Regulatory Threats Cloud Show

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Anaheim, Calif. -- The threat of government action against
the cable industry hung over the Western Show's general sessions here last week, amid
overall enthusiasm about the industry's prospects.

At the opening general session, both Leo J. Hindery Jr.,
president and chief operating officer of Tele-Communications Inc., and Gordon Crawford, an
influential media investor as senior vice president of Capital Research and Management
Co., issued warnings on the threat of government policy.

Hindery said that if regulators force TCI and AT&T
Corp. to open their data networks to competitors as part of the merger of the two
companies, that requirement could create "a very significant risk that this
transaction would not progress."

Such a policy would be unfair because open-access advocate
America Online Inc.'s data business is vastly larger than TCI's data business, so TCI will
have had no chance to act as a dominant force suppressing competitors. Therefore, an
open-access mandate would be "the first time that an anticipated outcome became the
basis for a rulemaking," Hindery said.

Execution risk was also on Hindery's mind. He warned that
over the next five years, it will take a lot of work and truck rolls to meet goals like
getting digital boxes into 80 percent of customer homes and signing up 30 percent of homes
passed for data and telephony services. But after that's done, about 50 percent to 60
percent of operators' market value will come from revenue sources other than analog video,
he added.

Crawford countered that cable's biggest challenges are from
competitors, such as satellite providers and phone companies, and from the government. He
warned, "There is a time-to-market issue," especially as telcos make
high-speed-data services widely available over the next couple of years.

"What I worry about," he said, is that operators
will wait for standards or new technologies to progress before aggressively deploying
digital boxes, modems and telephony.

Moreover, he added, government action in areas like digital
must-carry, rate regulation and open access could imperil cable's ability to deliver those
new services."Other than the government coming in and really torpedoing this
industry's continued ability to raise capital, this industry's future is bright,"
Crawford said.

Opening the session, National Cable Television Association
president Decker Anstrom said operators' top priority should be to "restrain prices
in the months ahead" to make sure that cable regulation expires, as scheduled, March
31.

Anstrom's biggest applause line came when he declared that
the next-biggest task was to oppose any must-carry requirements for digital-broadcast
signals.

Digital must-carry concerns pervaded the show. Many
attendees wore yellow badges that said "Digital Must Carry: Unfair, Unconstitutional,
Un-American."

Government action also hung over the next day's session of
MSO chiefs.

The CEOs of TCI and Cox Communications Inc. defended their
abilities to choose how they allow other companies to tap into their networks.

TCI chairman and CEO John Malone said the regulatory
request by AOL and other Internet-service providers to force TCI to offer wholesale
versions of high-speed-data access to them "doesn't work technologically or
economically for us."

Cox president and CEO James Robbins picked up on that
theme.

"The investment in the 'big pipe' has been made by
private, venture-equity money," as opposed to utilities, which are guaranteed a
regulated profit, he said. "I think that any artificial playing with that playing
field is abhorrent ... After-the-fact regulation, when the investment is being made and
the returns take a number of years to realize, is just not a level playing field."

At the same time, Robbins defended unbundling rules that
applied to the telcos due to their years of predatory behavior as dominant carriers.
Eventually, the phone and cable industries will be largely deregulated, he
predicted.Assuming that the unbundling issue doesn't derail TCI's merger with AT&T,
internal cost savings and growth in the video business alone should make the costly
acquisition pay off for AT&T, Malone said.

AT&T pays $13 billion per year to local-exchange
carriers to complete calls, so some of those payments should shift to another part of
AT&T once calls are completed on its cable plant, he said, adding that the success of
TCI's digital-cable service shows that consumers are willing to upgrade their cable
service.

"So all of these Internet-crossover, impulse types of
revenue are, in fact, incremental, and therefore very positive financially," Malone
said.Elsewhere, some of cable's new financial buyers lamented the lack of available
properties to buy, at least at current asking prices.

"We may be at a point here where prices are
optimistically high," Morgan Stanley Dean Witter Capital Partners managing director
Michael Janson said during a panel discussion last Thursday.

Janson, whose company's $1.8 billion fund backed
125,000-subscriber Renaissance Media LLC, said financial buyers may have to stay out of
the acquisition market until prices -- especially after being inflated by high-multiple
acquisitions by billionaire Paul Allen -- come down a bit.

That could happen as it becomes evident that new services,
such as high-speed data and telephony, take a while to deliver, Janson said, noting that
warnings to that effect were sounded during last Wednesday's general-session panel talk.

Mark Ein, principal at Washington, D.C.-based
boutique-investment firm The Carlyle Group, which backed some Prime Cable deals, agreed
that "it's really hard to find good stuff as a financial buyer." That played a
role in Carlyle's recent agreement to sell Genesis Cable Communications, a
51,000-subscriber rural operator, to Benchmark Communications, he added.

But the panelists, led by Insight Communications Co.
president Michael Willner, were bullish about cable values.

Willner laid out a case for buying a hypothetical
50,000-subscriber, single-headend cable system, pouring $19 million into an upgrade, and
generating 25 percent to 30 percent annual returns on the investment.

With 2 percent subscriber growth and new-service revenues,
annual cash flow should double over five years, using Willner's model.

Those numbers readily support a valuation of 10 times or
more annual cash flow, he said.

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