The feud has resumed between the nation's cable TV operators and regional telephone companies.
The industries--the Hatfields and McCoys of the telecommunications world--briefly laid down their arms last fall in the interest of building the information highway.
For the Record
Los Angeles Times Tuesday May 17, 1994 Home Edition Business Part D Page 2 Column 6 Financial Desk 1 inches; 22 words Type of Material: Correction
Artist's Credit--The illustration on the cover of Sunday's Business section was by Reuben Munoz. The illustration inadvertently appeared without a credit.
Bell Atlantic Corp. led the way, agreeing to pay $33 billion for Tele-Communications Inc., the nation's largest cable firm. Then Bell Canada struck a deal to buy into Jones Intercable Inc., and Southwestern Bell Corp. proposed a $4.9-billion venture with Cox Enterprises Inc.
Wall Street cheered the new alliances, which promised to fuse the cable industry's entrepreneurial spirit with the financial resources and experience of the phone companies.
But the truce was short-lived.
In late February, cable stocks plummeted, reflecting anticipation that the firms' cash flow would dip after the Federal Communications Commission decided to cut cable rates for the second time in six months. Bell Atlantic and TCI scrapped their deal, blaming a clash in corporate cultures as well as the FCC. Southwestern walked away from Cox and Jones reopened its talks with Bell Canada. Only Time Warner Inc.--which had sold a 25.5% stake in its entertainment unit to U.S. West Inc. in 1993--emerged with a telephone company's money in the bank.
In the aftermath, cable TV operators and regional telephone companies find themselves squared off again in the costly race to build high-capacity systems to the home. Experts estimate that the two industries could spend $80 billion to $180 billion over the next decade constructing networks that will enable them to compete in each other's traditional businesses.
Faced with such staggering costs, it is likely that the two industries may once more look for ways to combine their efforts down the road. But for now, consumers and investors can only guess when the new services will reach their homes, and how much they'll cost. The outcome of the horse race can be handicapped by looking at publicly disclosed plans of the top cable operators and regional phone companies.
On a market-by-market basis, the winner is expected to be the first company in the neighborhood to offer the broadest service.
"The guy who gets there second is at a disadvantage because the penetration rates go down," says Geoffrey W. Holmes, the Time Warner senior vice president overseeing the company's ambitious Full Service Network under construction in Orlando, Fla. "From our perspective, you've got to build now."
The feisty cable business claims an inherent advantage, because it has already completed the most labor-intensive part of its installation: stretching coaxial cable to each subscriber's home. Although cable operators may spend $1,000 per home to upgrade their networks with fiber and two-way technology, telephone companies will have to spend hundreds of dollars more per home to replace copper wires with coaxial cable or upgrade their networks with compression technology that allows video signals to go over existing phone lines.
"We can do it faster," Holmes says, "and we can do it cheaper."
But the phone companies are in a strong position to take on cable. They see their rivals as vulnerable in financing, technology and marketing.
"People are not completely satisfied with cable providers," says Jay Bennett, director of broad-band infrastructure policy at Pacific Telesis, comparing cable's poor public reputation to the highly reliable telephone companies'.
In the financial arena, the phone companies tower over the cable operators. Collectively, the seven regional Baby Bells will spend $17 billion on capital expenditures this year, compared to the $2.3 billion budgeted by 10 leading cable companies. Only two cable companies--TCI and Time Warner--have the resources to spend $500 million or more in a single year for construction of their networks.
Smaller cable operators recognize their vulnerability at a time when cash flow is depressed and banks are unlikely to lend more money. The telephone companies are "just going to swoop into our markets," moans one beleaguered cable executive who asked not to be named. Highly leveraged companies "could be bludgeoned in just six to nine months," he says--a message that could persuade some cable operators to sell out rather than fight.
Telephone companies "could pick up a slew of the smaller guys," he concludes.
"The cable companies are dead meat and they know it," says Bill Davidson, a USC professor who has consulted for the Bells.
For cable operators, salvation lies in tapping the lucrative $90-billion telephone market and providing pay-per-view and other services that fall outside FCC price controls. Some are wagering that within eight years, telephone service could account for 50% of cable operators' revenue, with 25% coming from unregulated services.
The telephone companies, meanwhile, want to protect their core business by using new technology to slash operating costs. And they want to barrel into the $21-billion cable TV business.