In an unusual collaboration between a telephone company and a cable and media conglomerate, US West and Time Warner agreed yesterday to merge their skills in building sophisticated cable services that would offer consumers a panoply of entertainment and information services on demand.
Several executives close to the talks said US West Inc., one of the seven Bell regional operating companies, agreed to invest $2.5 billion for 25 percent of Time Warner Entertainment, a limited partnership controlled by Time Warner Inc. that owns the company's cable systems, Warner Bros. and the cable television channel Home Box Office.
Time Warner is the nation's second-largest cable operator, with 7 million subscribers. The boards of both companies met yesterday, and a formal announcement of the agreement is expected today.
The agreement is emblematic of the future convergence of the two technologies and a significant push forward in efforts to create a super-highway into the home that can deliver entertainment and information services at the consumer's whim, including movies or video games ordered from the programmer's central library.
Advanced video-conferencing and pocket-telephone service might also be included.
In February, Southwestern Bell Corp., another Bell regional company, agreed to acquire two cable systems for $650 million. But the US West investment in Time Warner Entertainment is a far more comprehensive alliance between two companies, each a giant in its own industry, committed to jointly building the most advanced cable technology across the country.
Unlike the much smaller deal in which Southwestern Bell acquired Hauser Communications outright, the latest deal represents a significant step because Time Warner is uniquely positioned as an operator of cable systems and an owner of entertainment programming by virtue of Warner Bros., a producer of films and TV programming.
The venture also marks the first cooperative effort between a phone company and a cable television concern.
While telephone companies and cable operators have historically viewed each other as rivals, some companies have come to believe that "since the expertise of the two industries is complementary and the costs for either of them going it alone are enormous, it may be better to work as partners," said Paul Kagan, who follows both industries for the consulting firm that bears his name.
Although cable companies are not allowed to own more than 5 percent of a programming company in their home market, several executives close to both companies said yesterday there was relatively little overlap between customers of the two companies so there did not appear to be a regulatory problem.
Only about 100,000 of the 25 million customers of US West, fTC which is based in Denver and serves 14 Western states, are in markets where Time Warner, which serves 36 states, has cable franchises.
Time Warner's motivations are more complex than simply making a strategic alliance. The company is still saddled with $13.8 billion in debt as a result of the 1990 merger of Time and Warner.
US West, for its part, has experience with advanced switching systems that allow it to set up links quickly between two or more entities on demand. Ultimately it could create competition for local telephone companies, since a sophisticated cable system could handle telephone calls.
Cable systems have historically been passive, one-way delivery systems. But companies such as Time Warner are now moving toward "a full-service network," one in which consumers would be able to communicate electronically with the cable system to get movies and other material when they wish.
Time Warner has already said it is implementing such a "full-service network" for 4,000 homes in its Orlando, Fla., system and hopes to expand that concept elsewhere.
The merger would also help further US West's efforts in the inexpensive low-power wireless pocket-size phones that communicate through a network of antennas situated every couple of blocks. A cable system is more efficient than a telephone system in tying a personal communications system together in an urban center.
The deal also raises the specter of one Bell company's raiding another's territory, not in terms of local usage, but in terms of access to long-distance carriers.
For example, the deal would give US West the right to use Time Warner coaxial cable and fiber-optic networks to connect to long-distance carriers, thereby bypassing the local telephone companies.
In Baltimore, for example, US West could bypass the Chesapeake & Potomac Telephone Co. and use Time Warner cable to get customers to long-distance telephone carriers.
Together, the two companies can offer video-conferencing capabilities, particularly since the Bell companies have more experience than cable companies in marketing to business.