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February 29, 1996

Rivals Yawn at U.S. West Cable Deal

By MARK LANDLER

U S West's telephone rivals are almost cavalier in their reaction to the company's $5.3 billion acquisition of Continental Cablevision, which was announced on Tuesday.

"It just means that somebody else's name goes on your cable bill," said Stuart Johnson, president of Bell Atlantic's video services division.

To some industry experts, this nonchalance shows just how far the television business has drifted off the radar screens of the Bells since the passage of the telecommunications bill earlier this month.

Three years ago, Bell Atlantic offered $21.4 billion to buy the nation's largest cable operator, Tele-Communications Inc. But now the company is unruffled by the prospect that U S West could gain a head start in customers for a combined cable and telephone service.

With Continental's 4.2 million subscribers and its separate alliance with Time Warner, U S West will have access to a potential market of 16.3 million cable households. Tele-Communications has 15 million subscribers.

"What we're seeing here is a big bet," Johnson said. "But it is not the type of bet that we feel is required of us."

What has changed? In a word: deregulation. Under the terms of the bill, the Bell companies will soon be able to offer long-distance telephone service -- a business that analysts said was more predictable and more economical to break into than cable television.

"Their time and resources are much better spent on long distance, which is a near-term opportunity, than video, which is a long-term opportunity," said Daniel Reingold, an analyst at Merrill Lynch.

One result of this legislative windfall is that the TV ventures of the Bells are in danger of becoming corporate stepchildren, according to executives at several of the companies.

Tele-TV, a programming venture owned by Bell Atlantic, Nynex and Pacific Telesis, has signed a $1 billion contract to buy set-top convertor boxes and spent millions more to attract a staff of A-list programmers. But the company still does not have its first customer.

Some executives familiar with Tele-TV said its employees had become frustrated because its Bell backers have delayed plans to upgrade their networks, which would enable it to begin signing up customers.

Although the three Bells intend to use wireless cable as an interim technology to deliver video, executives said the companies had so far declined to embrace the technology wholeheartedly.

Johnson acknowledged that Tele-TV needed viewers soon to hold onto its staff and to compete with U S West in its new strongholds on the East and West Coasts. "You can only collect ammunition for so long before you have to engage the battle," he said.

Tele-TV is not the only Bell programming venture with more ambitions than customers. Americast, which is backed by three Baby Bells, the GTE Corp., and Walt Disney Co., hopes to offer interactive television services to as many as 50 million people in 19 states.

To date, though, Americast is active only in Richardson, Texas, a suburb of Dallas, where it is delivering a package of cable channels to fewer than 1,800 homes.


Stephen Weiswasser, chief executive of Americast, said that U SWest's cable deal did not worry him because his phone partners were charting a very different course. U S West plans to offer cable and phone service outside its 14-state region, while Americast's Baby Bell backers -- Ameritech, SBC Communications and Bell South -- are seeking to offer those services within their home territories.

Moreover, most of the Bells intend to upgrade their existing copper-wire networks for television -- an engineering feat that takes far longer than simply buying a cable operator like Continental.

Johnson said Bell Atlantic and its brethren would be rewarded for their perseverance by ending up with a more versatile and economical network to offer cable and phone service.

"I personally think that we will be the more efficient competitor," he said.

But while the Bells wait for the cost of fiber optic and digital technology to come down -- and in the process delay their timetables for upgrading their networks -- U S West will be forging ahead.

Chuck Lillis, chief executive of the U S West Media Group, said the company planned to upgrade 80 percent of the cable systems owned by Continental and its other cable partner, Time Warner, so that they could provide telephone service by the end of 1998.

U S West already has a tried-and-true model in Britain. There, the company owns a 20 percent stake in the largest British cable operator, Telewest Communications, which has 4.1 million subscribers and a thriving business in a combined telephone and cable service.

Still, other experts said that the United States was a different market. Unlike the United States, Britain did not have an established cable-television industry when U S West and other U.S. phone companies entered the market in the early 1980s. So analysts said it was not clear that U S West could duplicate its quick success here.

Before it gets that chance, U S West must clear potentially troubling regulatory hurdles. Lillis said he believed that the Continental deal would not raise antitrust issues. But consumer advocates said that by acquiring the nation's third-largest cable operator, U S West had laid bare a labyrinth of interlocking ownership stakes.

U S West owns 25 percent of Time Warner's cable properties and film studio. Time Warner, in turn, has agreed to acquire Turner Broadcasting System, in which Tele-Communications holds a 21 percent stake and Continental a 7 percent stake. If the Turner deal goes through, Tele-Communications would wind up with a 9 percent stake in Time Warner.

All told, the nation's three largest cable operators -- and one of the largest programmers, Turner -- will each have ownership stakes in the other. Moreover, U S West and Tele-Communications, which serve many of the same Rocky Mountain states, will share a variety of interests.

"We have significant concerns that this will dampen competition in U S West's 14-state region," said Gene Kimmelman, co-director of Consumers Union, a consumer lobbying group in Washington.


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