LIFE ON THE FRONTIER AT TIME WARNER
Geoffrey W. Holmes winces painfully at the memory of his first brush with the multimedia world. It was December, 1982, and the Atari Corp. subsidiary of Warner Communications had flooded stores with a new video game based on the hit movie E.T. But the video game craze was fading, and Atari was left with warehouses of unsold games. News of the debacle cut Warner's market value by 32% in one day. As head of investor relations, Holmes had the unenviable task of telling Wall Street what went wrong.
Ten years later, Holmes has a more welcome assignment. He is one of three key players in Time Warner Inc.'s effort to establish new businesses using its resources in entertainment, publishing, and cable tv. The other two are Dennis R. Patrick, former chairman of the Federal Communications Commission, and Robert W. Pittman, the media entrepreneur who helped create MTV. With the furor over Warner's 1990 merger with Time Inc. subsiding, the spotlight has swung to these ambitious executives.
It has fallen to them to realize the lofty promise Chairman Steven J. Ross made in selling the merger: that Time Warner would become a global multimedia empire. To do that, he said, Time Warner would link their properties in movies, cable tv, publishing, and recording. The company would also forge alliances with technology companies in Europe, the U.S., and Japan.
Holmes, for example, is talking to IBM about forming an alliance with the computer giant, according to sources close to Time Warner. Though he won't comment on IBM, Holmes says he wants to revolutionize television viewing by souping up Time Warner's cable system with computer software. Holmes is no techie: Before joining Warner in 1980, he managed money for financier Saul P. Steinberg. But the Atari collapse taught him a critical lesson: "You can make bad business decisions because you get so mesmerized by technology," he says.
Patrick and Pittman, meanwhile, are searching for other synergies inside Time Warner. Patrick is spearheading a new push into the mobile telecommunications business, a venture that would make use of the company's strengths in cable tv and marketing. Pittman is using Time Warner's stable of film and cartoon characters to rejuvenate the Six Flags amusement park chain, now half-owned by Time Warner.
All three are proteges of Ross, who has given them broad mandates. But synergy is hard work: They must persuade Time Warner's busy and fiercely independent division heads to support projects that may not pay off for years. Publishing Chairman Reginald K. Brack Jr. says he is a firm believer in them. And Ross's vaulting vision has raised daunting expectations. "The outside world is looking for us to do some gigantic thing," says Holmes. "I just don't know how you do something that big."
BOOKS ON DEMAND. Not that Holmes's vision is cramped, exactly. He wants to make Time Warner's cable-tv system an interactive pathway through which the company can send and receive reams of information. By pressing buttons on remote-control keypad, cable subscribers would be able to order a Warner movie or a video version of a Time-Life home-improvement book on demand. One key is adding networking technology that increases the amount of information that can be transmitted through the cable. That's why Holmes is talking to IBM and other computer companies.
He confirms that he wants a technology company to buy an equity stake in Time Warner's cable-tv and entertainment properties. Such a deal would be similar to the $1 billion strategic alliance Time Warner struck last fall with Japan's Toshiba Corp. and C. Itoh & Co. Still, bankers say the IBM talks involve a smaller deal than the Japanese alliance, in which the partners bought 12.5% of Time Warner's entertainment assets.
Holmes delights in showing prospective partners the world's first 150-channel cable system, which Time Warner began installing in Queens, N.Y., last year. With its fiber-optic cables, the system is a laboratory for the interactive services that Time Warner hopes to offer. For now, the system offers only limited interactivity to 3,000 subscribers. But the company plans to upgrade the service and expand the system to 850,000 subscribers by 1995.
Colleagues say Holmes is a deft salesman, who has broad contacts and an affinity for dealmaking. He also has the ear of Time Warner's top brass: He says he speaks to President Gerald M. Levin, a longtime proponent of interactive tv, a dozen times a day. But media experts caution that Holmes must win over a far tougher group: consumers. "I've seen no empirical evidence that there is pent-up demand for these services," says Samuel H. Book, an analyst at communications consultants Malarkey-Taylor Assoc.
Dennis Patrick has also emerged as a key figure because of his Rolodex. As former FCC chairman, Patrick knows how to approach the government for access to the radio spectrum. That's invaluable, since Time Warner's plan to get into telecommunications depends on wringing licenses out of the FCC. Colleagues describe Patrick as a headstrong policymaker, who led the drive to overturn the Fairness Doctrine while at the agency. "If you don't understand him, his reputation may be one of arrogance," says James Quello, an FCC commissioner who worked with him.
Patrick's latest project is characteristically bold: He wants to build a wireless telephone service that competes with cellular. Time Warner would sell its customers a portable phone that they could use to communicate with anyone, anywhere. Patrick says the technology, called Personal Communications Networks, will be cheaper than cellular because PCN phones send and receive a lower-power signal. Time Warner would make up for the loss in range by relaying the PCN signals over the unused portion of its cable wires. Time Warner has installed cable system in St. Petersburg, and Patrick is asking the commission for preferential treatment as a pioneer in PCN when it begins awarding licenses sometime in 1993.
HARD SELL. So far, telecommunications experts are chary of Time Warner's plan. In a survey, Jerry Kaufman, an analyst at Alexander Resources, found that few consumers thought PCN would be of much use except when regular phone service breaks down. Even Patrick concedes it will be a hard sell: I'm creating an industry that doesn't exist. This is Star Trek time."
While Patrick quietly works the FCC, Bob Pittman is out to make some noise. he wants to turn the lumbering Six Flags amusement park chain into a rival of Walt Disney Co. Six Flags generates $100 million in cash flow, but profits still lag behind those of Disney and others. Time Warner has invested $50 million over the past two years to buy a 50% stake. Pittman now spends most of his time running the unit.
The trouble is Six Flags lacks Disney's brand image. So Pittman is fashioning a new image by drawing on Bugs Bunny, Yosemite Sam, and other Warner Brothers characters for rides, merchandise, and ads. He just unveiled a new roller coaster called Batman The Ride, and the park in Gurnee, Ill., to capitalize on the June 19 release of Warner's Batman Returns. Pittman doesn't hesitate to put a dollar value on his brand of synergy: He says he can boost Six Flags' cash flow by almost $50 million through increased concession sales.
If Holmes and Patrick are more reticent to estimate a payoff than Pittman is, it's because their projects are still in nascent stages. The two also tend to keep a lower profile than Pittman. Indeed, some company insiders say Pittman's brash style has alienated some of Time Warner's powerful division heads.
For his part, Holmes insists he would be happy just to add 1% to Time Warner's $12 billion in revenues and trim 1% from its $10 billion in costs. "That's synergy," he says. Maybe so. But Steve Ross's synergy squad will have to turn their multimedia dreams into real money before they live up to the boss's grandiose plans.By Mark Landler in New York, with Mark Lewyn in Washington, and bureau reports