Adelphia sale part of bigger Web race

Time Warner-Comcast bid is part of rivalry over range of home services

April 09, 2005|By James P. Miller and Jon Van | James P. Miller and Jon Van,CHICAGO TRIBUNE

CHICAGO - With the nation's two largest cable-TV operators reportedly poised to complete their $17.6 billion purchase of rival Adelphia Communications Corp., the race to bring high-speed Internet service into American homes appears likely to intensify.

As technical advances have revolutionized the methods by which entertainment and information are delivered to consumers, the nation's telephone-service and cable providers have squared off in a high-stakes tussle over providing customers with everything from telephone service and Internet access to pay-per-view TV and standard cable television.

"Essentially, we're seeing a duopoly forming in major markets," said Robert Rosenberg, president of Insight Research Corp in Boonton, N.J. "Cable and [telecoms] are trying to sell consumers the same things."

Verizon Communications Inc., SBC Communications Inc. and other regional phone carriers have accelerated their efforts to expand fiber-optics into their networks so they can deliver video programming as well as high-speed Internet and voice service to homes.

Comcast, Time Warner and other cable operators are likewise adding voice to their data and entertainment products. The introduction of Internet-based telephone communication (known as Voice over Internet Protocol, or VoIP) has improved their ability to provide consumers with a full "bundle" of services, including high-speed data transmissions.

Because the technological upgrades involved often require heavy capital spending, bigger companies have an advantage. "Telecommunications is all about scale," said Rosenberg. "The bigger a company is, the more successful it will be."

That bigger-is-better logic appears to be at work in the combination now under way in the cable industry.

Bloomberg News reported that Adelphia accepted the Comcast-Time Warner offer over bids by Cablevision Systems Corp. and a partnership including Kohlberg Kravis Roberts & Co. and Providence Equity Partners Inc.

A bankruptcy judge needs to approve the deal, which may be completed within a couple of weeks, said sources, who asked not to be named.

Comcast Corp. and Time Warner Inc. are respectively the nation's No. 1 and No. 2 cable operators.

Adelphia, which has been operating in Chapter 11 bankruptcy since an accounting scandal in 2002, was put on the auction block last year.

The Time Warner-Comcast bid is said to have topped a competing, 11th-hour bid from Cablevision, the big New York City operator.

Under Comcast-Time Warner deal, the two buyers are expected to pay about $12 billion in cash and issue $5.6 billion in stock in a new company that will be formed by combining the cable operations of Time Warner and Adelphia.

The cable industry saw round after round of consolidation in the 1980s and 1990s, in part because increased size gave the operators better leverage to negotiate prices with programming providers.

That scale advantage on the cable side is real, but its value is sometimes overstated, contends Ragu Gurumurthy, a vice president with Adventis, a consulting group in Boston. "But the scale benefits to telecommunications systems are even higher than for TV," he said.

So for a cable company that will be expanding its voice-communications side, like Time Warner, bigger size "translates into an operating benefit, and a bottom-line benefit. All of a sudden you have a new growth engine, the VoIP and high-speed data side."

"That's the good news," Gurumurthy said.

But there are "challenges," too, he said, referring to the capital outlays Adelphia's prospective buyers are likely to face as they start to upgrade Adelphia's system for telecom service.

In related news, Comcast said yesterday that former Chairman C. Michael Armstrong will not stand for re-election to the company's board at the annual shareholders meeting June 1.

The cable company said it has created the position of director emeritus for Armstrong, with a renewable one-year term, to provide advisory services and attend board meetings.

Armstrong, 66, was a Comcast director after the completion of the AT&T Broadband acquisition on Nov. 18, 2002, and was chairman until May. He is the retired chairman of AT&T Corp. and Hughes Electronics Corp., and spent more than three decades with International Business Machines Corp.

The Chicago Tribune is a Tribune Publishing newspaper. The Associated Press contributed to this article.

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