U S West's Gauntlet Won't Just Lie There

Rivals will be scrambling for their own opportunities

It was only a matter of time, once telecommunications reform was passed, before companies started breaching the Berlin Wall that has kept them from jointly offering cable TV and local and long-distance phone service. But U S West Inc. waited a mere 19 days after President Clinton signed the historic Telecommunications Act of 1996. On Feb. 27, the Denver-based cowboy of the seven Baby Bells announced it will acquire Continental Cablevision Inc., the nation's third-largest cable-TV operator, for $10.8 billion--and in three years hopes to use those cable networks to offer local phone service across the nation.

US West, which provides local phone service in 14 Western states, has long been among the most adventurous of the Bells. It already holds a 25% stake in Time Warner Entertainment and its 8 million cable subscribers, owns two Atlanta cable networks, and is a major cable operator in Britain. The Continental deal puts it front and center in the converging world of telecom and video.

Not that rivals wouldn't like the pole position. Continental Chairman Amos B. Hostetter Jr. says he spoke to every one of the Bells about a merger before settling on U S West. U S West Media Group President Charles M. Lillis says he knows that "a number of the other Bells believe that cable is a good idea, but...until this point, there hasn't been much opportunity."

In fact, few other local phone companies could have made the Continental deal--they are barred from owning cable networks in their local calling regions. Boston-based Continental has only 300,000 subscribers in U S West's sparsely populated region, so there is little overlap. But the other Bells must find some way to counteract U S West. Lillis says he plans to offer local phone service in Atlanta over his cable networks there by yearend, and Continental's networks will be upgraded to offer telephone service within three years. That puts an experienced local- calling competitor smack in the middle of the regions of BellSouth, Bell Atlantic, Nynex, Ameritech, and Pacific Telesis.

These companies are just as eager to offer customers a package of video and telephony. Bell Atlantic is running trials of its video-over-phone lines system to several thousand customers in Maryland and New Jersey, and Bell South is investing heavily in broadband technology that will deliver both phone and TV signals. PacTel and Nynex have bought stakes in wireless cable companies. PacTel says that it is not "currently interested" in a cable venture but has held talks with cable operators in the past. "There is no reason we should be doubling the pipe to the home," says PacTel Chairman Philip J. Quigley.

All these efforts are driven by the same bet: That consumers will want to order local telephone services from a company that can offer deals on long-distance, wireless, and cable TV. Since October, 1994, when long-distance carrier Sprint Corp. formed a partnership with cable operators Tele-Communications, Cox Communications, and Comcast to jointly offer cable, local calling, long-distance, and wireless services under the Sprint name, the local phone companies have plotted to assemble a similar package. Now they're free to do so and have money to burn.

TOP DOLLAR. U S West proved that. It is paying about $2,100 for every Continental subscriber--11.1 times Continental's projected 1996 cash flow, by far the richest cable acquisition ever. Bell Atlantic Corp. offered just $900 per subscriber in its failed 1994 bid for TCI. And the buyout is only the start of the cash outlays U S West is facing. The company wants to upgrade its cable properties to deliver video, voice, and data over one wire at superhigh speeds. That could cost $800 or more per subscriber.

The big question now: Will telecom reform end up consolidating power in the hands of a few big companies? "It's very unfortunate, but I think there is a risk to that effect," says Sprint Chairman William T. Esrey. Even so, Esrey admits he, too, would do a deal with U S West--or another erstwhile rival. "We don't compete with U S West in any particular [cable] market, so we may end up cooperating in the future--or competing. Who knows?" Sounds like more walls will be breached this year.

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