Investors Sense Slowdown at Cable Nets

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Viacom Inc.'s share price tumbled last week, partly
over concern that its bellwether cable networks may be seeing slower cash-flow growth.

Even though the analysts who sparked the concern later said
that investors overreacted, the fears appeared to spread to other network owners,
including USA Networks Inc. and Time Warner Inc.

The Walt Disney Co. already had a bad patch earlier this
month, after analysts, anticipating its third-quarter results, trimmed their profit
forecasts.

Last Tuesday, analysts at Merrill Lynch & Co. and
Deutsche Bank Securities downgraded Viacom and lowered their profit estimates, spurring a
sell-off that dropped Viacom's share price by more than $10 at one point, before the
stock closed at $56.75 -- down $6, or about 10 percent.

Viacom ultimately had its spokesmen tell reporters that
there was no change in its business that would prompt such a drop in its stock price. A
sale of the publishing division remained on track, and other aspects of the business,
including the cable networks, are "performing very strongly," Viacom said.

Viacom spokesmen would not address the issue of programming
costs affecting cash flow, but analysts said MTV Networks executives, in particular, have
downplayed that issue, and it won't show up in the third-quarter results, which are
due out in early November.

Merrill Lynch first vice president Jessica Reif Cohen, who
downgraded Viacom to "accumulate" from "long-term buy," cut cash-flow
estimates for publishing and Blockbuster Video.

She also referred to "mid-teen" cash-flow growth
at MTVN in the third quarter, which is healthy, but below its "historical" 20
percent growth. Cohen cited rising start-up losses for MTV Asia, adding that costs for
original programming are rising.

In an interview, though, Cohen said she actually raised her
estimates for MTVN a bit, and she sees no sign of any cash-flow slowdown at other
networks, such as Time Warner's cable networks. MTVN's potent Nickelodeon unit
faces stiffer competition, which is something to keep an eye on, she added.

In the second quarter, MTVN's cash flow rose 16
percent, but excluding MTV Asia's losses, the rise was about 20 percent. The
first-quarter cash-flow rise at the networks was 17 percent, again including losses in
Asia.

With cable-network ratings on the rise and advertising
revenue also on the upswing, analysts are worried mainly about costs and competition.

"Most of us feel that margins are not going to expand
at these networks in the future," Credit Lyonnais Securities USA analyst Richard Read
said of the Viacom networks. "I think that they've been pretty open that this is
not a sustainable 20 percent [cash-flow] growth business."

Eventually, MTVN figures to plateau at 13 percent to 14
percent cash-flow growth, which is still solid, Read said.

Meanwhile, Deutsche Bank entertainment analyst Alan Kassan
last Tuesday cut Viacom's and Seagram Co.'s ratings to "accumulate"
from "buy," citing slower profit growth at Viacom's cable networks versus
the second quarter and at USA Networks, which is 46 percent-owned by Seagram, among other
factors.

He maintained "accumulate" ratings on Time Warner
and Disney and a "buy" rating on CBS Inc., saying that CBS'
primetime-ratings improvement should lead to at least a breakeven performance in 1999
through 2000.

Kassan wrote in a report, "Advertising trends remain
positive" at cable networks, but he said rising programming costs, which are
necessary to maintain or improve ratings, will squeeze profit margins. Time Warner's
networks may also feel the pinch in the fourth quarter, after a strong third quarter, he
added.

Profit pressures at movie studios, home-video operations,
broadcast networks, music producers and theme-park operators are also affecting these
media conglomerates.

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