NEW YORK -- Cablevision Systems' strategy to dominate New York's entertainment industry received a major blow Thursday when the New York Yankees announced they will merge with the New Jersey Nets.

The Yankees and Nets said they have signed a letter of intent to combine the two teams into a single company called "YankeeNets." No details about the transaction were announced.

YankeeNets will have enough games to launch its own regional sports channel to compete with Cablevision Systems chairman Charles Dolan's MSG Network, which currently carries the Yankees. So, not only will Cablevision be faced with the possibility of losing the telecast rights to the Yankees, Dolan's strategy to dominate the New York market has encountered a big kink.

More leverage

"Up until today, Cablevision had cornered the cable market for live sports and entertainment in New York," said Lee Berke, senior VP of marketing for the Marquee Group and a former top executive for MSG. "But now the Yankees and the Nets have more leverage to create a regional sports network on their own."

Walt Disney Co.'s ESPN could benefit from the Yankees-Nets merger because the sports cabler is the likeliest candidate to link with YankeeNets to create a new regional sports network.

Cablevision, with partners Fox/Liberty Networks, directly compete with ESPN with their Fox Sports Net national service. Even if YankeeNets do not end up launching a regional sports channel, the threat of such a channel could force Cablevision to overpay to keep the Yankees rights, thereby weakening ESPN's competition.

Up until late last year, Cablevision had been negotiating with Yankees owner George Steinbrenner to buy his team. But those talks broke off, sources said, over the issue of how much managerial control Steinbrenner would wield over the Yankees and Cablevision's New York Knicks and Rangers.

In recent years, Cablevision's Dolan has led his company on a buying spree to lock up control of the major entertainment businesses in the New York area.

Cablevision is the largest cable operator in the New York area with 2.7 million subscribers and owns the Knicks, Rangers, Madison Square Garden, Radio City Music Hall, the Wiz electronics chain, the Clearview theater chain and the MSG Network and Fox Sports New York, both of which Cablevision owns in joint ventures with Fox/Liberty Networks.

MSG's 12-year, $486 million rights deal to carry the Yankees expires after the 2000 baseball season and Cablevision reasoned it would make financial sense to purchase the ballclub and own its rights in perpetuity rather than having to cough up huge rights fees.

Will seek license fee

Steinbrenner will seek a $1 billion license fee from MSG to carry the Yankees for another 10-12 years, estimated Neal Pilson, chief executive of Pilson Communications and a former president of CBS Sports.

If Dolan balks at such a high fee, YankeeNets would likely seek out a cable partner, such as ESPN or Time Warner, to help it launch a new regional sports cable network.

Some observers said Dolan might refuse to carry the new YankeeNets channel on Cablevision's systems. But Dolan might not want to risk the public backlash that dropping Yankees games from his systems would generate.

Several pundits said that Steinbrenner's agreement to merge with the Nets is a negotiating ploy to get Dolan to come back and sweeten his offer to buy the Yanks. "Steinbrenner is a terrific negotiator," Berke observed.

Cablevision stock dropped $3.12 Wednesday.