The following is one of the best analysis I've seen lately of Allen's Wired World. Dated Oct. 29, it comes from Raging Bull's Cyberstock Investment Report:
--------------------------------------------------------
Vulcan vision
The Starship Enterprise has finally landed on planet Earth, and it's not a
Vulcan named Spock that's piloting this New Age cyber-vessel. Far from it.
However, as the second-richest man in America and Chairman of Vulcan Ventures,
Microsoft (MSFT) co-founder Paul Allen's estimated $40 billion net worth does
leave him as one of the most powerful men in the solar system. I'm not kidding.
Besides AT&T (T), Microsoft, and perhaps Softbank, there are few companies or
individuals in the world today that have the ability to play such an enormous
role in the convergence of telecommunications and media. Critics can call Paul
Allen a scatterbrained investor, but the man is amassing a massive portfolio of
investments that can finally make his longtime "Wired World" vision a reality.
Paul Allen envisions a world that will seamlessly link homes and offices via
computers, televisions, Internet appliances, and telephones. Forget just making
video on demand and interactive television a reality. We're talking George
Jetson meets "2001: A Space Odyssey" kind of futuristic plans. Clearly, it's
these types of visionary ideas that have driven Allen to amass a hodgepodge
portfolio of over 165 tech-related companies, but has also led to an avalanche
of criticism from various pundits over the past decade. Wired magazine went so
far as to label Allen the "Accidental Zillionaire" back in 1994. In truth, not
everything that Allen has touched has turned to gold.
For example, an Allen investment back in 1991 in SkyPix - a satellite venture
that planned to bring pay-per-view movies into the home - ended up losing
millions. Then there is also the infamous America Online (AOL) investment tale.
Looking to leap into the online services game, Allen's investment organization
acquired a 25% stake in a fledgling AOL back in 1992. However, after repeated
squabbles with AOL management over the company's future direction, Allen
unloaded his minority position for a $70 million profit in 1994. Not a bad day
at the office for most investors, but after AOL's incredible run to the top of
the online world, that 25% stake would today be worth billions.
Did Vulcan and trusted Allen lieutenant William Savoy make the investment
blunder of the century? Not in my book. You cut your losses - or in this case
disagreements with management - and move on. The great irony to this tale is
that AOL is today desperately looking to cut high-speed cable access deals, and
will eventually likely have to come to the table once again with Allen, who has
been recently re-born as a cable baron. In other words, what comes around, goes
around.
Clarifying the vision
However, I must admit that it hasn't always been easy for me to see how Allen's
portfolio companies all mesh together. I've finally come to the conclusion that
they simply don't. Armed with one of the world's largest bankrolls, Vulcan
Ventures can afford to cast its net as far as the eye can see and dabble in a
vast array of different technologies. It's like the miner or oil prospector who
purchases stakes in dozens of gold mines and oil fields to help diversify his
risks. No one has mined the Internet longer, harder, and deeper than Paul
Allen.
One can look at failed Allen investments like SkyPix two ways. Either Allen has
been barking up the wrong tree for over a decade, or his long-term vision has
always been far ahead of the actual technology needed to fully hatch his Wired
World. I tend to lean toward the latter suggestion. After all, Allen has been
envisioning a "connected future" for over 20 years, well before Tim Berners-Lee
even created the World Wide Web.
I believe this connected future is finally starting to emerge from the fog and
come into focus for Allen & Co. A quick check of the Vulcan Ventures portfolio
over at <A HREF="http://www.paulallen.com">http://www.paulallen.com</A> and a
look at the investments Vulcan has made over the past year suggest to me that
he's finally on the brink of making his Wired World a reality. Stakes in
telecommunications, cable, media, and e-commerce companies have Paul Allen
finally sitting in his digital sandbox near Seattle with all of the building
blocks needed to construct his supercharged "Vulcan Web." Thus, I decided to
provide a bird's-eye view this week of key components of the Paul Allen
portfolio and how I see them fitting together in the future. The size of scope
of his Internet related holdings are truly staggering.
Collecting the wires
Over the past two years, cable has rapidly emerged as the preferred wires for
Allen's vision. Vulcan initially began its cable binge with the acquisition of
Marcus Cable for $2.8 billion in 1998. Soon after, Allen acquired Charter
Communications for $4.5 billion, and merged the new holding into Marcus. The
combined company is now the seventh-largest cable company in the U.S., with over
2.5 million subscribers. This would be a gigantic accomplishment for most
investors in such a short time, but Allen was only beginning to whet his
appetite in this space. A spate of additional acquisitions in the past year
will now make Charter the fourth-largest cable company in the U.S. after the
acquisitions of Falcon Cable and Fanch Communications close. In addition, Allen
has earmarked almost $3 billion to upgrade Charter's cable systems over the next
three years. A planned mid-November IPO of Charter should raise the company
over $3 billion.
In addition to banking heavily on Charter, Allen also owns roughly a one-third
stake in High Speed Access Corp. (HSAC), a provider of high-speed Internet
access via cable to primarily tier two and tier three markets. High Speed
Access currently offers its services to over 1.5 million homes in 26 states.
While Vulcan continues to bulk up its cable holdings, Allen also owns roughly a
8.5% stake in NorthPoint, a national DSL provider. Perhaps the most interesting
connectivity move Allen has made lately is a $1.65 billion investment in RCN
Communications (RCNC), an operator of local fiber networks. This October
investment will give Allen a 27% stake in the CLEC. Allen will also use RCN to
provider telephone service initially in Los Angeles to Charter's cable
customers.
RCN is not the first CLEC that Allen has introduced to the Vulcan war chest. In
August, Allen made a $365 million investment in Allegiance Telecom, a
Dallas-based CLEC that provides a bundled package of voice, data, long distance,
and Internet services. Allegiance is currently operational in 17 markets, and
further helps increase the rapidly growing Vulcan Ventures "connectivity
footprint."
Finally, Allen has further hedged his bets on the connectivity side of things by
increasing his stake in longtime wireless holding Metricom (MCOM) earlier this
summer. Allen's $300 million investment gives Vulcan roughly a 49% stake in the
wireless firm. Metricom plans to roll out its services to 12 cities by the
middle of next year. Overall, Allen's huge cable holdings through Charter, and
stakes in Allegiance, RCN, and Metricom have the connectivity side of Allen's
Wired World looking like it's in good order.
E-tailing buffet
Vulcan has also been quite aggressive in expanding its holdings in the
e-commerce arena. Allen currently has minority positions in a bevy of e-tailers
that include Priceline.com (PCLN), Value America, Beyond.com (BYND),
Drugstore.com (DSCM), Stamps.com (STMP), group purchasing aggregator Mercata,
and Egghead.com (EGGS). Allen has also recently increased his stake in distance
learning player click2learn.com, formerly known as Asymetrix, with an additional
$10 million investment. Vulcan also pumped an additional $20 million into
online bookseller FatBrain.com (FATB). This varied stable of e-tailers gives
Vulcan no shortage of commerce plays to serve as his connectivity building
blocks in the future.
Allen made his first entry into the digital music arena earlier this week as
part of a $30 million investment in music portal site RioPort.com, which was
spun off by sound card maker and MP3 Rio player manufacturer Diamond Multimedia
in June. The RioPort.com investment is particularly interesting for Vulcan,
because not only does it represent a content and commerce play, but it also
brings Allen closer to another hardware device. RioPort.com is directly linked
as the default music portal for the popular Rio MP3 player.
This is not the first time that Allen has cozied up to hardware devices that he
believes could help enhance his Wired World. Vulcan currently has stakes in
both Replay Networks and Tivo, both direct competitors and creators of a new
advanced recording device that lets users customize their TV viewing. Clearly,
Vulcan views investments like Tivo, Replay, and RioPort.com as being much more
than cutting-edge hardware plays, but also devices that hold the potential to
become distribution platforms in the future. Interconnected platforms and
devices will make Allen's vision really hum one day.
Eye candy
Allen's investment pace on the content side of the Net has recently increased as
well. Vulcan is clearly not afraid of betting on content-oriented companies,
and increasingly appears interested in broadband and multimedia content plays.
While most venture capitalists won't touch entertainment and Hollywood-related
companies with a ten-foot pole, it was Allen who plunked down half a billion
dollars for a 25% stake in DreamWorks SKG back in 1995.
Thus, it wasn't surprising to find out on Monday that Allen would be investing
$50 million in POP.com, a new online entertainment company founded by movie
moguls Steven Spielberg and Jeffrey Katzenberg at Dreamworks and Ron Howard's
Imagine Entertainment. POP.com plans to launch in the spring of 2000, and will
produce a number of 5-6 minute original features for the Web. Without a doubt,
this investment gives Allen a smorgasbord of top-rate entertainment content to
run over Charter's "fat pipes" in the future.
Allen continues to maintain minority positions in Barry Diller's USA Networks
and tech publisher and broadcaster CNET (CNET). Other important Allen content
investments include a $50 million investment made in tech publisher Ziff Davis
(ZD) back in February, and a one-third stake in fledgling computer news channel
ZDTV. As part of the ZDTV investment, Allen also agreed to carry ZDTV over
Charter's cable systems.
Allen made a similar deal with Oxygen Media, the brainchild of cable vet
Geraldine Laybourne and Oprah Winfrey, when Vulcan pumped $100 million into
Oxygen earlier this summer. The Oxygen channel will also be carried on
Charter's cable systems when it launches early next year. The Oxygen and ZDTV
deals both remind me of the scores of similar agreements that crafty cable
tycoon John Malone negotiated for his programming investment vehicle, Liberty
Media, when he was running cable giant TCI.
Broadband partners
It is important to point out that while AT&T seems hell-bent lately on pulling
away from the vertical integration of connectivity (AT&T Broadband Services) and
content (ExciteAtHome), Allen is clearly attempting to blend these two worlds
together via Vulcan and Charter. Nothing making this plan more evident than the
announcement earlier this month of the formation of an Allen-led joint venture
called Broadband Partners.
The joint venture is a laundry list of Vulcan portfolio companies that includes
RCN, Charter, High Speed Access, and Go2Net (GNET). Broadband Partners plans to
launch an interactive TV-based broadband portal early next year that will
initially be targeted to Charter set-top box owners, and potentially other cable
companies. To me, this is the first time that Allen has combined pieces of his
connectivity and content portfolio all under one roof that represents Allen's
own United Nations of cyberspace. Content meets connectivity, finally. It also
positions this new joint venture as a hot broadband content and distribution
play that Allen can flip to the public sometime next year. After all, having
public currency to snatch up additional dot-coms could prove a lot cheaper for
Vulcan than having to sell Microsoft stock each quarter to fuel further
investments.
Allen's portal platform
Domination of the Net is still and always will be an eyeball game. Controlling
various connectivity conduits to a broadband world is nice, but without a
massive aggregation point to serve as the intersection between content and
connectivity, Allen was left with a large gap in his Wired World puzzle. He
desperately needed an eyeball aggregation and online distribution play. Allen
filled this gap in March when he surprised the investment world by announcing he
would acquire a sizeable minority stake in portal site Go2Net. When the deal
finally closed in mid-June, Allen ended up plunking down $426 million for a 34%
stake.
While still not near the caliber of a Lycos (LCOS), Excite (ATHM), or Yahoo!
(YHOO), Go2Net has managed to claw its way up to #12 on Media Metrix's (MMXI)
Top 50 Sites for September with nearly 10 million unique visitors last month.
Without a doubt, Go2Net has quickly become a cornerstone component to Allen's
portfolio, and will play an important role in Allen's recently announced
Broadband Partners initiative.
Piecing together the wired portfolio
Perhaps the most frustrating realization for Internet investors is that there is
currently no easy way to directly invest in Paul Allen's vision. Unlike
Internet holding companies CMGI (CMGI) and Internet Capital Group (ICGE), Allen
seems to have no intention to tie together his vast array of investments into
one publicly traded security. One can't really blame Allen for this. While
Microsoft pal Bill Gates is under the microscope 24 hours a day by regulators
and investors for heading a public company, Allen is left to quietly execute his
plans as he sees fit without all these prying eyes. Perhaps the best way for
the public to get a slice of the Wired World pie for the near term will be the
IPO of Charter Communications scheduled for mid-November.
Another strategy for cyberstock investors would be to compile a "mini-Wired
World portfolio" by putting together an identical basket of some of Allen's wide
variety of public holdings. In any case, the next three years will likely allow
the guitar-playing Allen to finally put his harshest critics on ice for good.
In the words of Allen's favorite guitar player, Jimi Hendrix: "I stand up next
to a mountain and chop it down with the edge of my hand." Cyber-rivals, you've
been warned: Allen is playing for keeps. Mountains won't be all this Vulcan
will be chopping down if he can become the first Net architect to blend content,
connectivity, and commerce. If that happens, critics may have to start calling
Bill Gates the lucky zillionaire instead.
--------------------------------------- |
