Let the games begin.
Time Warner Inc.'s $17.7-billion bid to buy the local cable assets of Adelphia Communications sets the stage for an intense battle to snare TV viewers in the nation's second-largest media market.
Both Time Warner and its biggest rival, satellite provider DirecTV Group Inc., boast deep pockets that will likely be used to market their services and add a slew of program offerings, such as video on demand and TiVo-like capabilities. A third player, Echostar Communications Corp.'s Dish Network, could also prove formidable in the mix.
"It's astonishing that in a city as sophisticated as Los Angeles, many of these services still are not provided," said Dean Hansell, president of the Los Angeles Information Technology Agency, which regulates cable activity. "Los Angeles is the entertainment and technology capital of the world, where many people work from their homes, and it's critical that Angelenos have access to state-of-the-art technology."
But that's likely to take time as well as big money. Adelphia's network is considered well behind other cable operators, so Time Warner will have to make major upgrades boosting the cost of a deal that some on Wall Street already consider too rich.
During a recent Bear Stearns Cos. Inc. conference in Palm Beach, before the Adelphia bid was made, Time Warner Chief Executive Richard Parsons acknowledged the high costs. "It's an expensive proposition, and it takes a long time, and the markets will have to say, 'We're just going to sit back and let them burn through a bunch of capital because we like what the business looks like down the road at the end of this irrational competition,'" he said.
DirecTV also faces huge costs as a result of service add-ons. The El Segundo-based company, which is majority-owned by News Corp., lost $235.3 million last year, despite the addition of 1.7 million subscribers.
At first, both companies might be inclined to keep monthly subscriber costs down in an effort to attract customers, but at some point rates are likely to go up, which in the case of Time Warner, could create some testy confrontations with L.A. city officials. Since 2001, Adelphia has lost 11 percent of its customers, most of who fled to satellite rivals because of poor service and higher rates.
"It's going to be a tough environment for Time Warner because they have to come in and revive a flagging asset," said Jimmy Schaeffler, senior research analyst at Carmel Group.
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