Time Warner Chief Levin's Bet on Cable Now Looks Smart

Nearly five years ago at the "Superhighway Summit" conference in Los Angeles, Time Warner Chairman Gerald Levin was scoffed at by some industry heavyweights when he predicted that cable and digital interactivity were forces to be reckoned with. Many Wall Street analysts and executives dismissed Levin as out to lunch and believed his obsession with cable distribution at a time when content was king would prove wrong-headed and ultimately cost him his job.

With Time Warner's stock near an all-time high and cable the darling of Wall Street, Levin should receive a far warmer reception from Hollywood this week as the keynote speaker at Town Hall Los Angeles, a nonpartisan speakers' forum for industry leaders. Levin will be discussing the responsibilities media companies face as content creators in today's wired universe of instantaneous digital communication.

Both cable and interactivity have been embraced by the entertainment industry at large. Even Disney Chairman Michael Eisner, who dismissed digital technology as a nonevent at the summit, proclaiming that "the story is first, second, third . . . making sure someone sees the story is fourth, fifth and sixth," has become a major proponent of the Web.

Time Warner, meanwhile, is leveraging its status as the nation's second-most-powerful cable operator to build a new business selling its customers high-speed Internet connections and online services.

Levin has promised investors that Time Warner has no imminent plans for major acquisitions and will continue to focus on debt reduction. But some analysts and cable industry executives speculate that Time Warner could be presented with an irresistible opportunity to expand its wired universe.

Its cable and Internet partner, Media One, is scheduled to split off from its US West parent this summer in a transaction that could give Time Warner the chance to unwind an unwieldy partnership with the Denver company that Wall Street has long disliked.

Levin has been a steadfast believer in cable and his company has invested heavily in the future of wires in the ground as well as programming delivered over them. Before he rose to the helm, he engineered the 1989 merger of Time Inc. and Warner Communication, introducing the publishing company to the world of cable systems. To shore up Time Warner's hand in cable programming, he bought Turner Broadcasting two years ago, creating the world's largest owner of such services.

The moves have paid off in spades. Over the last year and a half, the company's earnings and stock have soared.

At the time of the "Superhighway" conference in January 1994, Time Warner's stock was trading at $41 a share. In May of this year, it hit an all-time high of $82.88 and Monday it closed at $78.08, up 25 cents.

When Time and Warner merged, the combined company's cash flow was about $2.5 billion and debt was nearly $20 billion, compared with cash flow this year approaching $6 billion and debt of $16.3 billion.

Analysts say that cable TV programming should be Time Warner's fastest-growing segment over the next five years, as new services such as Internet connections and phone delivery kick in.

While Levin has been right about the importance of cable in the media business, he conceded last year at a media conference in New York that he was wrong about the delivery system--or at the least premature. Time Warner dumped millions of dollars into a flashy R&D; experiment in Orlando, Fla., in 1994 called the Full Service Network, but scrapped the roll-out when it proved not economic because of uncertain consumer demand for the advanced interactive cable TV system. What Levin had not anticipated was that the computer would be much better suited as the interactive medium than a TV set and as a result the costly FSN project was jettisoned last year.

That costly experiment has informed the company in building an online service that it is betting will rival @Home Corp. in value. @Home, the online provider jointly owned by cable companies including Tele-Communications Inc., is valued by Wall Street at more than $3 billion despite its lack of profit.

Time Warner is in the process of merging its high-speed Internet service, Roadrunner, with the Media One Express service of its partners. The partners are about to complete a deal that would bring Microsoft Corp. in as a 20% partner for an investment of more than $400 million, insinuating a value of more than $2 billion.

Sources say those talks and the merger with Media One Express have been difficult because of the long contentiousness between the partners. Under the partnership, formed in 1992 to help Time Warner finance its recent merger, US West bought 25% of assets including Home Box Office, most of the cable systems and Warner Bros.

Though Time Warner says relations have improved, cable industry sources say the partnership continues to hold the company back. For instance, many of Time Warner's newest programming services, such as CNNfn and CNNsi are not even carried by the company's systems because of Media One's power to veto such moves.

Time Warner's attempts to dissolve the partnership have failed, but Levin and the company could get another chance when Media One splits from its phone parent. Asked in March by his institutional investors about the likelihood of a Media One takeover, cable mogul John Malone named Time Warner as the most likely buyer, in a consortium with other cable operators.

Indeed, language in the partnership agreement would make it undesirable for any company but Time Warner to buy Media One, which is the nation's third-largest cable operator.

Time Warner insists no acquisitions are likely and certainly would be shred on Wall Street for thinking of spending upward of $20 billion to buy Media One, formerly known as US West Media Group. But Levin believes as deeply in cable as he ever has. And no doubt bulking Time Warner up in cable, especially if he could minimize the expense by bringing in other cable operators, would be close to his heart.

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