Time Warner's Techie At The Top

His path to power was one of the most Byzantine in the annals of Corporate America. Yet Gerald M. Levin comes off more as a scholar than a street fighter. In style and substance, the new chairman of Time Warner Inc. couldn't be more different from his late predecessor, Steven J. Ross. Ross was a wily and gregarious dealmaker who left the details to others. Levin is a self-effacing intellectual who spends hours learning about new technology such as fiber optics.

Four months after Ross's death from cancer, Jerry Levin's techie bent is transforming Time Warner. When Ross engineered the merger of Time Inc. and Warner Communications Inc. in 1989, he wanted to create a global media colossus. But the 53-year-old Levin has shelved Ross's rhetoric about worldwide clout in favor of concentrating on technology's role. "We have to nurture artists and journalists," says Levin in a rare interview. "But we also have to be intimately familiar with the technology that gets us to consumers."

Time Warner executives insist Levin's vision is no different than Ross's. But there's no doubt the company is radically shifting its emphasis. Two years ago, Ross and Levin were traveling the world in search of alliances with media companies to help them break into markets in Europe and Japan. Now, Levin is pushing for an alliance with U.S. West Inc., a regional Bell telephone company based near Denver. He spent much of last year unsuccessfully pursuing a similar partnership with IBM Corp.

NEW IMAGE. Levin's laser focus on technology is buffing the image of a company that has mostly drawn attention in recent years for the paychecks of its top executives or the shenanigans of stars such as Madonna. Nowadays, investors are more interested in Time Warner's gigahertz cable systems than its provocative lyrics or compensation packages. "Times change. This is a very different company than it was after the merger," says Francis T. "Fay" Vincent Jr., the former commissioner of Major League Baseball, whom Levin recently nominated to Time Warner's board.

To a certain extent, Time Warner is simply responding to a communications revolution set off by digital technology. In 1989, few observers would have predicted that the media, computer, and telecommunications businesses would converge within a decade. Levin says he saw it coming, and he has been working feverishly to prepare Time Warner. Given his career path, that's a credible claim: Levin first made a name for himself at Time Inc. in 1975, when he persuaded his bosses to put Home Box Office on a satellite. Overnight, HBO became a national network and transformed cable television.

Today, Levin thinks the future isn't aloft but underground, where cable wires have snaked into more than 60 million U.S. homes. Digital compression now enables these wires to carry vastly more programming and information. Add a few high-tech gadgets, and subscribers can send signals back up the line. Suddenly, cable TV becomes a conduit for a dizzying array of services: news and entertainment, home shopping and banking, interactive video games, even telephone service. Not surprisingly, everyone from Apple Computer Inc.'s John Sculley to Microsoft Corp.'s Bill Gates wants in on this game.

But Levin is convinced that Time Warner is uniquely positioned to become a dominant player in multimedia. From Batman to Barbarians at the Gate to Money magazine, it has the words and pictures to fill the electronic pipeline. It also has a cable network with 7.1 million subscribers. "It's our manifest destiny, because it brings together all the parts of our company," he says.

But Levin's strategy carries enormous risks, not least its huge price tag. Executives at Time Warner estimate it will cost up to $4 billion to upgrade its cable systems to offer these multimedia services. And the company must make this investment at the very moment that the Federal Communications Commission is rolling back rates for cable television, historically one of Time Warner's most reliable money spinners.

What's more, Levin must persuade his notoriously independent operating executives that multimedia is a business worth pursuing. For its movie and music divisions, where multimedia applications are easy to see, Levin hasn't had a hard sell. But the publishing company is still casting about for ways to squeeze Time magazine onto Levin's electronic superhighway. "I'm not at all prepared to say that this is the wave of the future," says Reginald K. Brack Jr., chairman and CEO of Time Inc.

Levin is an improbable evangelist. Friends and colleagues marvel at his mental discipline and brutal hours. But even those who know him well say he remains a solitary figure in a business lubricated by relationships. One rival media executive points out that Levin still hasn't named a chief operating officer to help him press his strategy. After Ross fell ill in November, 1991, and co-CEO Nicholas J. Nicholas Jr. was ousted three months later, Levin left their spacious offices empty. Now he is virtually alone on the 29th floor of Time Warner's Manhattan headquarters.

SEEKING ALLIES. But if Levin prefers to go it alone at the office, he knows he has to seek alliances outside. That's because Time Warner needs both hardware and technical expertise to compete in multimedia. So Levin is forging a latticework of ties with computer and telecommunications companies (chart). Most of the deals are much smaller than the proposed U.S. West linkup. Time Warner, for example, has given $5 million to Trip Hawkins, whose Silicon Valley firm, 3DO, is developing technology for a machine that could double as a video game player and an advanced cable converter box.

Levin's immediate goal is to assemble technology to build the world's first fully interactive cable system in Orlando. By 1994, he hopes to offer 4,000 cable customers home shopping, video games, and movies all at the push of a button. To build the system and lay fiber-optic cable in the rest of its systems, Time Warner is hiking its 1993 cable capital expenditures by $100 million, to $400 million.

Alliances between media and tech companies have a checkered history. Japan's Sony Corp. and Matsushita Electric Industrial Co. paid top dollar for film studios in the late 1980s to get entertainment programming for their advanced TV sets and other electronics products. But both companies have struggled with the idiosyncrasies of Hollywood. And some observers argue that the technology side of these companies can lead the entertainment side a-

stray. Sony Music Entertainment, for example, must put its artists on Sony's new MiniDisc product regardless of how successful that format turns out to be with consumers. "They're still on the wrong end" of the equation, says Robert J. Morgado, chairman of Warner Music Group.

Time Warner decided what it wanted to offer its Orlando customers before talking to technology companies. And when it did, it cast a wide net: AT&T, Scientific-Atlanta, Silicon Graphics, Sun Microsystems, and Hewlett-Packard, to name a few. "Nobody out there is smart enough to know who the winners and losers are going to be," says Steven Rattner, a general partner at Lazard Freres & Co. "Companies should absolutely hedge their bets."

FINANCIAL PRESSURES. But some critics say Levin's strategy has some major weaknesses. For one thing, Time Warner still shoulders $10.1 billion in debt from the merger. As a result, the company's biggest deals are still driven by financial pressures as well as strategic opportunities. Take Toshiba Corp. In late 1991, Time Warner sold the Japanese computer giant a 6.25% stake in its Warner Brothers studio, cable company, and HBO for $500 million--and sold another 6.25% stake to Japanese trading firm Itochu. The company used the $1 billion to reduce some of the debt.

Time Warner says Toshiba could help it build the first interactive cable network in Japan, as well as keep it abreast of technological developments. But executives familiar with the company say Time Warner could have gotten those benefits through a conventional vendor relationship. Indeed, Toshiba says the first year of its partnership with Time Warner was primarily an educational experience. "The strategic alliances are a debt reduction strategy mas-

querading as a technology strategy," says one media executive familiar with the company.

True, Levin is taking steps to reduce the specter of debt. Ross contended that cash from strategic partners would be enough to pay down the debt. But Levin is biting the bullet with more conventional refinancing, swapping Time Warner's preferred equity for cheaper long-term debt. This has reduced the company's debt service and pushed its maturities out a decade or more. Media analysts say that Time Warner's balance sheet doesn't look much different from other cable giants, such as Tele-Communications Inc., which loaded on debt to finance enormous expansion during the 1980s.

Levin is even open to raising cash by selling off or otherwise changing Time Warner's minority stakes in companies such as Turner Broadcasting System Inc. In recent talks with TBS Chairman Ted Turner, for example, Time Warner expressed interest in buying Turner's entertainment networks while selling out its interest in Cable News Network. Owning 100% of some of Turner's assets rather than 20.6% of the whole company would improve Time Warner's balance sheet, since the cash flow from these assets would show up on the company's income statement.

A BETTER FIT. Some observers say the Turner talks point up Levin's characteristic pragmatism. As a top Time executive, Levin championed buying 50% of CNN when Turner offered it to the company in 1985. Nicholas, who then headed Time's video group, vetoed the deal. Now Levin seems to be forsaking CNN in favor of the Cartoon Network or TNT. Executives familiar with the company say Levin recognizes that these networks are a better fit with properties such as Warner Brothers and HBO, although others profess shock at his willingness to abandon his passion for CNN.

Levin's pragmatism is invaluable in cultivating new relationships in the fast-changing world of technology. The IBM talks are a good example. According to IBM insiders, the two companies spent months planning a joint venture called Gemini, which would have drawn on Time Warner's software and IBM's expertise in switches and the video servers that store vast amounts of data in digital form. The computer giant would have anted up $500 million for a stake in Time Warner's entertainment assets. But after several meetings with former CEO John F. Akers, Levin realized IBM's interest was waning as it became consumed by its own problems.

So Levin turned his sights to a telephone company. And in short order, he was in talks with U.S. West. Analysts say such an alliance would make strategic as well as financial sense, since Time Warner is anxious to offer some form of phone service via cable. To be a contender in the $80 billion local phone business, Levin will need switching capacity far more complex than anything he has ever dealt with.

U.S. West has the knowhow and service to operate such a system for Time Warner. Bankers familiar with the company say the deal, the details of which are still being worked out, has more than a 50% chance of going through. In return for access to Time Warner's entertainment properties, U.S. West would invest $1.5 billion to $2 billion for an equity stake.

Homebodies. Levin also established a relationship with AT&T by giving it the contract for a high-speed switch for the Orlando system. Because of the huge cost of upgrading systems, most observers think cable companies and phone companies will end up cooperating to offer video and voice services over the same fiber-optic network.

Levin's flexibility may be tested further when the Orlando system is up and running. He is sanguine that subscribers will want a panoply of multimedia services. But some media experts wonder whether Time Warner is overestimating the market. Archrival TCI, for example, plans to spend $2 billion to equip 90% of its cable network with fiber-optic wire and compression technology. But it is holding off on some of the more exotic switching devices and video storage facilities that Time Warner is installing in Orlando. Why? TCI isn't sure how many interactive services customers really want. Time Warner is "assuming that people are never going to want to leave their homes again," says Denise Caruso, editor of Digital Media.

However large a business multimedia becomes, Levin can't afford to forget he is still running a complex and diffuse media empire. Time Warner's businesses are humming nicely: Its cash flow jumped 12% in the first quarter of 1993, to $630 million, on revenues of $3.3 billion. (After paying dividends on its preferred stock, it lost $124 million.) For the year, Time Warner's operating income could rise 6.5% to $2.7 billion, on sales of $13.9 billion, says Christopher Dixon, a PaineWebber Inc. media analyst.

But Levin hasn't finished the arduous task of melding the disparate cultures of Time and Warner. At the moment, for example, he is mediating a low-grade feud between Warner Brothers Chairman Robert A. Daly and HBO Chairman Michael J. Fuchs over the Hollywood studio's free-spending ways. With Time Warner making the digital highway the focus of its strategy, some outsiders think the company needs to be harmonized. "He has to get all the divisions marching to the same drummer," says Frank J. Biondi Jr., CEO of Viacom Inc. and an old colleague of Levin's.

Strengthening his senior management team would help matters. Some observers think Levin should name a chief operating officer, who could advise him on thorny issues such as last year's censorship controversy over rap musician Ice-T or the more recent flap with Walt Disney Co. over an ad campaign for Time Warner's Six Flags theme park chain. But executives close to Levin say he doesn't want such help because he buys Ross's philosophy that it's better to have strong operating executives with plenty of autonomy. Even if Levin did name a COO, some observers doubt he could elevate one of the company's five operating chiefs without alienating the other four.

So for now, Time Warner must rally around its soft-spoken chairman. Shareholders are certainly applauding his vision: Time Warner's stock has risen 30% since Levin took the helm. Now, if he can marshal the company's resources behind his high-tech blueprint, Levin will put his indelible stamp on the empire that Steve Ross created.

      Time Warner could use the Orlando cable system to push a variety of products:
      Video on Demand
      Warner Brothers films such as this summer's Dennis the Menace or Home Box 
      Office productions such as Barbarians at the Gate
      Other Entertainment
      Samples of music or interviews with Warner Music artists such as En Vogue
      How-to tips from Time-Life Books, financial advice from Money magazine, home 
      improvement ideas from Martha Stewart Living
    Before it's here, it's on the Bloomberg Terminal.