Now, Time Warner Is A Phone Company

For a company that generates more than its share of noise, Time Warner Inc.'s silence was deafening. The Federal Communications Commission had set Oct. 28 as the deadline for companies to register for its December auction of wireless communications licenses. Since Time Warner had been an early champion of this new type of mobile-phone technology, called personal communications services (PCS), rivals expected it to be a lively bidder. Instead, Time Warner let the deadline pass without a peep. While other cable-TV and telephone companies scrambled to set up alliances, Time Warner said it didn't plan to bid for any of the 99 major PCS licenses.

What gives? Has Time Warner, the very avatar of a diversified communications company, decided to kiss off one of the telecommunications industry's hottest frontiers?

Not exactly. But Time Warner's decision underlines how its telephone strategy is diverging radically from that of other cable companies. While TCI, Comcast, and Cox Cable are betting heavily on the growth of wireless, Time Warner is putting more emphasis on the lucrative--but entrenched--wired telephone business. And while its cable colleagues have allied with a long-distance provider, Sprint Corp., Time Warner has thrown its lot in with a Baby Bell, US West (table). "The industry is going through a major consolidation," says Christopher Dixon, a media analyst at PaineWebber Inc., "with two different models emerging."

LOCAL BYPASS. For Time Warner, the success of its approach has broad ramifications. Government reregulation has chopped the company's cable cash flow, and Time Warner is urgently searching for new sources of revenue. The telephone business also may have a more predictable payoff than such exotic services as interactive home shopping or video games. At a recent presentation for Wall Street analysts, Time Warner trumpeted the promise of the phone business while giving its once highly hyped Orlando cable system only a perfunctory mention.

On the face of it, Time Warner's strategy doesn't seem all that revolutionary. Like its rivals, the company is upgrading its cable wires to offer both local phone service and competitive access--a service that bypasses local phone companies to link long-distance calls. But Time Warner is pushing into telephone service on a market-by-market basis. Sprint and its cable partners, on the other hand, want to build a national service that bundles cable, long-distance, local, and wireless service.

Time Warner's strategy is motivated by both necessity and opportunity. With $13.9 billion in debt, it can't afford to squander a nickel in building its telephone infrastructure. That's why Time Warner Chairman Gerald M. Levin decided to pass up the FCC auction. Media executives predict the bidding for PCS licenses will be ferocious: The license for New York State alone could fetch $1.3 billion. Time Warner may yet bid for smaller licenses during a second round of bidding, mostly in areas where it owns cable systems. It also intends to lease PCS space on the spectrum from existing licensees. "An auction is often the worst place to buy anything," says Dennis R. Patrick, a former chairman of the FCC who oversees Time Warner's wireless strategy.

Time Warner's strategy is also driven by its powerful telephone partner. US West, based in Englewood, Colo., owns 25% of Time Warner Entertainment, which comprises Warner Bros. Inc., Home Box Office Inc., and Time Warner Cable. The Baby Bell has given its partner technical expertise in the form of 70 executives, including Tom Morrow, who runs Time Warner's wired phone business. It has also pledged $1 billion toward Time Warner's $5 billion effort to upgrade its cable network. Although Time Warner officials say that US West hasn't prevented it from considering a long-distance partner, the alliance has made such a link less important.

There's another reason for Time Warner to eschew the likes of Sprint. The company's 9 million cable subscribers are heavily clustered in such metropolitan areas as New York, Orlando, and Charlotte, N.C. By upgrading those systems with fiber-optic cable and digital switches, Time Warner believes it can create profitable, stand-alone local phone businesses.

Already, Time Warner is pushing to offer phone service in Rochester, N.Y., and Ohio. Last May, it won approval from the New York State Public Service Commission to offer service in Rochester, where it owns a cable system. And it signed a landmark deal with Rochester Telephone Corp. in which the company will hand off calls to Time Warner's cable network. Morrow says he hopes to offer phone service by the summer of next year. After Ohio, New York City may be Time Warner's next major area of focus.

Given the huge expense of upgrading its cable systems, some observers question whether Time Warner will be able to compete with local phone companies on price. But Morrow thinks he has an ace in the hole: He plans to package Time Warner's cable and phone service together. Says Morrow: "We've become more confident that we can offer packages of services that would make Time Warner attractive."

CROSS-PURPMSES? Time Warner's telephone strategy faces several hurdles. Only six states currently allow cable companies to offer local phone service. Without national telecom legislation, Time Warner must lobby state governments--and battle resistance from local phone companies--to expand its service. Such a process could delay by a few years its effort to become a big-time phone company.

Some observers also contend that Time Warner's interests will inevitably clash with US West's. Gerald H. Taylor, president of MCI Communications Corp., says the Baby Bell played a part in Time Warner's recent decision not to invest in Teleport, a competitive access provider. Time Warner says it pulled the plug on Teleport itself because the company was going to be folded into the Sprint alliance. For its part, US West says it is satisfied with Time Warner: "Any cultural differences have been minimal," says Thomas E. Pardun, president of US West's multimedia group.

Time Warner has ample motivation to keep it that way. US West is key to its strategy of expanding its clusters of cable subscribers. Although Time Warner has looked at several cable operators and is currently in talks with Cable-

vision Industries Corp., its balance sheet cramps its options. US West has similar ambitions but a much fatter wallet. By coordinating their dealmaking, the companies could build a national cable-telephone network more quickly.

Such a network would hedge Time Warner in an era of eroding cable profits. And if the company's bet on wired over wireless communications turns out to be right, it could generate vast new profits. Either way, for Time Warner, phone service is no longer the tail at the end of the Info Highway comet, but the star of the show.

               Who's Got The Right Number?
      Time Warner leads one of two evolving cable-telephone strategies
                 TIME WARNER/US WEST               TCI, COMCAST, COX/SPRINT
      FOCUS      Favors wired over wireless phone  Gambles heavily on wireless busi-
                 service. Expands service on       ness. Constructing a national
                 a market-by-market basis.         network of long-distance, local,
                 Eschews long-distance partners.   wireless, and cable services.
      ASSESSMENT Avoids huge cost of PCS           Fewer regulatory obstacles than
                 auction but will lose out if      a Baby Bell alliance. But a
                 PCS becomes a big business.       national network poses huge
                 Potential regulatory hurdles.     logistical challenges.
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