In a landmark deal that combines for the first time a major telephone carrier with a leading cable operator, US West Inc. has agreed to buy Continental Cablevision Inc. in a transaction valued at a startling $10.8 billion.
The merger is a harbinger of the consolidation that promises to reshape the telecommunications industry. It is the largest deal to be announced since President Clinton signed into law this month far-reaching telecommunications reform that opens the cable and the long-distance and local telephone businesses to fierce new competition.
Although it is far from clear how this new world will be defined and who will be the surviving players, in theory it is expected to bring lower consumer prices as cable, television and telephone services are bundled under single brand names.
"Clearly, passage of the Communications Act of '96 has opened a whole new world," said Amos Hostetter, who co-founded Continental 33 years ago and built the Boston-based, privately held concern into the nation's third-largest cable company, with 4.2 million subscribers, including nearly 500,000 in the Los Angeles area. "This will be a game of large players."
Continental has about 32,000 subscribers in Orange County, mostly in the cities of Tustin and Costa Mesa. The company also has an office in Costa Mesa, where regional managers oversee the budgets and personnel of Continental operations in 14 markets across three states.
The landscape has quickly evolved, even in the last month, with AT&T investing in the DirectTV satellite dish service and MCI teaming up with News Corp. to enter that business as well. In addition, AT&T and MCI are negotiating joint strategies for delivering local phone service, while at least two local Bell operating companies, Nynex and Bell Atlantic, have discussed a merger to gird for the new competition.
For many in the cable industry, the high price fetched by Continental affirms cable's place in the shifting landscape.
"The long-distance carriers have to be thinking, 'I'm going to get me one of them cable companies,' " said Richard N. Yelen, director of marketing for Southern California for Western Communications, which has been purchased by the largest cable owner, Tele-Communications Inc. (TCI). "It's cheaper to buy an existing wire than build it from scratch."
AT&T, for one, recently announced that it would examine cable, among other technologies. While company officials said they are a long way from a decision, the long-distance carrier has negotiated with Time Warner about investing in the company's cable operations.
While the long-distance carriers may well step into alliances with cable companies to speed their entry into the local phone and video businesses, the regional telephone companies, including Pacific Bell, seem to be betting on other technologies. That makes Englewood, Colo.-based US West something of a renegade.
As its six Baby Bell sisters splintered into two groups developing plans to use satellite and radiowave technologies to offer video, US West singularly plotted a cable strategy, aiming eventually to provide telephone, television and data services through a single wire to the home.
"US West is the only one with a vision, charting a cable course and sticking to it," said Jessica Reif, a media analyst at Merrill Lynch. "The other Bells are waffling and changing strategies every month. This purchase reaffirms the value of cable."
In addition to offering phone services to about 10 million households in 14 states in the West and Midwest, US West owns a mid-sized cable system in Atlanta and a 25% interest in a Time Warner partnership that includes Time Warner's cable interests, Home Box Office and the Warner Bros. studio.
The partnership gives the phone company 50-50 management control over 11.5 million Time Warner cable subscribers nationwide, though the two companies have been locked in a legal dispute stemming from US West's opposition to Time Warner's proposed merger with Turner Broadcasting System Inc.
Though the partners seemed to be on the verge of a divorce that would split the Time Warner cable subscribers into two, analysts on Tuesday predicted that the partners might even merge their subscribers into a separate cable juggernaut with 16.2 million subscribers--surpassing TCI as the nation's largest cable operator.
Some on Wall Street are betting that AT&T joins in the alliance, giving the partners a firm foundation for a national telephone, video and data brand.
Time Warner praised the Continental purchase on Tuesday, although sources said it had signed off on its partner's merger plan last May, when US West and Continental came close to a pact after more than two years of talks--before backing off because of disagreement over price.