Amid a flood of publicity, Tele-Communications Inc. announced late last year that it would spend billions to rebuild its cable television system with fiber-optic lines and digital converter boxes. TCI painted a striking vision of the TV future: 500 or more channels, thousands of movies on demand, and interactive shopping. Indeed, the largest cable operator seemed to be leading the rush to build an "information superhighway."
But TCI has suddenly been trumped. Time Warner Inc.'s $2.5 billion deal with U.S. West Inc. to build a similarly advanced cable system, announced on May 17, could outclass TCI's effort. The deal gives Time Warner, the nation's second-largest cable operator, cash to pay down its steep debt, as well as telephone knowhow crucial to its plan to provide both entertainment and phone service. U.S. West, which plans to upgrade its 14-state phone system to offer interactive video as well, presumably will gain access to Time Warner's rich library of movies and TV shows. Ultimately, Time Warner's and U.S. West's systems, if combined, would tower over TCI's.
All this must not sit well with John C. Malone, TCI's hard-charging chief executive who has relished his role as the cable industry's leading visionary. Now, as the industry awaits his next move, Malone isn't talking. But his most likely response will be a megadeal of his own. The most likely partner: American Telephone & Telegraph Co.
Rumors have circulated for months that the companies, which already cooperate in an experimental video-on-demand system (table), are talking about a broader alliance. Now, a TCI spokesman acknowledges the two giants have held discussions--though he won't say what a deal could entail. AT&T won't comment.
The alliance makes sense enough on its own merits. TCI would obtain the telephone-based switching technology it needs to provide true viewer-controlled TV, wherein a show can be sent to just one home. That technology also could allow TCI to provide local phone service to its 10 million customers. And hooking up with AT&T allows TCI to avoid the prohibition against a local phone company owning cable service in its area. For AT&T, a TCI deal could ease a costly dilemma since its breakup: how to send its long-distance calls to customers. AT&T now pays local phone companies about $14 billion a year in access charges. These calls instead could be sent via TCI.
LION'S SHARE? But this deal may be about more than just two companies. An executive familiar with the talks says TCI is examining an investment in MGM/UA Communications Co., the troubled movie studio owned by the French bank Credit Lyonnais. If a TCI-AT&T venture pans out, AT&T could take a stake in MGM-UA as well, the executive says. "We know all about MGM, we know about their business predicament," says a TCI spokesman, who declines to comment further. The bank says officially that MGM/UA is not for sale, but it has hired Hollywood agent Michael Ovitz, presumably to find buyers.
MGM-UA is the source of programming that would neatly round out a TCI-AT&T partnership. TCI could get new movies for pay-per-view services. AT&T could use the movie studio's output to feed its own information superhighway aspirations. And since AT&T is expected to announce shortly an alliance with a video-game maker, rights to MGM-UA movie characters that can be used in games look attractive. That sort of synergy is a critical asset of the U.S. West-Time Warner venture, and an element neither TCI nor AT&T brings to the party.
A three-way deal likely would produce anguished cries from rivals that AT&T was trying to recreate the Bell System. AT&T's agreement last year to buy one-third of McCaw Cellular Communications Inc. prompted similar criticism. But AT&T isn't barred from returning to local phone service, as long as it doesn't buy the Baby Bells.
Those Baby Bells, in any case, may well find partners of their own. U.S. West and Time Warner shattered whatever reluctance that cable and phone companies--longtime rivals--have had to do deals. And if AT&T and TCI link up, the digital future could arrive in the nation's living rooms sooner than anyone thought possible.
TCI ISN'T GOING IT ALONE Partner Joint venture NEWS CORP. New cable entertainment channel, programmed by News's Fox unit, seeking 40 million subscribers CAROLCO $90 million investment gives TCI access to first-run movies for pay-per-view services AT&T AND Trial near Denver offers consumers a choice U.S. WEST of movies on demand TELEPORT Connecting big companies directly to long- COMMUNICATIONS distance phone companies GROUP U.S. WEST Cable TV/phone systems in Europe McCAW CELLULAR Trials of wireless phone service via cable TV DATA: BUSINESS WEEK