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.
Though the deal has not yet been approved, Time Warner and Comcast Corp. agreed to establish a partnership in bringing Adelphia out of bankruptcy in a stock and cash deal.
Under the proposal, Time Warner would become the No. 1 cable provider in Southern California, picking up Adelphia's lucrative franchises in Eagle Rock, Manhattan Beach, the San Fernando Valley, Santa Monica, Sherman Oaks and West Los Angeles long considered the crown jewels of the local cable market. As another part of the complex deal, Time Warner would add Southern California subscribers of Comcast.
This would give Time Warner nearly all of the L.A. cable market and around 70 percent of the market in Los Angeles and Orange counties. That concentration would resemble most other major U.S. cities, where a single cable operator predominates. (The lone exceptions would be San Pedro, which is covered by Cox Communications, and portions of Marina del Rey, controlled by Charter Communications Inc.)
Several consumer groups are urging the Federal Communications Commission to pay close attention to the antitrust ramifications of the Time Warner-Comcast deal. That's because Comcast, which bought AT & T; Broadband in 2002, controls more than 40 percent of the nationwide cable TV market, serving 30 million subscribers in the U.S.
Another imponderable: Cablevision Systems Corp., of Bethpage, N.Y., which was still looking to make a last-minute bid for Adelphia.
The Time Warner-Comcast proposal is very complex and even if approved will likely be just the beginning of numerous swaps and sales involving both companies, as well as other cable players. It could easily take many months perhaps much longer for the new owners to make an imprint.
That delay might play into the hands of DirecTV, which recently named David Hill, chairman of Fox Sports, as its entertainment group president.
Hill will oversee programming, marketing, promotions and technology at DirecTV, which plans to highlight its own technological advantage against cable with the introduction of an interactive TV package. That would allow viewers to choose camera angles, pick their favorite commentators and potentially place bets on games.
Already, DirecTV has found a large following with its NFL Sunday Ticket package, which included every NFL regular season game for $249 last year, as well as other sports packages. "DirecTV is going to blow a lot of people away when they see the new layers of NFL Ticket," said Schaeffler.
But Time Warner has been especially aggressive in advancing its own offerings. The company is currently testing a navigational tool that will allow viewers to use a pull-down menu that will allow instant channel surfing on different channels.
"Envision a world where TV networks are not only programming their linear service, but also part of the video-on-demand server," Glenn Britt, chief executive of Time Warner Cable, told Reuters at a cable show in San Francisco earlier this month.
Video-on-demand services and digital video recorders are considered the mother lode of programming services even though they threaten to undermine advertising-supported television.
In many markets, cable providers have an upper-hand against satellite since they can bundle TV, broadband Internet and phone service. But their success in Los Angeles has been mixed. And Time Warner's success in advanced programming has been mixed, too, with several video-on-demand services flaming out over the past dozen years because of legal and technical complications.
Cable, satellite differences
Seth Geiger, co-founder and president of SmithGeiger LLC, a media and entertainment consulting and marketing firm in Los Angeles, said cable TV providers have closed the gap and now eclipse satellite by offering not just digital cable but video on demand, broadband and eventually VOIP protocol that allows phone calls over the Internet. But he still thinks DirecTV has the upper hand.
"Putting David (Hill) in that role is really the next phase of the inner circle at Fox taking control of DirecTV," he said. "It's also an admission that sports will be a very big driver, a key differentiator for them."
Also to be considered is potential competition from Verizon Communications and SBC Communications Inc., which have been investing in their infrastructure to deliver TV content over phone lines as a defensive posture against cable companies moving into telephony, Geiger said.
While the main offerings are similar, there are some distinct differences between cable and satellite.
Digital cable can support up to 260 channels and offers video-on-demand services, as well as local and community channels. Satellite has more channels and offers pay-per-view services but lacks local public access channels.
Satellite tends to be less expensive than cable, with the Dish Network known as the least expensive alternative. That's because cable operators have a variety of fees, including franchise fees that are paid to each city, plus taxes and equipment costs. Satellite usually gives away its reception equipment and set-up services as an enticement to subscribers.
Even before Adelphia plunged into bankruptcy, its customers routinely expressed outrage to city regulators about the customer service, picture quality and billing disputes.
The company earned a reputation in L.A. for logging the highest number of customer complains roughly 6 per 1,000 subscribers. Time Warner, which has the best record, had just 0.6 complaints per 1,000 customers.
While Time Warner also has made big strides in beefing up its programming, it will face hurdles trying to revamp Adelphia's cable system, which was inherited from Century Cable nearly a decade ago.
"They are going through a lengthy process of trying to upgrade but they aren't there yet and won't be there for at least a year," said Hansell, noting that many Adelphia subscribers still do not have high-speed Internet access.
Yet such demands could help spur price increases in Adelphia's franchise areas. Despite intense competition from satellite providers, cable prices in the past eight years have jumped 60 percent nationwide, according to Carmel Group research.
"We don't know what's going to happen and what the split will be, but for Los Angeles consumers we do find that when one company has a stranglehold on a regional area, prices usually rise," said Kenneth DeGraff, a policy advocate with Consumers Union in Washington.
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