NEWS ANALYSIS : US West-Time Warner Deal to Speed New Uses of Cable : Media: Subscribers will choose a local phone company. The system will have two-way capability.

The $2.5-billion agreement announced Monday between Time Warner and U S West to develop a state-of-the art television and phone network is only the beginning.

The deal between the nation’s No. 2 cable operator and No. 3 regional phone company will accelerate the delivery of the next generation of entertainment and information services into the American home. And it will confront consumers with not just hundreds of new channels, but also a choice of which phone company to pick.

Time Warner’s alliance with U S West is just the latest sign that the lines separating telephone, entertainment and information providers are blurring. Covering 7 million subscribers, the deal is considered by analysts the first of a cascade of expected alliances between such traditional rivals as cable, phone, movie and media companies that will, taken together, break down the distinctions between them.

The agreement, the first of its kind between a Bell phone company and an owner of both cable TV and programming operations, calls for Time Warner to upgrade its entire cable system to carry telephone, dial-up shopping and movies, paperless bill-paying and other two-way services as well as the traditional one-way transmissions of news, sports and entertainment.

This new, jointly operated system, dubbed a “full service network,” is expected to be available to business customers in Time Warner cable territories by the end of 1994 and to all its subscribers by 1996.

The deal, which covers about 7 million Time Warner subscribers in 36 states, affects 12% of the nation’s cable households, but others are expected to follow suit for what promises to be a huge opportunity.

“Once one player starts, they all do join in; there’s a fair amount of ‘group think’ going on with these guys,” said Herb Maher, a telecommunications analyst at Hancock Institutional Equity Services in Boston.

Phone companies are motivated to join forces with cable companies in part because they fear that another regional phone concern, in concert with a local cable carrier, could suddenly be a competitor in what once seemed a secure monopoly market.

For example, Time Warner has about half a dozen cable territories in California, including Huntington Beach and, in San Diego County, Pacific Beach, where Pacific Bell is now the monopoly telephone company. Once the new “full service network” is turned on in the state, Time Warner subscribers would be able to choose whether to take phone service from the cable company or to continue as a Pacific Bell customer.

Pacific Bell says it will stick by its plans to build its own advanced telecommunications network capable of offering services similar to those slated for delivery over the Time Warner system. “This doesn’t change our plans at all,” said Lee Camp, president of Pacific Bell’s Information Services unit.

From the perspective of a consumer accustomed to dial-tone telephone service from one provider and cable TV from another, the choices may prove perplexing. Besides the new competition, both the telephone and cable companies promise to greatly expand their offerings to include an array of information and entertainment that consumers will be offered on an a la carte basis.

Given the complexities, analysts caution that the new services are by no means sure hits. “Despite all the enthusiasm and torrent of ideas, the consumer is still limited by the amount of time and money he wants to spend in front of the TV,” said Gary Arlen, a Bethesda, Md., telecommunications market analyst.

Until recently, it was accepted wisdom that cable operators and telephone companies would engage in a protracted struggle over which side got to control the coming fiber-optic pipeline into the home.

But the high cost of rewiring America--estimates vary from $200 billion to $500 billion--and the need for expensive new decoders in every home is forcing enduring rivals to become allies.

“This accelerates the whole process,” said Richard J. MacDonald, an analyst with Wasserstein Perella Securities in New York. “There will really be two wires into the home--cable providing telephone services and telephone companies providing cable TV.”

Under the terms of the proposed agreement announced Monday, U S West will get a 25.5% stake in Time Warner Entertainment, which in addition to its cable properties owns the Home Box Office channel and the Warner Bros. studio. Two Japanese companies, Toshiba Corp. and Itochu Corp. already jointly own a 12.5% stake in the entertainment unit.

U S West officials said $1 billion of their $2.5-billion investment will go directly toward upgrading the Time Warner cable network with additional fiber optic line, sophisticated computers and software so it can carry two-way communications. The remaining $1.5 billion will be used to pay down part of the nearly $15 billion in debt Time Warner took on for the 1989 merger of Time Inc. and Warner Communications.

The Time Warner deal with U S West faces a number of regulatory hurdles. Regional telephone companies, for example, are barred from owning cable TV systems in their area. But a Time Warner spokesman said his company has fewer than 100,000 subscribers in areas served by U S West, and expects to sell those systems.

“If there is a legal objection, we will have to give it full consideration,” said James Quello, interim chairman of the Federal Communications Commission. But he said he foresaw no problems: “It fulfills the Administration’s wish for an interactive superhighway into the home.”

The companies hope to complete the deal by the end of the year. Time Warner has previously announced its plans to have its first full-service network in operation in 4,000 homes near Orlando, Fla., by early 1994 and would expand the concept to other markets later.

Although some analysts said the deal was largely driven by Time Warner’s need for cash, analysts predict it will still make it easier for other such joint ventures between cable operators and phone companies to emerge.

Indeed, such Baby Bell companies as Bell Atlantic, Southwestern Bell and NYNEX as well as U S West have all have made advances of varying kinds into video over the last several months. Some of them, such as Bell Atlantic, are directly challenging cable’s local monopoly by building their own cable TV systems; others, like Southwestern Bell, are acquiring existing operators.

“There are discussions going on with nearly everybody,” said one major cable TV operator about other alliances between phone companies and the cable TV industry. “Most Bell companies are not going to fight the local cable operator in their territory.”

One problem for everybody is that all the information-delivery technology in the world has limited use without programs or services to fill the hundreds of channels the technology would make available. From that perspective, the Time Warner and U S West alliance is considered a good one because of Time Warner’s vast programming resources.

“These guys can build a huge electronic superhighway, but without content it’s not there,” explained Tom Wolzien, an analyst with Sanford C. Bernstein & Co. in New York.

What’s Ahead: the Video Mall

Time Warner’s deal with US West puts both on the road to realizing one of the hottest concepts in telecommunications: the Full Service Network. Such a network would provide a wide range of video and information services, all via traditional cable or phone lines. If all goes according to plan, the networks will help unite telephones, computers and TVs, giving consumers the chance to choose from:

* Entertainment and information: All would be on demand.

* Education: Universities without walls could offer long-distance classes-for-credit. Adult education could occur at home. Job training and professional enrichment could occur anywhere.

* Shopping: A video mall--retailers are expected to turn their popular catalogue businesses into home shopping. Viewers could buy via a hand-held remote control.

* Services: Everything from banking to airline and hotel reservations. Electronic classifieds will have videos illustrating, for instance, homes for sale.

* Communications: Users could visit relatives across the country--on screen--without leaving home. Executives could confer. Doctors could diagnose diseases.

Source: Times staff