2 L.A. Cable Firms to Form Partnership

In a milestone in the consolidation of the fractured Los Angeles cable television market, Tele-Communications Inc. and Century Communications will announce a partnership today that will create the largest provider of cable services in the region.

The deal will be announced at the Western Cable show in Anaheim, where more than 25,000 executives from across the country are gathered this week. Analysts predict that banding 250,000 of Tele-Communications’ customers with Century’s nearly 400,000 subscribers in the area could spur other alliances in Los Angeles, helping to speed the delivery over cable lines of the industry’s Holy Grail--futuristic services such as high-speed Internet access, digital television with hundreds of channels and phone service.

Media One and Time Warner, now the region’s top two cable operators, have talked about forming an alliance here, broadening a relationship under which Media One’s parent, U.S. West, owns a 25% stake in most of the entertainment giant’s cable systems.

Despite being the entertainment capital of the world, Los Angeles has lagged the nation’s other urban hubs in rolling out advanced cable services.

Cable ownership in most major cities has concentrated over the last few years into the hands of one or two dominant providers, but Los Angeles has remained fragmented among more than 30 companies. Large contiguous “clusters” of customers are necessary to justify billions of dollars of equipment and upgrades needed to introduce new services.

Although seven cable companies serve 85% of the roughly 3 million customers in Los Angeles and Orange counties, more than 20 providers carve up the remaining subscribers. The largest company, Media One, with 575,000 customers, controls only 20% of the total base.

In contrast, two companies--Time Warner and Cablevision Systems--will soon divide about 3.6 million cable customers in the New York area, while Tele-Communications Inc. dominates San Francisco with 1.1 million subscribers.

The venture between Tele-Communications and Century will affect 750,000 cable subscribers in Los Angeles, Arcadia, Redlands, Ventura, Hemet, Sherman Oaks, Santa Monica and Anaheim.

“L.A. will never be dominated by one company because of its size, but eventually it will be divided into four chunks,” predicted Leo Hindery, president of Tele-Communications, the nation’s largest cable company, which is based in Englewood, Colo.

Hindery has made industry consolidation his top priority since taking the helm in February. The partnership with Century will be the ninth alliance he has announced to consolidate service in such cities as New York, Houston, Kansas City and Buffalo, N.Y.

The company will also announce today plans to swap systems serving more than 500,000 customers in the Sacramento area, southeast Florida and Peachtree, Ga. for about the same number of subscribers Media One now serves in suburban Chicago, southern Illinois and central Michigan.

The partnerships have also allowed the company to unload debt to the new ventures. The debt was depressing the company’s stock prices and hampering its introduction of new services.

Industry sources say a partnership between Tele-Communications and Century will be heralded in Los Angeles because Century has resisted previous overtures.

For the cable industry, the ability to sell a bundle of services to large clusters of customers is the key to prosperity. While industry stocks have soared this year because of renewed faith that cable is the most efficient system for delivering information and entertainment into the home, most cable operators are deeply in debt because of investments in new technology.

Operators are betting that new services will bring in more customers and revenues.

Consider Eric Grossman, an aspiring filmmaker who is contemplating moving to Culver City solely because of the high-speed Internet service Media One rolled out there last month. For about $50 a month and an installation charge, Media One allows customers to use cable modems to access the Internet at speeds 50 times faster than by traditional phone modems.

“Culver City is not my first choice to live, but I don’t want to wait three hours to download something from the Internet--it’s like having a fast car on a busy street,” said Grossman, whose longtime cable operator in Beverly Hills is Century. “Century is fine, but they don’t have modems and aren’t sure when they’ll offer them. I surf the Net more than I watch TV, so for me, it’s important.”

To be sure, parts of Southern California are hotbeds for advanced cable services because of the number of households with computers, high discretionary incomes and a reputation for welcoming new technology. In Orange County, Cox Communications has built what is perhaps the most advanced cable system in the world. The company has begun offering some of its 250,000 customers high-speed Internet access and phone service as well as digital television packages with fancy features like a button that commands the VCR to record.

In Los Angeles, Media One will roll out telephone and digital TV products next year, when all its customers will also be eligible for the high-speed data service.

But some Los Angeles cable subscribers are lucky to receive 40 channels because of the antiquated equipment used by mom and pop providers, illustrating the dual-class society these technological breakthroughs are creating. Marc Nathanson, chief executive of Los Angeles-based Falcon Communications, recently pleaded before the Washington Cable Club for relief for rural cable providers like his that cannot justify billion-dollar upgrades.

In Los Angeles, even some of the largest operators, including Century, have hung back. “Future investments have to be done cautiously and conservatively,” said Bill Rosendahl, senior vice president of Century’s cable television division. “You don’t want to do what the phone companies did and have to retreat. We’re going to experiment with cable modems, but we want to make sure the modems are mobile, so people who move can use them wherever they go.”

Cable operators say several factors have kept L.A. low on their priority list. They cite the city’s sprawling size, diverse cultural and economic mix, a geography that is challenging to service because of the mountains and canyons and a competitive bounty of nearly two dozen broadcast signals.

For instance, because of the abundance of broadcast stations, most early cable systems had only 15 slots left for new channels like HBO and CNN, slowing the build-out of cable here since the late 1960s.

The difficult economics discouraged any single cable company from trying to monopolize L.A. And local governments further discouraged concentration by breaking up the region to keep from becoming dependent on a major supplier.

Even today, the high cost of doing business in L.A. has discouraged some operators from expansion. “L.A. is not cable-friendly,” said Brian Roberts, chief executive of Comcast Corp. “It’s expensive to do business there.”

Some cable operators say they are put off by the low penetration of cable in Los Angeles. Figures are difficult to come by, but operators estimate that roughly 50% of the residents here subscribe, compared with more than 60% nationwide. Angelenos apparently aren’t trained by humid temperatures and harsh winters to take refuge in front of the tube.

But the low use may also be a symptom of fragmentation, considering the higher penetration of cable in San Diego, where Cox dominates.

Cable operators say the hasty retreat of phone companies from the television business has also moderated their drive toward new services in Los Angeles.

While phone companies such as Ameritech are keeping competition alive in places like Chicago, PacBell reversed course in California after investing hundreds of millions of dollars in new fiber-optic technology. Its new owner, SBC Communications, has put PacBell’s television operations up for sale.

While smaller cable operators led by Cox and Cablevision pioneered the concept of clustering early in the decade, Tele-Communications’ more recent consolidation drive has had the biggest impact because of its size.

By the end of the year, Hindery vows to spin off nearly 5 million of the firm’s more than 14 million subscribers into partnerships owned jointly with other cable operators.

In the biggest deal, the company in June swapped 800,000 of its subscribers in the New York area for a 30% equity stake in Long Island-based Cablevision, which will now manage 2.5 million customers.

In addition to spreading investment costs over a larger base, cable operators say large clusters allow them to align channel lineups, promote their services more efficiently and develop programming exclusively for their region, including special sports and entertainment channels.

While clustering no doubt will lead to advances in technology and more choices, some consumer advocates warn that the trend may not reduce consumer rates.

“Clustering conceals a broader motivation by the industry to block competition by being able to bid for prized properties such as sports rights and raise prices,” said Gene Kimmelman, co-director of the Washington-based Consumers Union. “While there may be some efficiencies from clustering, they have not been reflected in rates, which keep going up.”

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Cable’s Top 10

Consolidation has begun in the fractured cable TV market in L.A. and Orange counties, where more than 30 companies serve about 3 million customers. Tele-Communications Inc. and Century Communications will pair up in a partnership.

Cable Co.: No. of Subscribers

Media One: 575,000

Time Warner: 455,000

Century: 375,000

TCI: 350,000

Cox: 335,000

Comcast: 265,000

Charter: 225,000

Marcus: 110,000

Jones: 100,000

Falcon: 50,000