The recent scuffle between Time Warner Inc. and U S West Inc. over the former’s proposed acquisition of Turner Broadcasting System Inc. may terminate yet another much-ballyhooed telecommunications partnership that couldn’t survive changing industry conditions.
On Sept. 22, U S West filed a lawsuit asking the Delaware Chancery Court to block the merger because Turner Broadcasting is a competitor of Time Warner Entertainment L.P., in which U S West holds a 25.5 percent stake.
“We have explained our concerns to Time Warner that the separate legal and economic structures of Time Warner Inc. and Time Warner Entertainment will make the potential synergies of the Turner merger difficult to realize and will create innumerable conflicts of interest and violations of fiduciary obligations,” said U S West Chairman and Chief Executive Officer Richard McCormick.
Things have come a long way since May 1993 when U S West’s $2.5 billion investment in the strategic partnership was announced.
Back then, the deal was applauded for giving U S West access to markets in 32 states outside of its existing 14-state regional telephone network while giving Time Warner access to the regional Bell operating company’s telephone expertise.
Telephone expertise was an important factor because the two companies at that time clearly included personal communications services as an essential component of their broadband, interactive Full Service Network that would begin carrying communications, entertainment and information to homes and businesses by 1998.
“Cable systems are ideal to hang PCS on,” U S West spokesman Steve Lang said at the time.
By June 1994, Time Warner Telecommunications had successfully completed a large scale technical PCS test in Orlando, Fla., using Code Division Multiple Access digital technology from Qualcomm Inc.
Time Warner Telecommunications’ Chief Executive Officer Dennis Patrick said of the test, “Most of all, it demonstrates the tremendous potential of cable plant in delivering better and cheaper wireless telephone and data services to average consumers.”
Yet by the end of the year Time Warner changed direction and announced it would begin offering cellular phone service in Rochester, N.Y.-the company’s largest cable television market-by reselling service from the city’s B-side carrier, Rochester Telephone Mobile Communications.
“We see this as an evolution, with the anticipation of evolving from resale into a facilities-based service. Branding, marketing and distribution will become deciding factors, but these are Time Warner’s strengths,” Patrick said.
“As new wireless licenses are issued by the FCC in the next two years, there may well be a surplus of network capacity in the market. We think spectrum will become a commodity, and the companies with leverage in that market must have had low acquisition cost, low operation costs and good branding. There are other options for us downstream. The BTAs are more attractive,” he said.
But Patrick now says, “We have no plans at this point to bid on spectrum.”
“Our reselling business in Rochester has been very successful, gaining one-third of new customers in that market-about 3,600 customers-and we’ve just added paging. Their are only three cellular competitors there, so in less than a year we’ve achieved competitive parity,” he said.
Patrick said Time Warner adopted this strategy for two reasons.
First, “When we did the economic analysis we saw we would be much more effective as a reseller. It would be a better use of our investment dollars.”
Second, “We are of the view that wireless spectrum is becoming commoditized. And we believe the value is going to shift to marketing and distribution-Time Warner strengths. We’ve put resources into developing those assets,” he said.
Elliott Hamilton, director of the U.S. wireless division at Economic and Management Consulting International Inc., commented, “They just looked at the market to see what was key to success and they came up with brand name as going to be key. If brand name and marketing are key, then you don’t need the infrastructure.”
“There are some synergies between cable and wireless infrastructures but they’re very marginal. There’s not that much extra synergy,” Hamilton added.
Jon Foxman, director of strategic and business planning at BIA Consulting Inc. said, “The industry two years ago when Time Warner and US West got together is very different than it is today. The relative significance of various opportunities and threats has vastly changed. Further, the competitive landscape has changed. Alliances such as the Sprint Telecommunications Venture and PCS PrimeCo L.P. naturally would have changed the value that Time Warner and U S West placed on their relationship.”
