Cable TV's New Frontier : Time Warner's Bold Deal Blazes a Trail for Others to Follow

By JAMES FLANIGAN

May 19, 1993 12 AM PT

The lesson for all business in the deal in which US West is investing $2.5 billion in Time Warner’s entertainment division might be the old Satchel Paige line: Don’t look back, something might be gaining on you.

Taking bold steps is something vibrant companies have to do--even though the success or failure of such moves won’t be known for three to five years.

Above all else, the US West-Time Warner deal is an attempt by two big companies to move into new businesses.

US West, the Denver-based regional Bell telephone company for the mountain states, looks forward to offering telephone service to Time Warner cable customers in Florida, New York and elsewhere. In doing so, US West will invade the territories of BellSouth and NYNEX and become in one bound a national telephone competitor.

Time Warner, the publishing, music, movie, video and cable giant, is moving into the telephone business in hopes of finding future growth for Warner Bros.’ films, HBO pay cable, as well as Time Warner magazines and music. All those glamorous media businesses still return a decent profit, but are rightly seen as mature and lacking in excitement by Wall Street and Time Warner management.

Gerald M. Levin, Time Warner’s chairman and chief executive, likes moving on to new businesses. Levin, 54, joined the old Time Inc., the company that originated weekly news magazines, in 1972--but as a vice president of Home Box Office, the cable TV channel. His timing was good. Time’s cable operations--HBO and American Television & Communications, which owned cable systems--soon supplanted the hallowed magazines as revenue and profit producers for Time Inc.

It was the success of the new television media as opposed to founder Henry Luce’s print properties that led Time in the ‘70s and early ‘80s to dabble in movie properties and ultimately--with Levin pushing the deal--to agree to buy Warner Communications in 1989 and make its boss, the late Steve Ross, chairman of the merged Time Warner. Ross died last year.

The deal had good and bad points, but among the good was that it made Time Warner a globe-spanning media giant--with $13 billion in revenue last year and a total stock market value of about $13 billion--instead of a fading magazine empire, worried about erosion in advertising patterns.

Now Levin wants to move on because he believes that the future lies in 500-channel telecommunications systems that can bring the public interactive video, home shopping, movies on demand and all sorts of personal services that will open up unforeseen markets.

This is the stuff of the electronic superhighway that everyone from the White House on down talks about spending hundreds of billions for. But cable TV, with its existing ability to carry television signals to the home, has a good chance of creating such a system for less--tens of billions as opposed to hundreds of billions --if it upgrades to fiber optic cables and acquires the switching ability of telephone systems.

So Levin, a lawyer by training, is doing a deal with a telephone company--attracting US West’s investment in exchange for a 25.5% ownership in Time Warner Entertainment, a partnership in which two Japanese companies already own 12.5%. Analyst Jeffrey Logsdon of Seidler Amdec Securities, a Los Angeles brokerage, calls it a move to grow. “Levin sees that telephones are an $80-billion-a-year business and wants a piece of that,” he says.

Savvy investors like growth. That’s why Gordon Crawford of Los Angeles Capital Group and Joan Lappin of New York’s Gramercy Capital Management invest in Time Warner.

They’re betting on appreciably greater value in three to five years--and accepting the risk of short-term troubles.

Trouble there could be. “No doubt the new services are going to come,” says analyst John Tinker of Furman Selz Mager Dietz & Birney, a New York institutional brokerage. “But that could be five years out, and what happens between now and then--whether the customers will pay for the new services--are other questions.”

US West’s money will allow Time Warner to upgrade a portion of its cable system, but not all. Most of the upgrade necessary to allow new services will depend on Time Warner’s own cash flow--which may face restrictions because of new regulations on cable charges, and which is already needed to repay the company’s massive debt.

The company’s $16 billion in debt, which will be reduced to $14 billion-plus by using some of US West’s money, was taken on when Time paid out handsomely to merge with Warner. That’s one reason Time Warner today must sell portions of its future in order to grow. With US West and Japanese firms owning 38% of the entertainment division--which includes the movie and cable properties--buyers of Time Warner stock get only a five-eighths share of the anticipated growth sector of the firm.

Still, investors have given a lift to Time Warner stock since the deal was announced Monday. US West, which most analysts agree has made a good deal, has also risen, though not dramatically. And all Wall Street is wondering which cable companies will become partners for AT&T;, GTE and the other Bell operating companies.

The stock market, taking a hint from Satchel Paige, obviously likes companies that keep moving.

Multimedia Mania: New Fuel for Cable Stocks?

Phone giant US West’s decision to buy a 25% stake in Time Warner’s cable TV unit is forcing investors to reconsider the value of cable TV-related stocks, as Wall Street focuses on the potential uses of multimedia networks in the ‘90s. How three cable giants’ shares have fared since 1983:

(Highest stock price each year, plus latest)

Tele-Communications Inc:

Tuesday: $19.50

Comcast Corp.:

Tuesday: $19.13

Turner Broadcasting System:

Tuesday: $20.50

The Biggest Names in Cable:

The 10 largest cable TV operators, ranked by number of subscribers nationwide (in millions).

Tele-Communications Inc: 10.3

Time Warner: 6.9

Continental Cablevision: 2.9