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Time-Warner Deal Puts Pressure on Cable TV Leader

Times Staff Writer

With their weekend proposal to merge, Time Inc. and Warner Communications created a hubbub about the need for an American media giant to compete with foreign companies on a global scale.

Yet their most immediate competitor hails from Denver. Industries executives are wondering how Tele-Communications Inc., the nation’s largest cable television and movie theater investor, will respond under its president and chief executive, John C. Malone.

Tele-Communications remains the undisputed leader in cable TV systems, with its ownership or financial stake in franchises serving an estimated 25% of the nation’s cable subscribers, compared to Time Warner’s 12% of the nation’s 45.6 million cable homes. But Time Warner--with more assets and $10 billion in revenues--will dwarf TCI’s $2-billion operation.

“If (Malone is) eager to be a big player in this business, he just got leapfrogged, in the sense of overall power in the media business,” said one money manager, who noted that a week earlier he would have called Malone the industry’s most powerful man. “If you asked me today, I’d probably say (Warner Chairman) Steve Ross.”

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Face-to-face combat between the two giants is unlikely because most cable franchises are awarded as a near-monopoly in the cities and hamlets of America.

The competition, if it comes, will be for other media properties and control of program costs. Program suppliers already grumble that TCI can demand a discounted price for their product--or put them out of business by refusing to buy.

Tele-Communications has invested in such diverse cable networks as Black Entertainment Television, the Discovery Channel, Turner Broadcasting’s CNN and TNT, and Movietime, through 40%-owned United Cable. But those investments pale next to Time’s Home Box Office, Cinemax and the Warner Bros. film library.

Malone--and other cable operators--will keep a wary eye on Home Box Office’s pricing once the merger occurs, predicted analyst John Tinker of Morgan Stanley & Co. “If HBO ups prices, then TCI has a problem,” Tinker said Tuesday.

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Malone, 47, could not be reached for comment, but the independent-minded TCI president is unlikely to panic, industry executives agreed.

Indeed, Malone was quoted Tuesday by one news service as saying there is “no truth at all” to Wall Street speculation that his company is a likely bidder for other giant media companies. Malone threw cold water on rumors that TCI might bid for Columbia Pictures Entertainment, telling Dow Jones: “We’ve never contemplated wanting to be an active Hollywood mogul.” Malone added, however, that he would not rule out a passive investment.

TCI once considered taking a 35% stake in Columbia’s Tri-Star Pictures as partial payment when it planned to sell its UA Theater circuit in 1986, but the deal collapsed. TCI--through its 65%-owned United Artists Communications--then decided to keep the movie theaters and expand the chain.

That decision, coupled with TCI’s investment in various cable programming networks and its rapid acquisition of other cable systems, gave Hollywood a bad scare because of Malone’s purchasing clout.

“If TCI turns you down, you’re out of business,” declared Jack Valenti, president of the Motion Picture Assn. of America, in early 1987 when TCI’s market share reached 20%.

In 1988, “peace” talks were actually staged between some Hollywood chiefs and the TCI president. Although no agreement materialized, sources said Malone accepted Hollywood’s proposal that he reduce his cable holdings to 17.5% of the nation’s subscribers. Later, these sources learned that Malone had explored the tax break that TCI would have reaped if it had sold cable properties to adhere to the agreement. To some, the incident proved that Malone behaves less like an empire-builder than an entrepreneur intent on minimizing his tax burden.

Paul Kagan, a media analyst in Carmel, said cable operators traditionally have not plunged into other businesses because the growth of their own industry has been so rapid and lucrative. In the case of TCI, “we think it’s possible for it to double (in value) over a five-year period,” Kagan said, “so they don’t have to buy anything.”

Malone has “done a brilliant job in building his cable system,” said Warner’s Ross in a brief interview Tuesday. “We’re no competition for John, he’s got so many more subscribers.”

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Indeed, the two giants may form a loose alliance, suggested Tinker of Morgan Stanley, noting that the launch of a new cable TV network would be virtually assured if both companies agreed to buy it. “One phone call to Malone and (they’ve) got one-third of the country,” Tinker said, predicting that Time Warner will be keen to develop more cable networks.

“You’ve got two gorillas in town, basically, but I don’t know that that’s a bad thing for either side,” the analyst said. “It’s the smaller guy who has the problem.”

TWO TITANS OF CABLE

Tele-Communications Inc.

Subscribers: 11.2 million in 1988. *

Revenue: $1.71 billion in 1987. (1988 figures not available.)

Cable programming investments include: -- Black Entertainment Television. (Partners: Great American Broadcast Co. and Home Box Office.) -- Discovery Channel. (Partners: Cox Cable Communications, United Cable Television, Newhouse Broadcasting, New York Life, Group W, management and others.) -- Turner Broadcasting System. (At least 8.15% voting interest; with affiliates, control of three board seats.) -- Movietime. ** (Partners: American Television & Communications, Continental Cablevision, Cox Cable, NewChannels Corp., Home Box Office.) -- VISN Interfaith Satellite Network. (Partners: Post-Newsweek Cable, American Television & Communications, United Cable, Jones Intercable, TKR Cable, National Cable Television Co-op, Heritage Cable.) -- Think Entertainment. (Partners: United Artists Communications, United Cable, Newhouse Broadcasting, actress Shelley Duvall.)

Time Warner ***

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Subscribers: Combined 5.5 million in 1988.

Revenue: Combined $8.7 billion in 1988.

Cable programming investments include: -- Home Box Office. (Full ownership.) -- Cinemax. (Full ownership.) -- Movietime. (Partners: Continental Cablevision, Cox Cable, NewChannels Corp., United Cable.) -- Turner Broadcasting System (9.2% voting interest; Time controls two board seats and Warner controls one.)

* Includes affiliates.

** Through 40% ownership of United Cable.

*** If merger is completed.

Sources: Paul Kagan Associates, National Cable Forum, Standard & Poor’s, company reports


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