H’wood picks up the phone

NEW YORK — How big a threat are the telephone companies to the cable industry? Consider this: The seven Baby Bells collectively gross about $ 82 billion a year , $ 33 billion of which counts as operating cash flow. By contrast, the entire cable industry generates $ 21 billion in sales and only $ 6 billion in cash flow.

No wonder cable operators are quaking over a federal judge’s ruling Aug. 24 that telcos could enter the cable biz in their own backyards. But the Hollywood production community — and the cable networks that buy its TV shows and movies — could come out the winners if phone companies take the multibillion-dollar plunge into cable programming.

Speaking for a number of industry observers, Mary Kukowski, cable analyst for First Boston, predicts that many phone companies will go head-to-head with cable operators by marching into communities already wired for cable and building an alternative system. That means that telcos could not only own cable systems but would by extension be able to invest in cable networks or create new networks of their own.

Under this scenario, called “overbuilding,” the production community will benefit in at least two ways. The telcos would become another buyer of the same program services that cable operators rely on, like TNT, Discovery and Lifetime. Also, the telcos would hire producers to create fresh programming for new networks that would crop up to distinguish the telco service from the existing cable service.

“These new technologies would want to set up their own networks,” says Tom Rogers, president of NBC Cable, which owns CNBC among other cable-network holdings. “And the existing networks would want to get as much distribution as possible.”

But Marc Nathanson, chairman and CEO of Falcon Cable, the 12th largest MSO in the country, says any gains by the networks and producers would be short-lived unless the telcos’ systems added to the total number of paying subscribers, boosting the current 62% of U.S. households to, say, 70% or 75%.

No-win situation?

If telco overbuilding ended up eventually driving existing cable systems out of business, Nathanson continues, demand for cable programming would fall back to what it was before the telephone companies took on the cable operators. There’s another school of thought that argues that “the telcos won’t do any overbuilding because it’d be a no-win situation for everybody,” says Dennis McAlpine, cable analyst for Josephthal, Lyon & Ross.

Nathanson says it would cost a telco $ 3,000 per home to convert a telephone user into a cable customer. And Andy Kessler, a cable analyst with Unterberg Harris, says the overbuilding telco would lose lots of money in a given community because “it would have to bid the price down” below what the cable system charges subscribers every month as a lure to get people to convert.

Even if the existing cable system refused to collapse under the challenge of its deeper-pocketed telco competitor, “you’d end up with two weak companies that would be hesitant about moving forward into new program ventures,” says Rod Thole, president of Crown Cable, a top-20 MSO.

Thole says overbuilding is the equivalent of telcos’ “reinventing the wheel.” Rather than constructing another cable system in a community, he says the telco would be more likely to go after the people who don’t subscribe to cable by offering paycable services in a package that wouldn’t require the household to buy dozens of advertiser-supported networks to get access to HBO, Showtime or even a new pay channel.

Another telco hook

Another possible telco hook for non-subscribers would be whole catalogues of pay-per-view movies that’d be available at the flick of a remote button, Thole says.

The production community would also most likely come out ahead if the court decision, handed down by a judge in Alexandria, Va. and specifically favoring Bell Atlantic, holds up.

Kukowski is convinced that even if the appeals court affirms the Bell Atlantic decision, Congress would throw the court decision out, passing a new law that would put the telcos back at square one, prohibited from buying cable systems that operate within their territory.

But Paul Marsh, media analyst with County Natwest, points to such current arrangements as U. S. West’s $ 2.5 billion investment in Time Warner’s planned rebuilding of its cable systems. He says the deregulation momentum is pushing in the direction of allowing telcos to buy out cable operators no matter where they’re located.

And since the telcos have bottomless pockets, all sorts of new programming endeavors could loom on the horizon — a prospect that compels the eyes of Hollywood producers to well up with tears of joy.

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