THE TANGLED VINES OF TV OWNERSHIP

MAVIS SCANLON

Will a free-market-oriented Bush administration give rival media companies free rein to tighten their ties?

When TiVo's heavyweight media investors gather around the board table, they'll find themselves seated with some of their biggest corporate rivals.

News Corp.'s Rupert Murdoch is likely to enter into an uneasy alliance with one of his major competitors - Viacom's Sumner Redstone - through Murdoch's purchase of a handful of major UPN affiliates, the broadcast network Viacom controls.

One of Comcast's largest backers, Microsoft, will soon launch a satellite version of its personal video recorder and interactive TV service, Ultimate TV, in partnership with Comcast's biggest DBS rival, DirecTV - which, in turn, has an executive sitting on the TiVo board.

Issues arise when companies that are primarily seen as competitors link up, either through common ownership of another entity or through a contract giving competitors joint economic interests.

During the Clinton administration, the government was expected to take a hard look at these deals. However, as the more free-market, deregulatory Bush administration prepares to take office, these entanglements could intensify. If they do, how will they affect the cable and broadband industries?

It's gotten to the point that one of the market risks TiVo described in its latest Securities and Exchange Commission filing is that its competitors may have relationships with its partners - and that may hinder its own market expansion and subscriber growth. Another point TiVo made in its filing also illustrates the domination of bigger players. If Microsoft, which controls WebTV, enters into third-party agreements, it may preclude TiVo from doing the same.

The result is bizarre situations where UPN stations airing Viacom programming could promote and even air News Corp. cable shows from FX, Fox Family Channel, Fox News Channel or the Fox Movie Channel. In fact, Murdoch could theoretically use retransmission consent leverage for these stations to help his cable channels compete with Redstone's MTV Networks and Showtime.

News Corp. is awaiting Federal Communications Commission (FCC) approval for its purchase of the Chris-Craft Industries station group, which would require wavers of several current regulations. Some expect the newly installed FCC to relax some rules, including ownership caps.

"I don't think [a Bush Justice Dept. or FCC] will be as quick to enforce summarily this cap on national numbers," says a communications attorney in Washington, D.C., who declined to be named.

That deal is further complicated by the station's current (and likely to be extended) affiliation with UPN. If UPN extends its affiliation agreement, it would lead to the unlikely alliance of arch-rivals Murdoch and Redstone.

Many industry observers are taking a wait-and-see approach, and there is a consensus that mega-mergers will not be rubber-stamped.

"Deals of that size will be scrutinized without question," says Gary Farber, who follows the cable group at SG Cowen Securities, of the AOL Time Warner merger.

Even so, expectations are that regulations meant to stem the industry's power, such as ownership caps, will be relaxed. The combination of increased ownership caps and less regulatory pressure could open the door to further consolidation and more partnerships.

"There does not seem to be a fervor in Washington to regulate competitive businesses," said Robert Sachs, president of the National Cable Television Association, in December. "With a Republican government we're likely to see a greater commitment to marketplace solutions."

Why the play on both sides of the fence? Rather than grabs for control, these investments give media companies partnerships in emerging technologies, such as interactive TV, as well as access to marketing information garnered by the tech company.

To some degree, media companies are also testing the waters. "Nobody knows where the real golden nugget is, or what's going to be the standard for middleware or other types of platforms," says Keith Kennebeck, a senior analyst at The Strategis Group.

On the plus side, cable companies' investments in this space are more of an affirmation that these services will get rolled out, says Farber of SG Cowen.

Still, many expect a shakeout in the interactive TV sector, which could accelerate depending on a company's ability to raise capital in an uncertain economic environment. The problem is no one knows who the winners and losers will be. Hence, the hedging.

In the end, the pioneers will likely take the arrows, predicts Matthew Harrigan, an analyst with investment firm Janco Partners. The smallish size of interactive TV companies relative to their large backers will make it harder for them to scale operations to compete - and much easier for them to be swallowed.

Let's make a deal The AOL Time Warner merger is a classic entanglement, but there are other examples that have not been scrutinized as heavily in the press, yet are just as disturbing to antitrust officials. Some observers are concerned these types of deals will accelerate in the next four years.

Liberate Technologies, for example, counts AOL, Comcast and Cox Communications as both customers and investors. The company's strategy was to give away chunks of equity in exchange for having major network operators test its software. As part of its agreements, Liberate also issued warrants for the purchase of its common stock if it reached certain commercial milestones.

What's more, Liberate states in its most recent proxy filing with the SEC that these agreements provide that those operators who tested Liberate system are entitled "to receive the benefits of any more favorable terms and conditions we may grant to any other North American network operator in the future." Where does that leave the cable operators who did not purchase Liberate stock or invest in the company before its IPO?

AT&T, with its holdings in several other cable operators, is another example of a media powerhouse with a tangled web. AT&T, whose AT&T Broadband subsidiary is the largest cable company in the country, owns a 25.5% chunk of Time Warner Entertainment, which operates Time Warner's filmed entertainment, television production, TV broadcasting and cable systems. TWE also operates a portion of Time Warner's interests in cable programming and digital media.

Granted, AT&T acquired the stake through its purchase of MediaOne, and MediaOne gave up its rights to a say in TWE management in August 1999. Still, critics charge, the intertwined stake - one the FCC said AT&T must divest - reeks of all the dangers of too much power concentrated in too few hands.

Making things even more interesting, AT&T also has a 9% ownership stake in Time Warner, and a 30% stake in Cablevision Systems, the seventh largest cable company, along with complex partnership and stock ownership ties to No. 3 cable operator Comcast.

Further, through its Liberty Media Group subsidiary, AT&T owns stakes in several major media and telecom companies, from Gemstar-TV Guide to News Corp. to Sprint PCS to Motorola.

To be sure, many large companies that have overlapping investments in competitors have little or no say in how those companies run their businesses.

But when one entity has stakes in several of the companies that are competing to be the delivery mechanism for data into the home, it can appear to be anti-competitive.

"For subscribers it comes down to if this is sort of a collusive element," says Kennebeck at The Strategis Group, in reference to AT&T's investment in Time Warner Entertainment. "If they are working in collusion - consciously or inadvertently - hindering competition or a competitive aspect in the industry, that could affect consumers in the long run."

Competitive pressures If one buys the corporate argument, there is a pressing need to up the ante in the race for brand recognition, market presence, distribution channels and the mighty advertising dollar. After all, the more products a media or cable concern has - or the more consumers it reaches - the more revenue it can command. Hence the continued struggle to sign up the best promotional or strategic partners, plant stakes in varied assets, or buy outright the assets that are seen as complementary.

The passage of the Telecommunications Act of 1996, which was intended to dismantle what were viewed as monopolies in the cable and telephone industries, played no small part in triggering telecom and media industry merger mania.

Within the first few years of its passage, the bill unleashed a torrent of mergers, buyouts, partnerships and joint ventures that effectively helped form what we now know as Big Media.

Now, as these industries look to the future, insiders who watch Capitol Hill and the regulatory triumvirate of the FCC, the Federal Trade Commission and the Department of Justice are hoping for relative stability from regulators and lawmakers.

While the cable industry is hopeful a Republican president will mean less pressure to regulate the industry, consumer advocates see battle lines shaping up over issues such as ownership caps.

"We support ownership caps, and we expect a battle over that," says Mark Cooper, director-research at the Consumer Federation of America.

"The correct scenario is a straight-up legislative fight," he says, a scenario he sees as likely to become more of a "back-door" issue than a knockdown brawl for the regulators.

Some cable observers in Washington predict AT&T will continue to seek legislative or FCC review of the rules, which cap the number of subscribers one company can serve at 35% of total multichannel video subscribers.

At the very least, AT&T wants the rules to be changed so only subscribers to cable companies the MSO actually controls, and not those it has an economic interest in, are counted as served by AT&T.

If the rule is overturned, its stakes in Time Warner and Cablevision would not count toward its overall cable subscriber ownership.

To Sachs at the NCTA, the ownership rules are not at the top of his agenda. Sachs said in a December press conference that while AT&T's arguments against the attribution rules are correct, the issue simply doesn't affect anyone other than it and Time Warner.

Instead, he points to other hot-button issues in Washington, such as whether vertically owned programmers should be forced to sell their programming to their DBS competitors, open access of cable lines to Internet access providers, and retransmission consent.

The recent agreement between Comcast and Disney shows the contentiousness of the retransmission argument.

After a year of negotiations, Comcast and Disney finally agreed on terms for the carriage of newer Disney networks Toon Disney and Soap Net. Toon Disney, targeted to kids ages 2 to 11, reaches 17 million homes and just began carrying national advertising in September. Net, launched last January, reaches about 5 million homes. That pales in comparison to Disney's more established networks, such as ESPN, which reaches nearly 80 million.

Disney's bargaining chips include its ownership of the ABC television network and ESPN. In a widely publicized flap last spring, Time Warner removed the ABC-owned station from its cable systems in New York and other markets, a move that became a public relations disaster.

Disney used Time Warner's action as a reason to attack the AOL Time Warner deal, arguing the new company will hold control of both content and distribution.

Sachs also does not believe the NCTA will be forced to ask for a legislative remedy for solving ongoing retransmission consent fights.

It's a jungle out there When Time Warner and Disney fought, many in the industry wanted Congress or the FCC to impose laws forcing broadcasters to negotiate in good faith. Since that impasse has been resolved, however, there has been little pressure for new regulations. With Comcast and Disney successfully coming to terms, a call for new rules is even less likely.

Consumer advocates disagree.

"We say you need a new set of rules," says Cooper at the Consumer Federation, pointing to the newness of broadband technology. Those rules "have to be more flexible" than those previously written, but that "doesn't mean you abandon the principles of interconnection."

The newly installed commission has an opportunity to write new rules for common carriage, Cooper says, eager that the FCC jump on the chance to do so.

Major media companies can now be counted on one hand, the cable industry has consolidated itself to less than 10 major players, and cross investments among cable, media, satellite providers and interactive TV providers abound.

All the while, the deals and media partnerships have grown increasingly complex.

"When you get to be a large media company you cannot help but be supplier, vendor and competitor," says John Sie, chairman/CEO of the Starz Encore premium movie channels. "That's the reality we face."

Ever since cable operators realized they can "own" the broadband pipe into consumers' homes, they have been raising Wall Street's expectations for future growth.

"Once you establish a market for future growth - including broadband access and telephony - you're on that track and really can't get off," Sie adds.

Whither content? While analysts expect 2001 to be a buyer's market for cable systems, that may not be the case for content.

The acquisition of Black Entertainment Television by Viacom for $3 billion, or roughly $48 per subscriber, has upped the ante for content sales.

One plum likely to be sold in the near future is a portion of Rainbow Media Holdings, the programming and sports arm of Cablevision. Estimates of that sale run as high as $5 billion.

As proof of content's rising value, Sie points to the output deal Starz! has with the major studios that license movies to the network. Starz! has exclusive rights to all distribution methods if the content is sold via subscription, whether over the Internet, the television, or some future delivery method.

In order to protect its niche - in order for it to grow - a company has to be both offensive and defensive, he says.

Still, "buying content in order not to be cut off from it" is not the best business model, says Janco's Harrigan, who adds such a scenario would open the door to overpaying.

Plenty of deals are on the horizon in most facets of the industry, Harrigan says, adding that if the Bush administration is extremely friendly towards deregulation, there could be further consolidation in television broadcasting, for example.

Cats and dogs sleeping together? Maybe not, but media companies that don't solicit deals with their rivals at a time of loosened regulatory strings could find themselves a lost breed.