considering another case that could determine the future of video slots. And several other pro and anti-gambling measures are still on the state legislative table, which means the money is still flowing not only in the casinos and card rooms but in Sacramento as well.

MR. LEHRER: Still to come on the NewsHour tonight, Online off- line, cereal wars, and a David Gergen dialogue. FOCUS - AMERICA ONLINE OFF-LINE

MR. LEHRER: Now two business stories, one on-line, one grocery line. Charlayne Hunter-Gault does the first.

MS. HUNTER-GAULT: For 19 hours yesterday, the world's largest on-line service shut down, the biggest blackout in cyberspace history. This unexpected bump along the information superhighway left 6 million America on-line subscribers lost in space, but it affected others as well. Here to tell us more is Dennis Kneale, technology editor at the "Wall Street Journal." Thank you for joining us, Dennis. What exactly happened yesterday in AOL cyberspace, without getting too technical?

DENNIS KNEALE, Wall Street Journal: [New York] Well, that's the hard part, without getting too technical. In the simplest terms what happened to AOL is what happens to computers anywhere in America on any given day. It's a software bug. What happened is engineers were working at 4 o'clock in the morning on a Wednesday on these middle-sized computers called servers. And these computers are like rapid-fire machine guns. And they take information from really, really big computers called host computers, and then they zap it out to little computers on your desk top and my desk top and 6 million other desk tops where people want to get hold of information. They do this upgrade. They're trying to improve and get some housekeeping to the routers, something goes terribly wrong.

MS. HUNTER-GAULT: And that's the something we don't want to get too detailed about, right?

MR. KNEALE: Well, basically what happened is while they're working on the mid-sized computers, another part of America Online starts sending computer directions to these, to these so-called switches or routers saying, oh, here's the directions for the coming day, here's where traffic will go and how it will route. Those directions turn out to be wrong. So when America Online turns those routers on again, the routers can't even talk to one another, and the engineers are saying something is wrong here, some of the housekeeping that we were doing we must have made a mistake, and they spend hours scrambling around trying to figure out what they did wrong when it turns out it was just the wrong directions from that other part of America Online.

MS. HUNTER-GAULT: So would you call it a human error or a computer error or--

MR. KNEALE: The company is saying it's a combination of some computer error, because there also was an error in some of the software that runs these routers, and also a human error, because they kind of werelooking, as one reporter for the Journal put it, they were looking for the problem to the right when suddenly it turned out the problem was coming from the left.

MS. HUNTER-GAULT: Give us some idea about who was affected and how.

MR. KNEALE: I don't think that all six million subscribers to America Online are getting on-line every day. So it's not like it affected 6 million. But whatever portion of subscribers--let's say 20 percent get on-line at a given time--they were unable to hook up to America Online at all. Now these people are avid communicators, and they've come to revel in sending electronic mail messages out and taking part in chat sessions. Yesterday they were frustrated and unable to do that at all. For small businesses that actually use AOL and some big business employees for communication to talk to clients, to talk to employees on the road, to swap messages, they were unable to use AOL at all.

MS. HUNTER-GAULT: Was there anything really serious that happened as a result of this?

MR. KNEALE: Not truly, at least not that we've found. Basically, it's a major pain and an inconvenience. What's going to be interesting to watch now is the company has said, we're sorry, and we'll credit you for one day of usage. Now that amounts to about 30 to 60 cents. When a waitress brings you the wrong entree in a restaurant, sometimes she offers you dessert for free. 30 cents is not going to leave a whole lot of subscribers feeling very good about it.

MS. HUNTER-GAULT: But were there any businesses that had serious disruptions--because I understand there were, you know, check transfers, all this sort of thing--was there anything like that that you know of?

MR. KNEALE: I'm sure that some small businesses or some large businesses had a tougher time getting some things done as efficiently. The nice thing about electronic mail and zapping a document across the network is it's a lot simpler, a lot more instant than having to pick up the phone and reach somebody or having to send it out on a fax machine.

MS. HUNTER-GAULT: Right. But in the total--

MR. KNEALE: So it's some inconvenience.

MS. HUNTER-GAULT: In the total scheme of things, it wasn't a big deal?

MR. KNEALE: This is not catastrophic. This is a black eye for America Online at a time when this service needs to lure millions of more newcomers who aren't comfortable with computers and who aren't comfortable with on-line services, you should come jump aboard. And now the customers are going to say, well, I'm not so sure I should.

MS. HUNTER-GAULT: Well, then are you saying--does this--does this bode ill for future situations? I mean, are there going to be more glitches like this in the future, do you think, not just on America Online but in general?

MR. KNEALE: I'm sure that America Online is doing everything it can to stop glitches like this from happening again. It's almost a fact of life. Computers are both incredibly complex and yet incredibly stupid, and mistakes like this are going to happen. One thing that this shows is how much getting on-line has become a way of life for many people in this country. I think that two years ago if you had a big story like this, first of all, it wouldn't have been covered on the front pages, it would have been in the back pages for three paragraphs, and second of all, half your readers wouldn't have even known what an on-line service was. When something like this happened yesterday, you could suddenly see how much on-line is becoming a part of American society.

MS. HUNTER-GAULT: And so we can, umm--I mean, in general, we canlook for the good with the bad in the future, right?

MR. KNEALE: Well, we certainly can. The company is oddly finding a silver lining in this. The president of the company keeps saying, hey, one good thing about this is we see how important America Online is, the fact that so many people were so upset about not being able to communicate with their computers, although crisis management consultants say that's not exactly a good argument to be making at a time like this.

MS. HUNTER-GAULT: All right. Well, we have to go. Thank you for joining us.

MR. KNEALE: Thank you. FOCUS - CEREAL WARS

MR. LEHRER: Now our second business story, this one from the breakfast table. Our business correspondent Paul Solman of WGBH- Boston reports.

PAUL SOLMAN: Packaged cereal, an $8 + billion a year industry, now a staple which serves breakfast for about 40 percent of us, cereal began a century ago as a health fad. The father of cereal, religious nutritionist Dr. John Kellogg, whose health tips included dressing in white and as he lectured patients at his world famous spa avoiding meat, spices, coffee, and above all constipation. His cures: exercise, some stuff you don't want to know about, and high fiber cereal, granola, and soon after corn flakes. The spa immediately spawned competition as one of its patients left to create his own health food company. C.W. Post, a suspenders salesman, made his fortune with Grape Nuts. Kellogg and Post were such bitter rivals they appeared together only once, next to President Taft in 1911, Kellogg, of course, in white. And their hundred years' war has continued to this day. Kellogg's and Post, now a part of Philip Morris, are still two of the major players in an industry that includes General Mills, Quaker Oats, Rawl Corp., and a host of store brands. Over the century, the industry has introduced more than a thousand new products and adds to that number every year. The struggle for shelf space and attention is ferocious. Cereal makers pay stores to stock new items, give stores special discounts if they agree to feature shelf talkers and end- of-aisle displays.

[COMMERCIAL WITH TONY THE TIGER]

MR. SOLMAN: The battlefield broadened with the coming of television. For the first time, cereal makers could train their sights directly on children.

[LUCKY CHARMS COMMERCIAL]

MR. SOLMAN: Kid vid marketing may be a far cry from cereal's health pitch of a century ago but it hasn't hurt prices any. Since 1983, they've risen at twice the rate of inflation and the TV ads continue to hook the kids, this summer with the tie-in to the Olympics.

MOTHER: Today we had to drag him out of the aisle because he wanted Lucky Charms.

MR. SOLMAN: Why did you want Lucky Charms?

LITTLE BOY: Because I wanted them. They're Olympic.

MR. SOLMAN: But though he complained bitterly, that boy didn't get Lucky Charms, still 50 cents higher than the store brand equivalent, Magic Stars. In fact, cereal sales fell nearly 4 percent last year and many consumers at this Shaw's Supermarket in Waltham, Massachusetts, were buying cheaper non-name brand cereals.

MOTHER: Sometimes I bought the store brand because I thought the others were too expensive. I think $4.50 to $5 a box is too high.

MR. SOLMAN: It is in this context that Post announced in April that it was cutting price 20 percent on average. The sound bite it sent to TV stations was upbeat.

TIM CALLAHAN, Post Cereal: With this price rollback, we're giving consumers what they want for breakfast. For example, this box of Post Honeycomb sells for $3.95 and will go to $2.99, almost $1 less than its current suggested retail price.

MR. SOLMAN: In the next several months, Post gained sales at the expense of arch rival Kellogg, and so in June, Kellogg also cut prices, sounding as though they'd just thought of it.

ARNOLD LANGBO, CEO, Kellogg Company: The good news for consumers today is that the best to you each morning will now cost less for you each morning.

MR. SOLMAN: General Mills has since followed suit, and on June 26th, Quaker Oats also cut prices. To get some insight into all of this, we asked marketing professor Ron Curhan of Boston University to join us at the supermarket and explain what's going on.

MR. SOLMAN: First question: Why a price war in cereals?

RON CURHAN, Boston University: Well, there has been a good decade for cereals. The category has grown at about 5 percent a year for a decade.

MR. SOLMAN: That is the industry. You mean cereals--

PROF. RON CURHAN: Yes.

MR. SOLMAN: --as a category of product?

PROF. RON CURHAN: Yes, cereals in general. And you notice that we have a very expansive array here of cereals. And you have a tremendous variety here of cereals. So whether it was oat brand in the 80's or more and more healthful foods at various times, the category has grown, and as it has grown, the manufacturers have been able to raise their prices, which they have done. Actually over the years you get to a position where it's ripe for some price cutting, and it's no surprise that the company with the third largest share took the lead in price cutting. And, of course, then the others had to follow. And now what you have is you have the private label brands accounting for as much as 10 percent of the market.

MR. SOLMAN: Five years ago what were they, or ten?

PROF. RON CURHAN: 4 percent. Ten years ago 1 percent.

MR. SOLMAN: Really?

PROF. RON CURHAN: And so with the growth of the private labels, the national manufacturers said, hey, we've got to compete more vigorously on price. And that's one of the reasons for the price war.

MR. SOLMAN: Now what's been the key to competition until now?

PROF. RON CURHAN: The key to competition until now has been a lot of proliferation of different varieties. You came up with a new brand it seems as though every week, and if you look here and you ask yourself what were the brands that I knew when I was a kid--

MR. SOLMAN: Yeah.

PROF. RON CURHAN: --you know, you'll still find the Wheaties and you'll still find Corn Flakes--

MR. SOLMAN: But you can hardly see em.

PROF. RON CURHAN: But you're going to find an awful lot of additional brands, additional packages here on the shelf.

MR. SOLMAN: Now how much of the price of something like this--I don't know--this $4.29 for Just Right--how much of that price is the product and how much is other stuff?

PROF. RON CURHAN: It depends on how you charge in factory costs and depreciation and one thing or another, but when all is said and done, a $4 box probably costs $1.35 plus or minus to actually make at the factory level.

MR. SOLMAN: And so the rest of it is marketing, promotion, advertising?

PROF. RON CURHAN: You're not going to sell any of this and have the consumer even know that it exists without some marketing efforts. And yes, they'll spend 80 cents, a dollar on marketing. It--the cereal department has a high marketing cost at the manufacture level compared to many other departments in the store.

MR. SOLMAN: Well, I read somewhere that 30 to 40 percent of the price was marketing versus even other packaged food goods, maybe 20 percent, something like that.

PROF. RON CURHAN: Well, I think 20 percent for the rest of the store would be in the right range and 30 percent for cereals would also be in the right range.

MR. SOLMAN: As a marketing professor, how do you respond to the charge that we heard from a number of people outside of today that there's just tremendous waste in advertising, in promotion, and stuff like that?

PROF. RON CURHAN: Well, my response would be that the consumers are very intelligent people, and you've talked about a price war. The price war is in response to consumer resistance to the higher prices, and so the system tends to redress itself. And here we're getting a new equilibrium based, I think, on the consumer's pressures ultimately to drive it in that direction.

MR. SOLMAN: Do you think that we're beginning to see a sort of- -I don't know--a business-wide trend, or an economy-wide trend? I'm thinking of the fact that cigarettes went through this same process recently. Is this something that we're going to see more and more of now, do you suppose?

PROF. RON CURHAN: Well, we're certainly going to continue to see it. More and more I don't know, but there is a concern amongst a large segment of the population for price when they purchase. They may go to a warehouse club. They may go to a discount store to buy a dress. There's also a sector out there who are beginning to say deliver my order to home and paying 13 or 14 dollars extra an order just to have it sent home. And so it's really a very complex market, and that's not a surprise; when you have over 100 million households, naturally we're going to have some of one type and some of another, and stores tend to focus on a segment of the population, more than all segments of the population.

MR. SOLMAN: Finally, quickly, who wins, who loses?

PROF. RON CURHAN: Well, clearly, the biggest winner is the customer because the customer comes in and now can buy the goods that are an important part of their table. They can buy them at a lesser price. From the point of the retailer, the retailer probably comes out a little less good in the sense that they tend to look for a gross margin percentage on each item. If it has a high price tag and they make 20 percent of $4, then they made 80 cents. If it's selling for $3, they only make 60 cents. And the mentality of this industry still is to look for gross margin percentage.

MR. SOLMAN: And what about the manufacturers, themselves?

PROF. RON CURHAN: The manufacturer is going to get a lot less out of this.

MR. SOLMAN: So their stockholders, for example, are hurt? Their stock is down, I think, am I right?

PROF. RON CURHAN: The stock of Kellogg's dropped, I forgot how many points, on the news of this just like with the Philip Morris situation with the cigarettes, the stocks dropped because it's clear that they're going to be able to extract less from the marketplace, at least in the short run. Now, remember, they will in the long run have some savings because they are cutting advertising, I heard as much as $40 million in the quarter, and that's a lot of advertising. And in addition, they are cutting their promotional activity not only media, but the couponing we were talking about and the other things, so they will tend to try to protect their profit in this area. But they're going to take a hit in the short run.

MR. SOLMAN: Okay. Well, Professor, thank you very much.

PROF. RON CURHAN: You're welcome. DIALOGUE

MR. LEHRER: Finally tonight, a Gergen dialogue. David Gergen, editor at large of "U.S. News & World Report," engages Warren Rudman, former Republican Senatorfrom New Hampshire, author of "Combat: Twelve Years in the U.S. Senate."

MR. GERGEN: Senator, many of us who've served in public life in the past quarter century have regrets about decisions we've made along the way. But very few of us are honest enough to admit them. In your own candid way, you talk in your new book about coming to the United States Senate after your election in 1980 and making one of those big mistakes. Tell us about it.

WARREN RUDMAN, Author, "Combat": Well, the mistake in my view in retrospect was to vote for the Reagan tax plan and the whole Reagan economic plan which George Bush had called voodoo economics. I agreed with Bush. I found myself in the Senate, a brand new member with a very enthusiastic new majority, and frankly, it was hard to resist. But I should have resisted, and one of the things I say in the book is that Howard Baker told us that he thought it was a river boat gamble. And about two years later, I accosted Howard Baker, who is a dear personal friend to this day, and I said, you know, Howard, we not only lost the gamble, we lost the boat. And that's the way I felt.

MR. GERGEN: Because the deficits then went up very high.

WARREN RUDMAN: Absolutely.

MR. GERGEN: Even though we had a lot of economic growth, there was--the deficits went up. That's what you really felt aggrieved about.

WARREN RUDMAN: I felt very aggrieved that I had allowed myself to be taken in by that policy, and I'm pretty hard to a lot of people in the book about that, but to somewhat on myself as well.

MR. GERGEN: How does one advise the next group of Senators, the next generation, to avoid the big mistakes?

WARREN RUDMAN: You know, that's a great question, David, and I'll answer it the best way I can. The first thing I'll say is don't repeat it. And I tried not to, and, you know, when I got to Iran- Contra, I asserted total independence at that point. I didn't care what the administration was saying; I was going to do what I thought the American people wanted me to do. So my advice to young people is when you come in and you're brand new into a legislative body, whether it be the state house or the U.S. Congress or the United States Senate, really be a doubting Thomas. Follow your own instincts. And don't be afraid to, to be the lone dissenter on the block if you really feel you're right. It's a hard thing to do, a hard thing particularly if you know the circumstance of 1981. The first Republican majority in the Senate for what--thirty-five or forty years--great new majority leader, Howard Baker, a greatly loved President, Ronald Reagan, and what are you going to do, stand up and say, you're wrong? I should have, but I didn't.

MR. GERGEN: But you know, the adage in the Congress for so many years was to get along, go along. And you really feel that that, in retrospect, that's not the right advice?

WARREN RUDMAN: No, I don't think it's the right advice at all. As long as you do it respectfully, you don't do it by taking cheap shots at people but you essentially have a principled reason for what you do. I thought that was a major mistake and say so.

MR. GERGEN: Right. Let me ask you another question. You say you're--you made a decision after two terms to leave. You announced that in 1992. And as you say in your book, your decision to leave helped to prompt a number of others to leave, and we've had a whole series of people, distinguished Senators who are relatively young, and a good position in our home states where they could get reelected and yet have decided to leave. What do we do to address the conditions that led you and others to leave after two terms?

WARREN RUDMAN: I'm not sure the reasons are the same. I really didn't enjoy it much after that first two terms. And when you lose your zest for it, you ought to step aside. I mean, it's such a-- such a wonderful opportunity people in your state give you. If you really don't really want it badly, you shouldn't go after it. I was unhappy with the whole system. I didn't like it. But your broader question, I think to some extent it's going to continue to happen because the stressfulness of the place, the intensity of the place, I think that we won't have long-serving United States Senators in the future like Bob Dole, Ted Kennedy, Robert Byrd, Joe Biden. I could name a few others. I think you'll find 12 years or 18 years and out and onto other things in life. I think people will come in younger and leave younger than they have been for the last let's say four or five decades.

MR. GERGEN: Does that mean that some of the conditions we've seen develop in the last few years since you have come to Washington-- you first came in 1981--that the Senate's a much meaner place now, it's a much more partisan place?

WARREN RUDMAN: I think it is changing. I'm not sure how long it'll take, if it'll ever get back the way it was, for two reasons. I think the genesis of all of this hard feeling has come out of our campaigns. The campaigns are so negative. They are so nasty. You come back in after the election, you look at a fellow across the aisle who just defeated one of your best friends with a series of false ads.

MR. GERGEN: Right.

WARREN RUDMAN: And I had that happen. I remember the situation, looking at it and saying what kind of a person is that. So you don't feel the same. Secondly, if the terms are shorter, if people are not serving as long, you don't get to know people as well. So I think we're in for a period of some intensity and nastiness. Of course, I do think campaign finance reform will fix a great deal of that.

MR. GERGEN: How would you go about restoring more bipartisanship in the Senate, an institution that once prided itself on that?

WARREN RUDMAN: It has to start with the leadership, itself. It has to start with people like Trent Lott who has the capacity and the ability to do that with Tom Daschle. People are going to have to start talking to each other, instead of at each other. I mean, this past couple of years both the House and the Senate, particularly the House has been frankly, in my view, nasty, and I think the American people don't like it, irrespective of what gets accomplished. They don't like the bickering. They don't like the name calling. I think they're tired of it. And they're sick of it.

MR. GERGEN: You had some tough words in your book for the left in the Democratic Party, ideological, too partisan, unwilling to compromise, but you also had some tough words about the right wing of your own party.

WARREN RUDMAN: I did. As far as the left is concerned, I think they've been guilty of many excesses which have put the Democratic Party for a long time into a position of far less power than it had for many years. In my party, we've seen the evolution of the Christian right and the far right, which is a minority in our party but nevertheless controlling the party because they are hard working, they're active, and they really work for what they believe in. The net result of that has been we've got a convention going on in San Diego in which those delegates, in my view, will not necessarily represent the centrist part of the Republican Party. Don't call it the moderate part. I call it the centrist part. Most Republicans tend to be in the center but not the elected officials particularly, or the convention delegates. My own sense, David, is that unless the Republican Party shows, as Bob Dole has said recently, it must be more inclusive, must reach out, it must be more tolerant, then it will have a very difficult time winning the presidency and holding onto the Congress. That's my view.

MR. GERGEN: How does one disentangle the party, I mean, without losing a lot of the oomph that the party has?

WARREN RUDMAN: I don't know. It may be too late. This party may crumble. If we lose this presidential election and lose either the House or the Senate in the next two years, whether this year or 98, I think we've got serious problems. I'm not sure. You know, there are some people in the Christian right who are reasonable people, people like Ralph Reed, who, who called me after I wrote the book and talked to me about some of the things I said. My point to him and to others has been that it's not so much the things that they're advocating but the fact that they're advocating them within the framework of a "religious" organization. And one of the more harsh lines in that book which has been quoted often--I'll re-quote myself--and my statement has been if you want to see how religion and politics mix, I suggest you spend a few days in Belfast, Beirut, or Bosnia, where their religion is intricately involved in government. And you have people on opposites sides of religion fighting with each other. We don't need that in America. We need total separation, and we don't need people trying to insert their values, religious-based values on the basis that take it or leave it, if you don't agree with it, you can't be in my party. I mean, that just won't fly.

MR. GERGEN: How do you respond to their argument that the politicians in Washington have stripped religion out of public life, it's not just that public life is now neutral but it's hostile toward religious values?

WARREN RUDMAN: Well, it shouldn't be hostile, and if they have examples of that, I would agree that we ought to change that, but we ought to be very careful that we don't mix religion and politics. We ought to be firm on what the Constitution says. And the Constitution is very clear. You see, my problem, my problem are not the values they profess, it's the fact that they bring them into the cloak of religion. That's my problem.

MR. GERGEN: Well, you've been a man of combat since the Korean War. When you were out there--you describe in your book what action was like in Korea, and it was a remarkably interesting section-- and you still remain combative, but you want to see more reconciliation in American life.

WARREN RUDMAN: I don't have a problem with combativeness on issues as long as people can put their arm around each other and walk out of the chambers. I saw happen early in my Senate years people having terrifically fierce debate and walking out good friends. The problem is it's becoming personal, becoming mean. It's becoming bitter. And that is not good for the country. It's not good for the institution. The one thing that I have learned since I have left the Senate is the reason that the Congress is not held in the high regard it ought to be held--because there are some great people up there as you and I both know--is simply because the American people get a view that it's simply a free-for-all, and that's not what they want out of their government.

MR. GERGEN: Well, thank you for this book on the U.S. Senate, and we wish you well in the future.

WARREN RUDMAN: Thanks for having me, David. I appreciate it. RECAP

MR. LEHRER: Again, the major stories of this Thursday, the Federal Communications Commission directed television stations to air at least three hours a week of educational programs for children, and the U.S. Postal Service said Air Mail packages weighing more than a pound can no longer be dropped in mail boxes but must be taken to a post office. We'll see you tomorrow night with Shields & Gigot, among other mostly political things. I'm Jim Lehrer. Thank you and good night.