The other shoe drops

The $12 billion Bell Atlantic/TCI deal (Vol. 3, No. 5, p. 12) has irrevocably changed the cable/telco landscape in the U.S. John Malone, the largest and most powerful cable operator in the country — and the leader in cable’s crusade against the regional phone companies — has decided to join the enemy! Since that time, it has been “gentlemen, find your partners” at the telco/cable dance.

US West had already committed $2.5 billion for a 25 percent stake in Time Warner’s Time Warner Entertainment company. Viacom and QVC quickly signed up telco partners (Nynex for Viacom and BellSouth for QVC) to help finance their $10 billion ego war for Paramount (Vol. 3, No. 5, p. 3). Now, the latest partners on the dance floor are Southwestern Bell and Cox Enterprises.

ANOTHER BILLION DOLLAR DEAL

Each of these deals has been structured differently. This one bears more resemblance to US West/TWE than it does to any of the more recent arrangements. In essence, Southwestern Bell will invest $1.6 billion for a 40 percent share of the Cox cable empire. The deal does not include any interest in Cox print publishing holdings (Atlanta Constitution) or — for the moment — any part of Cox’s partial ownership of several properties (QVC, Discovery, E!).

Cox Cable president James Robbins announced that the bulk of the money will be used not to upgrade Cox plant to fiber (as TWE is doing), but to acquire additional cable franchises to increase Cox’s clout in the market. Cox claims 1.7 million subscribers, which makes it the sixth largest cable MSO. It would like to expand its coverage to at least 3 million subscribers in order to give itself real clout with program providers.

THE SHOOT-OUT IN OMAHA

Although Cox would rather focus on expanding its reach than on converting its current base to fully switched fiber/coax systems, it cannot afford to ignore the challenge of interactive services — especially when it faces a head-to-head challenge from a phone company invading one of its franchise territories.

RBOC vs. cable. US West had already announced that it will be installing a test interactive system in Omaha, NE, which is Cox territory. The US West test will be a fully interactive digital system with 3DO/Scientific Atlanta user terminals (settop boxes). Cox has now announced that it will respond with a test of its own that will use Santa Clara, CA-based ICTV’s technology to provide movies on demand and other interactive services over the existing coax cable wiring.

ITV on the cheap. You will recall that the ICTV “starter” system puts the digital-to-analog conversion circuitry into cards mounted in a rack at the “head end” of the cable service. Analog signals are transmitted on dedicated channels over the existing cable plant to the subscriber’s home. Since it is improbable that everyone who subscribes to interactive services will be making use of the interactive services at the same time, the system can make do with considerably fewer digital-to-analog converter cards than there are interactive customers.

The Omaha test will use the previously announced “package” of IBM servers to store digitized movies and other programs, ICTV’s interactive technology, and customer management and billing software provided by New Century Communications. Zenith Electronics Corp. has been awarded the contract for the relatively simple settop boxes.

The schedule calls for a trial of movies on demand and “other select services” starting in June 1994, with a later expansion to “thousands” of customers and a wider variety of services, including music videos on demand, interactive games, classified advertising, eating and entertainment guides, catalogs and home shopping services, and “distance learning.”

A strategic fit. This is exactly the type of customer ICTV’s system was designed for: A cable operator who feels that he needs to provide interactive services to stave off competition, but who does not want (or cannot afford) to upgrade his plant to a full ATM/fiber configuration.

In essence, Cox is betting that interactive services will take considerably longer to sweep the market than TCI, Time Warner, Bell Atlantic and others assume. If this is the case, Cox is better off spending Southwestern Bell’s money adding new service areas than in upgrading the “plant” in existing service areas. It may be right.

Jonathan Seybold