OL Time Warner, the world's biggest media company, said yesterday that it had lost control of cable television systems serving more than two million customers.
The development was a setback for AOL, which is the No. 2 cable television operator in the United States. It followed three months of negotiations in which AOL had sought unsuccessfully to retain the systems, which it controlled through a partnership with Advance/Newhouse Communications.
Instead, Advance/Newhouse, a unit of the Newhouse family's privately controlled Advance Publications empire, will gain financial and operational control of the cable systems. The systems are near Bakersfield, Calif.; Detroit; Indianapolis; Birmingham, Ala.; Orlando, Fla., and the Tampa Bay area in Florida.
Many media analysts had expected AOL to find a way to keep the Advance/Newhouse properties in its fold even if doing so might have meant a $5 billion buyout that would have added to AOL Time Warner's debt load, which is already a concern to investors.
Advance/Newhouse had joined the partnership with the old Time Warner in 1995 by contributing cable systems with about 1.5 million subscribers. But as Time Warner continued to grow, culminating in its acquisition by America Online last year, the Newhouse family grew concerned that AOL could enrich its wholly owned divisions at the expense of the partnership's cable systems, according to people close to the companies.
Under the terms of the partnership, at the end of March this year, Advance/Newhouse had the right to negotiate to take back control of the systems.
"When the partnership was established in 1995, there was always a way that this could happen because we were never certain that we wouldn't want to get back into managing," said Donald Newhouse, president of Advance Publications, which has holdings that include Cond้ Nast magazines, Fairchild Publications and newspapers. "What we have done, we have done because we are comfortable operating rather than being passive investors," Mr. Newhouse said in a telephone interview yesterday.
Although the companies said that the Advance/Newhouse systems would continue to offer the America Online Internet service over their cable lines, yesterday's move was still a strategic blow to AOL Time Warner.
Operating a larger number of cable systems gives the company direct access to millions of consumers and can give the company an edge on other major media companies in developing and selling new products and services.
It was to gain such advantages of scale that Time Warner Cable spent three decades accumulating cable systems. But the same factor may also explain why Time Warner Cable's interests were not necessarily parallel with those of Advance/Newhouse.
As the America Online Internet service is deployed over digital cable television lines, for instance, America Online shares its revenue with cable operators. Hypothetically, for instance, AOL Time Warner could structure a revenue-sharing deal that would allow its America Online division, which has been struggling, to show greater growth, while the cable unit would be made to appear weaker.
"Part of what is now AOL Time Warner used to be just Time Warner, and as we've gotten bigger and as we've done mergers, the risk of conflicts of interest has gotten much bigger," Glenn Britt, chairman of Time Warner Cable, said yesterday in a telephone interview.
"All of the Newhouses' businesses are owned privately, and they operate the business," Mr. Britt said. "In a way, our initial partnership was unusual for them, and over time I think they got uncomfortable with that."
Yesterday's deal is scheduled to be completed later this year. At that point, the Time Warner Cable division will shrink from almost 12.9 million subscribers to about 10.8 million. The unit will remain in the cable industry's No. 2 position behind AT&T Broadband, which has roughly 13.4 million subscribers and will grow to 22 million if the acquisition of the AT&T unit by Comcast is completed.
Robert Miron, chief executive of Advance/Newhouse and a nephew of Donald Newhouse, said that the systems under Advance's control would shed the Time Warner label at the end of the year in favor of a new, as-yet undetermined brand. Of the 2.1 million subscribers of those systems, more than 1.6 million are in the Tampa Bay or Orlando areas.
Until yesterday's deal, Advance owned one-third of a partnership that included about seven million cable systems. The other two-thirds was owned by Time Warner Entertainment, which is itself a partnership between AOL Time Warner and AT&T.
AT&T owns about a quarter of Time Warner Entertainment. AT&T has been trying for years to persuade the company that is now AOL Time Warner to buy AT&T's stake in the venture, but the two sides have been unable to come to terms. The companies have selected Bank of America to conduct an independent appraisal of the unit.
Under yesterday's deal, the Advance/Newhouse partnership with AOL Time Warner will remain in existence, but Advance's financial interest will now be only in the systems that it is running. About 5,000 Time Warner Cable employees will go to work for Advance.
What remains of the partnership will function mostly as a buying consortium for programming. By combining their purchasing power, Time Warner Cable and Advance/Newhouse should be able to get better deals from programming suppliers like Viacom, which controls networks including MTV, than either company could secure on its own.
