Cable Giant TCI Still Must Prove Itself
For anyone who is into high-tech innovations, the news from cable giant Tele-Communications Inc. sounded promising. Last month, TCI announced that Hartford, Conn. was one of three test markets nationally for All TV, the first digital television service in the country to be delivered over cable. The service will deliver more than 200 channels to TCI's regional customers, including a wide array of movie channels, specialty channels, pay-per-view choices and new services, including an interactive onscreen scheduling menu to help sort out all the offerings.TCI then announced that it would started hawking its local telephone business--People Link by TCI--in neighboring communities. TCI is practically giving away its phone service, with free installation and dozens of rate packages, all designed to undercut the rates of its competitor, Southern New England Telephone. In addition, @Home, TCI's long-awaited high-speed Internet service is already being tested in the area and is expected to be widely available within the next few months. Along with suburbs of Chicago and San Francisco, Hartford has become one of the leading test markets for new TCI products in the country because of Connecticut's favorable regulatory climate and the area's high percentage of cable subscribers. Despite all these high-tech initiatives, however, TCI's investors are nervous. TCI's stock has dropped precipitously in the past year, from a high of $22.63 last January to $11.63 per share Oct. 25. In fact, Wall Street has cooled on the entire cable industry, as stocks for cable companies have dropped an average of 30 percent in the past 12 months.Part of the decline is due to cable's mixed track record--there have been lots of promises and few results. And TCI has been among the worst offenders. TCI chief executive officer John Malone, for example, boasted in 1992 that a cable service with 500 channels was right around the corner. The company's recent poor stock performance may be the first sign that investors are nervous about the high-stakes, cross-market competition between telecommunications giants that is now heating up. An array of factors have contributed to the fall in TCI's stock. Most pressing have been questions about Malone's health--and, more pointedly, questions about the company's financial health. TCI's third quarter earnings were lower than expected, showing 3.4 percent growth rather than the double-digit growth forecast earlier. TCI's cable operation also lost some 70,000 subscribers, a mere drop in the bucket for a company with nearly 14 million customers, but still a step backwards. The company has also amassed a whopping $14.5 billion in debt, enough to make any investor nervous--particularly given the way cash-rich telephone companies are poised to cut into TCI's cable market.For that to happen, however, phone companies have to make expensive infrastructure investments. In many areas, TCI has already made such investments and may be better suited to cut into telephone markets than vice-versa. Part of the problem for TCI is the perception that the company's debt is based largely on its expansion into untested new markets, according to Gerald Gaines, head of the company's telephone subsidiary.Gaines says that's not true. "Our actual capital-at-risk with new ventures is much smaller," says Gaines, who declines quote numbers. "It is not a bet-your-company level of risk." Still, the volatility in the industry has made investors nervous. "We just had a two-hour conference call with Malone, investors and the banking community to try to explain all this," says Gaines. "It's a very common misperception." In a move designed to simplify life for investors, TCI is reorganizing its corporate structure, splitting its operations into three parts: core, urban and metropolitan regions; traditional rural systems; and what it calls cutting-edge markets. Hartford falls into that third category, in which investors can take their chances with the company's ambitious bids to roll out new systems. That clearly means that TCI's Hartford operations will be eyed closely by the industry and its investors. "I think it will be a very interesting market," says Gaines, noting that SNET is making the biggest plans of any telephone company in the country to cut in on TCI's market. "Connecticut is a bellwether we can use to draw a straight line and say, if it worked in this state, it can work across the country."Despite the recent doubts on Wall Street, analysts who follow the company closely say TCI--and the cable industry in general--is being underrated by its competitors. The rap on cable is that it's got the best backbone in the telecommunications industry--a network made up of high-speed fiber optic transmission lines and coaxial cable, which has a broader bandwidth than telephone lines and can carry more volume. Investors are nervous because they believe that given all this new competition, someone will have to lose. Not so, says TCI's Gaines. He's confident that the telecommunications industry will draw in new customers as more services hit the market. Using this rationale, Gaines says there's actually not much pressure on the company's Hartford operations.Maybe. But logic would suggest otherwise. If Hartford is indeed a bellwether for telecommunications competition across the country, TCI will be paying close attention to how its expanded services will be received there. If that means trying to deliver top-notch services to Hartford-area customers, TCI's gloomy financial picture may wind up benefiting local consumers. But if Malone's company fails to live up to its vaunted promises, Hartford area consumers will be the first to know.