Cable operators play follow the leader

Time Warner and Tele-Communications Incorporated are the leaders in the cable industry, claiming about 24 million of the industry's 65 million subscribers. Their sheer size, however, hasn't kept smaller cable operators from making a name for themselves.

Second-tier cable operators like Comcast, Cox Communications, and Media One, which have been caught up by the urge to merge, will likely continue the consolidation as they begin rolling out broadband services, analysts said.

As the specter of a combined AT&T and TCI looms, and rumors of a deal between Time Warner and AT&T to provide local phone service or Internet access abound, smaller cable companies are feeling the need to beef up.

"There's a real sense that Time Warner is going to do a deal with AT&T," said Ted Henderson, an analyst with Janco Partners, an investment bank specializing in the communications industry. "We don't think that Time Warner will be the last operator to partner with AT&T. They [cable operators] want to use the [AT&T] brand to help lever their telephony services."

Analysts expect other smaller cable operators--especially those involved in the 18-company @Home high-speed Internet partnership--to embrace a telephony or Internet deal with a company like AT&T

"I think they'd like @Home to be AT&T@Home," said Bruce Leichtman, director of media and entertainment strategies for The Yankee Group.

But analysts said only the largest operators are likely to be involved, with smaller cable companies being gobbled up.

Constant consolidation
Analysts say it is important for the second-tier cable operators to grow in order to cost-effectively roll out, market, and support new digital services. And many have done just that, often focusing in specific geographic locations.

"The mid-tier is fattening up," Leichtman said. "All of those guys have bought other players in the last four years."

Cox Communications bought Prime Cable and the cable properties of Times Mirror. Comcast recently bought Jones Intercable in a stock deal valued at $500 million.

Microsoft co-founder Paul Allen acquired both Charter Communications and Marcus Cable last year. And, Cablevision bought some TCI properties in the New York area.

"That's the name of the game in the cable industry, consolidating into a region," Leichtman said. "You don't need to be 12 million to survive."

But smaller players are likely to be acquired, analysts said.

"The Adelphis and the Centuries, those are ripe for consolidation," Henderson said. "To be more effective at delivering broadband services they need to be bigger."

Some analysts have expressed concern that MediaOne, under new management since its handover from Continental Cable to US West, could be more aggressive.

"It's a little bit RBOC [regional Bell operating company] in nature," Henderson said.

Despite its position as the No. 3 cable operator with about 5 million subscribers, Henderson said, MediaOne also could be a takeover target.

"Industry consolidation will continue," he said. "Ultimately there'll be a similar number of cable operators as there are in the RBOC industry."

The Baby Bells have been busy planning mergers of late. Combinations by GTE and Bell Atlantic, and SBC Communications and Ameritech, are facing Federal Communications Commission scrutiny.

Trading places
Analysts say the cable industry has not been a very competitive industry in the past. As a regional franchise-based business, many of the cable operators have established a history of working together.

Over the past 18 months, there have been a series of moves in the industry toward joint ventures and trading cable systems as a means of clustering subscribers together in geographic locations.

TCI recently signed a deal with Century Communications to combine cable systems in Southern California and the San Francisco Bay Area, strengthening each company's hold in those areas.

TCI and Time Warner yesterday announced a cable joint venture that will reach more than 1 million subscribers in Texas.

Henderson said: "A strong cluster offers you a better opportunity to provide new services."