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Cable--Is AOL really out in the Cold?
A reader has prompted me to ask the above question, and after a little research, I'd have to say: "Yes, at least for now and the foreseeable future."
To see why I came to this conclusion, it is imperative to understand how the cable access industry works. So I'd give my readers a brief outline. Currently, high-speed cable access to the internet is provided by two premier services: Excite@Home and Road Runner. As of now, the former has about 500,000 subscribers and is owned and operated jointly by AT&T (which holds only 40% of the stock but controls 70% of the voting power), Cox Communications, and Comcast, while the latter has about half the number of subscribers and is owned and operated jointly by Time Warner, MediaOne, Microsoft, Compaq, and Advance/Newhouse. Finally, there's also Charter Communications (owned by Microsoft co-founder Paul Allen), which offers cable access through its "Charter Pipeline" service. As of now, I couldn't find any subscription numbers for Charter Pipeline, but I am sure that number is significantly less than those numbers from Excite@Home and Road Runner.
Each company offers either the Excite@Home or Road Runner service through their own infrastructure, and is in part, responsible for its marketing in their own area (since infrastructures between companies do not usually overlap geographically). For example, if you live in Phoenix, you will be offered the Cox@Home service, while in Detroit, you will be offered the Comcast@Home service.
Will AOL strike a deal with any of the cable providers?
While there is a possibility, I do not think this is very likely. One argument for doing that is that cable providers need the AOL brand name to promote cable access. I think this argument is flawed. A service such as Excite@Home is already a household name, and while AOL can help cable access grow more rapidly if it did offer cable access, existing infrastructure does not allow for that kind of growth anyway. Demand is already outstripping supply, so any more promotion such as those by AOL would be redundant.
The latest proposal by AT&T to swap cable assets makes that idea far more unlikely. Under that proposal, there would hardly be any overlapping infrastructure (except in areas such as L.A. and New York), and thus, there would be no overlapping service (such as a Cox@Home vs. a Comcast@Home or one of those vs. a Road Runner service) and no competition. If any one of those companies brought in AOL, it would effectively be shooting only itself in the arm—and no deal with AOL (either a fee or a direct investment from AOL) could be better than a scenario with no competition, right?
What if there was a deal?
I think here, we can safely assume that AOL would not strike one with AT&T, so let's talk about a possible deal with other companies, such as one with Comcast or Cox. A deal with Comcast is possibly the most likely, considering that Comcast asked for AOL's help when AT&T outbided them for MediaOne. More than likely, Comcast would not let AOL freely use their cable infrastructure. The most likely scenario is for Comcast to charge a fee or commission for every subscriber that AOL signs up. As a result, I do not think that consumer prices will decrease significantly, and since Comcast's services do not compete (after cable assets are swapped) with any of the other company's, there will be no impact on other cable providers' revenues or profits. Moreover, Comcast would not put themselves into a situation where they will lose significant profits from a deal with AOL. Therefore, I believe both the Excite@Home and the Road Runner service is safe for now (in terms of profits).
Conclusion
AOL would probably never gain a foothold in cable access unless there is divine intervention in the form of the FCC. But I do not think this will happen either—check out why in the article here. Moreover, in the long-run, other types of access would provide competition to cable, such as DSL.
But while AOL would probably never offer cable access, this would not harm their growth in the long-term future—since there are other alternatives such as DSL and DirecTV. However, in the short-term, both DSL and DirecTV is still being very slowly deployed, and without offering cable access, this would most likely stun AOL's growth in the next couple or few years.
This is one of the many reasons why I have asked my readers to avoid AOL stock in favor of cable stocks such as ATHM. And if you are not comfortable with "betting everything" on cable, you can always "hedge your bets" by concurrently purchasing some DSL providers' stocks, such as COVD. (I have a little commentary on that—check it out here.) One way or the other, AOL does not look very attractive right now.
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