Reordering The Cable Universe : Media: Although rate regulation is the main focus, the FCC’s sweeping new guidelines could have a major impact on the industry and may result in spinoffs, mergers or asset exchanges.

Now that 60% of the nation’s TV households subscribe to cable television, a day of reckoning is about to come for those who deliver it.

Under a congressional mandate, the Federal Communications Commission is enacting a sweeping set of guidelines over the next few months that will affect everything from monthly subscription rates to the number of homes a cable operator may serve.

Rate regulation is the primary focus, since Congress reacted largely to constituents’ complaints about cable service and soaring prices.

But the FCC rules will have long-term consequences for the biggest cable operators--which also happen to be some of the biggest owners of programming services.

Congress instructed the FCC to consider setting limits on the concentration of ownership in the industry because cable operators--who face little or no competition in their franchise areas--act as “gatekeepers” for information flowing into American homes.

Unlike the AT&T; antitrust decree of 1983, no judge is ordering a breakup of the cable companies. Still, the congressional and FCC action may fuel an explosive series of spin-offs, mergers or asset exchanges, as cable operators look for clever ways to cope with regulation.

Already, enough strictures are emerging to make some investors skittish about the impact on cable stocks. Cable companies are bracing for lower revenues after Sept. 1, when rates will be rolled back as much as 10% from October, 1992, levels. The National Cable Television Assn. predicts the cuts could shave $1.7 billion from the $14-billion tab consumers paid in 1992 for non-premium cable programming.

Ownership rules will most affect six large operators that together hold more than 70 investments in cable programming ventures.

Between them, Tele-Communications Inc., Liberty Media Corp., Time Warner Inc., Viacom Inc., Cablevision Systems Corp. and Comcast Corp. serve over 25 million subscribers--nearly half the nation’s total. Together, their cable systems reaped more than $3 billion in cash flow last year from their cable operations, judging from filings at the Securities and Exchange Commission.

The cable operators were early investors in a number of fledgling networks, such as Discovery Channel and Black Entertainment Network. Without their support, the operators contend, unique cable programming would have been slow to emerge.

If programming now deteriorates due to a lack of financial backing, consumers could be the losers, warned John Hendricks, chairman of Discovery Communications, which operates both the Discovery Channel and the Learning Channel.

“The unintended consequence, I predict, will be the drying up of capital,” he said.

Though Congress did not attempt to regulate companies devoted strictly to cable programming, those firms will feel the effects of the new rules as well, if their shareholders include cable operators.

Six of the 15 directors of Turner Broadcasting System, for example, represent part-owners Time Warner and TCI. That has prompted concern from Turner that those directors might oppose future acquisitions of costly programming, such as sports events, if Time Warner and TCI are restricted in their ability to recoup such costs from subscribers, as the FCC has proposed.

On an individual level, the new rules could force John D. Malone--who doubles as TCI president and Liberty Media chairman--to resign from one firm or the other.

Liberty Media was created two years ago as the holding company for most of TCI’s minority stakes in programming and cable systems. By straddling both companies, the 52-year-old Malone wields unparalleled power in the industry. Ever pragmatic, he is said to be looking for ways to use the regulations as leverage with the Internal Revenue Service to wrangle tax breaks for spinoffs and the like.

Other executives--including Time Warner Chairman Gerald Levin--already are looking beyond the inconvenience of the Cable Act to a time when 500-channel systems and sophisticated switches allow subscribers to tap into any number of databases for entertainment and information. Such services--if marketed individually, rather than as packages--would be exempt from the new regulations.

To hasten that day, Time Warner and TCI agreed last month to work together in choosing the standards for the equipment required for their next-generation cable systems. Since the two companies serve nearly one-third of the nation’s subscribers, others are likely to follow.

“My interest is to have access to everything; the whole architecture system is designed for that,” Levin declared in a recent telephone interview. “There is no gatekeeping function or exclusivity.”

That vision doesn’t alter the task at hand for the FCC, however.

In a first step, the FCC already has decreed that cable programming services are “vertically integrated” if their shareholders include cable operators with stakes of 5% or more. Under rules adopted in April, such programmers are barred from discriminating when selling their service to non-cable competitors, including direct broadcast satellite and “wireless” systems. A service such as ESPN, however, is not subject to these rules, because its owners are broadcasters and publishers that own no cable systems.

In a second step, the FCC proposes putting a tight lid on cable operators’ ability to pass increased programming costs to subscribers if the operators own 5% or more of the programming service in question. The proposed rule--part of the rate regulation that will take effect Sept. 1--would limit such increases to the rate of inflation.

The proposal has brought howls of anguish from some operators who argue that they shouldn’t be penalized just because they have investments in cable programming.

The third and final step will come in October, when the FCC sets limits for both horizontal and vertical ownership. The commission has proposed limiting any single cable operator’s reach to 25% of the nation’s potential subscribers, while setting a 40% limit on the number of channels that could be filled by programming services in which the cable operator had a 5% interest. The FCC may count overlapping directors and officers in determining whether a program service counts for purposes of vertical limits; as a result Malone might quit either TCI or Liberty Media.

Understandably, the FCC proceedings make this a summer of reflection for cable companies.

“I think everybody’s looking at their options,” said Viacom President Frank Biondi Jr., “in part because of regulation, and in part because of technology.”

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Here, then, is a guide to six publicly traded operators worth watching in the changing cable universe:

The undisputed leader is Tele-Communications Inc., which serves about 18% of the nation’s subscribers and has flexed its muscle frequently. Fairly or not, Denver-based TCI is blamed in some circles for defeating a 1990 cable bill that would have proved less Draconian than the legislation passed last year.

At that time, TCI held stakes in 23 programmers and owned cable systems serving almost 25% of the nation’s subscribers. To placate critics in 1991, the firm spun off its minority interests in more than two dozen cable companies, creating Liberty Media Corp.--but only after finding a tax-free way to do it.

TCI kept its stake in two programming companies: Turner and Discovery. Under proposed FCC rules, that ownership would prevent TCI from passing along cost increases to its 10.2 million subscribers if Turner or Discovery raised the rates they charge local cable operators above the inflation rate.

TCI has pointed out, however, that programming rates rose an average of 103% from 1986 to 1992. Though the Consumer Price Index for entertainment climbed just 28% during that same period, the bulk of programming cost hikes were passed onto cable consumers. That boosted the average monthly basic cable bill 91%, to $20.35, according to an estimate by Paul Kagan Associates Inc.

Rather than swallow such costs, TCI might spin off its 24.7% stake in Turner, which had a market value of $628 million at year’s end.

But Malone is certain to weigh the merits of any spin-off against TCI’s long-term interest in aligning with a telecommunications company, as Time Warner recently did in a pact with U.S. West. And it seems unlikely that a TCI spin-off will occur before the FCC makes its final rulings on cable ownership.

Liberty Media is the smallest of the group, with 1992 revenue of just $156.5 million. Strategically, however, the company is important because it owns stock in 25 programming services, ranging from QVC Network to Court TV to 13 regional sports networks.

Since Liberty’s formation, its asset value has more than tripled, and its stock price has climbed more than sevenfold. Liberty has benefited from the initial public offerings of two programming services in its portfolio--International Family Entertainment and Black Entertainment Television--and from the run-up in QVC’s stock since former Fox Chairman Barry Diller took the helm of the home shopping company.

Most significant, however, has been Malone’s decision to invest more of his personal wealth in Liberty than TCI. Malone’s economic interest in Liberty--where he controls more than 50% of the voting stock--exceeds $670 million. That compares to a stake worth about $49 million in TCI, where he has reduced his holdings to 1.2% of the voting stock.

Liberty and TCI share other investors, notably TCI founder Bob Magness and TCI itself. In anticipation of the FCC ownership limits, TCI recently sold 20% of its Liberty common stock, reducing its stake below 5%.

Washington insiders now expect the FCC to adopt rules that might discourage executives from serving two cable companies simultaneously. If forced to choose, Malone has generally been expected to keep his chairman’s job at Liberty.

“I think long-term, John wants to be head of a programming company,” said one longtime TCI investor. “Let somebody else worry about the wires.”

But a few veteran Malone watchers predict he’ll keep his TCI job. “I think John likes (power) more than anything else in the world, and I think he’s going to stay at TCI,” said one cable executive. “He can steer a lot of stuff and smile favorably on Liberty.”

Liberty, meanwhile, has a number of investments of its own in cable TV systems serving 2.9 million subscribers. Here too, sources said, Malone will consider spinning off the systems--if he can find a tax-free way to do it.

Yet another scenario: Malone might pull Liberty back into TCI--”if he could do it in a tax-efficient way and it complied with the rules,” one Wall Street analyst said. A reunited TCI-Liberty still would serve under 25% of the nation’s cable subscribers.

Time Warner is the second-largest cable TV operator, serving nearly 13% of the nation’s subscribers. Although it owns the dominant pay-TV company, Home Box Office Inc., such services are escaping FCC price regulation, on the theory that the marketplace will set a fair price for a stand-alone service.

Time Warner has other programming interests--largely through its 20.6% stake in Turner--that will subject it to the rules governing vertically integrated operators. For that reason, Wall Street analysts have speculated that Time Warner might swap its Turner shares in exchange for some other valuable asset.

In a scenario spun by analyst Emanual Gerard of Gerard Klauer Mattison & Co., Time Warner could swap its Turner stock for TBS’s film libraries and Cartoon Network in a deal worth roughly $1.25 billion. By shedding Time Warner as a shareholder--and thereby severing any ownership link to Warner Bros.--Turner no longer would face antitrust obstacles if it makes a bid for a Hollywood studio, as the Atlanta firm reportedly hopes to do.

It’s a neat plan, but one Time Warner insider says the company won’t give up its Turner stake--”or any of our programming interests”--solely on account of the impending rate regulations.

Comcast, the fourth-largest cable operator, has limited its significant programming investment to QVC Network Inc. But Comcast faces its own problem, in the form of cross-ownership rules that prohibit ownership of a cable system and TV station in the same market. Here’s why:

As part of its recently proposed merger with rival Home Shopping Network, QVC will have an option to buy stock in Silver King Communications, owner of 12 television stations now airing Home Shopping Network. Silver King represents a unique opportunity to build a fifth broadcast network, a notion that holds appeal to QVC Chairman Barry Diller, architect of the fourth over-the-air network in his old job at Fox.

But some of the Silver King stations are located in cable markets served by Comcast and Liberty Media, another QVC shareholder. Without a waiver from cross-ownership rules, QVC “can’t do anything until it gets rid of those subscribers,” said one Wall Street analyst.

Cablevision, the fifth-largest cable operator, already is exploring the possibility of spinning off its programming stakes, which include holdings in national and regional sports networks, American Movie Classics and Bravo.

In April, the Long Island, N.Y.-based company asked the IRS to decide whether such a transaction would qualify for tax-free status; no decision has been announced.

Apparently, Cablevision’s programming interests would have to be valued at $150 million or less to comply with the firm’s existing loan covenants. But Salomon Bros. analyst Frederick W. Moran predicts that the assets soon could be worth “in excess of $200 million.”

Viacom, the 13th-largest cable TV operator, derives more of its cash flow from its programming services--including MTV and Nickelodeon--than from its cable TV systems. Viacom Chairman Sumner Redstone sold two of Viacom’s systems for $545 million in 1989 to reduce debt; earlier this year, the firm sold its Wisconsin system to Time Warner to help settle antitrust litigation.

Based on that track record, analysts have speculated that Viacom might spin off its remaining cable TV systems, leaving it with TV and radio stations and syndication and programming businesses.

But Biondi, Viacom president and chief executive, says that isn’t the firm’s agenda. “We haven’t really talked about spinning off cable or selling it,” he insists. “What we have looked at is taking in some partners in the cable business.”

Reordering The Cable Universe

Cablevision Systems Inc.

Subscribers: 1.3 million

Operating cash flow from cable systems, 1992: $247.7 million

Operating cash flow from cable programming, 1992: $8 million

Investments in advertiser-supported programming: 12

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Comcast Corp.

Subscribers: 2.6 million

Operating cash flow from cable systems, 1992: $358.8 million

Operating cash flow from cable programming, 1992: Not applicable

Investments in advertiser-supported programming: 2

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Liberty Media Corp.

Subscribers: 2.9 million (Liberty owns 50% or less of most of these systems)

Operating cash flow from cable systems, 1992: Not applicable

Operating cash flow from cable programming, 1992: Not applicable

Investments in advertiser-supported programming: 24

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QVC Network Inc.

Subscribers: Not applicable

Operating cash flow from cable systems, 1992: Not applicable

Operating cash flow from cable programming, 1992: $164.7 mllion

Investments in advertiser-supported programming: 4*

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Tele-Communications Inc.

Subscribers: 10.2 million

Operating cash flow from cable systems, 1992: $1.6 billion

Operating cash flow from cable programming, 1992: Not applicable

Investments in advertiser-supported programming: 8

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Time Warner Inc.

Subscribers: 7.1 million

Operating cash flow from cable systems, 1992: $977 million

Operating cash flow from cable programming, 1992: Not applicable

Investments in advertiser-supported programming: 12

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Turner Broadcasting System Inc.

Subscribers: Not applicable

Operating cash flow from cable systems, 1992: Not applicable

Operating cash flow from cable programming, 1992: $402.3 million

Investments in advertiser-supported programming: 6

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Viacom International

Subscribers: 1.1 million

Operating cash flow from cable systems, 1992: $190.5 million

Operating cash flow from cable programming, 1992: $249.8 million

Investments in advertiser-supported programming: 6

* Pending merger with Home Shopping Network

Who Owns What We Watch?

The operators of local cable TV systems are among the holders of the largest stakes in many popular cable programming services--a business combination that is getting close scrutiny from the FCC. Chart lists the 10 biggest advertiser-supported cable networks, as ranked by estimated 1992 revenue, and their owners.

1992 Revenue Network (in millions of $) Owners 1.ESPN $553.3 Capital Cities/ABC Inc. (80%) Hearst Corp. (20%) 2.CNN & Headline News 491.4 Turner Broadcasting System Inc.* 3.Turner Network 415.1 Turner Broadcasting System Television Inc.* 4.USA Network 364.0 Paramount Communications Inc. (50%) Matsushita Electric’s MCA Inc. (50%) 5.Superstation TBS 256.5 Turner Broadcasting System Inc.* 6.MTV 221.5 Viacom Inc. 7.Nickelodeon 205.1 Viacom Inc. 8.Lifetime 176.7 Capital Cities/ABC Inc. (33 1/3%) Hearst Corp. (33 1/3%) Viacom Inc. (33 1/3%) 9.Discovery 160.4 Tele-Communications Inc. (49%) Cox Cable Communications (24%) Newhouse Broadcasting (24%) John Hendricks (founder) (3%) 10.The Nashville 137.3 Gaylord Entertainment Co. Network

* TBS shareholders include cable operators Tele-Communications Inc. (24.7%) and Time Warner Inc. (20.6%)

Source: Paul Kagan Associates Inc., company reports