GNET, etc. Interesting story re Paul Allen from Forbes
May 03, 1999
Chased away by AOL, Paul Allen left $41 billion on the table. It's time for revenge.
If you can't join 'em, beat 'em
By Robert La Franco
In 1992 Microsoft cofounder Paul Allen tried to acquire all of America Online, then a tiny Internet community. Not yet 40, the billionaire keenly saw AOL as a magnet for the millions of eyeballs he knew would soon be trained on the World Wide Web.
He settled for buying a 25% stake in the public market, enough to make him a nuisance to AOL management. AOL boss Steven Case also resented Allen's dispatch of a 28-year-old financial whiz, William Savoy, to oversee his investment. Case denied operating control to Allen, who sold his shares for a $70 million profit by 1994. Today that 25% would fetch $41 billion—double Allen's net worth.
So who can blame him for seeking a new ticket to what he calls the "wired world"? In the past year Allen has acquired six regional cable systems for $11 billion, amassing the sixth-largest provider in the country. His Charter Communications has 3.7 million subscribers, from Los Angeles to North Carolina. It floated $3 billion in bonds and may go public this year, raising maybe another $3 billion of capital.
The money goes for upgrades and acquisitions—and a chance to show up AOL. Cable these days doesn't just mean television programming. Increasingly, it's a high-speed data conduit loaded with other uses (see "Cable guys").
Right now AOL dominates the Internet dial-up business in the U.S. with 16 million subscribers and a 44% market share. What could cut into such dominance? A new technology. When the only on-ramp is a standard telephone line, AOL is the default choice of consumers bombarded by introductory disks and with high brand-awareness. But when a high-speed data line is introduced and promoted in local TV and direct-mail ad campaigns, AOL shows signs of weakness. Allen is now the fastest-growing entrant in that business.
You can see the potential in Nashville, Tennessee, where an outfit called InterMedia Partners has signed up 16,000 homes to the At Home Internet portal on its cable system. According to InterMedia data, that's a runner-up 27% market share; meanwhile AOL's fell from 57% to 47%. Allen isn't involved there, but this past winter he bought a 400,000-subscriber cable system from InterMedia that covers part of South Carolina.
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Cable these days doesn't just mean television programming.
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In Fremont, California, At Home's service is distributed through cable giant TCI; there it also has jumped to second place among Web users with a 24% share, despite some serious technological problems. AOL, according to At Home, has a 38% share.
It's still early in the game. There are only 725,000 North American cable modem subscribers today, and even at its maturity, many analysts see cable getting just 15% of the U.S. Internet market. AOL, meanwhile, is booming: It took just 42 days this year to jump from 15 million to 16 million customers (90% are in North America).
The majority of AOL's customers are still connected at the antiquated 28.8-kilobit-per-second modem speed, more than 50 times slower than cable modems. One of the company's strategists, George Vradenburg, says customers have not demanded high-speed service, and when they do AOL will find a way to bring it to them. At a current cost difference of $20 to $30 per month, who needs that extra speed when all you want is e-mail, chatting and some shopping?
"People buy service, not technology," says Vradenburg. "As yet there has been no effect on our growth."
But the cost of cable technology will come down, and Allen, who is compiling an arsenal of content (stakes in Dreamworks, Priceline, Go2Net and Value America), will offer Pipeline, his portal service, on a data highway wide enough to achieve his notion of what a wired world is all about, a combination of service and entertainment. Allen's whiz kid Savoy, now president of his Vulcan Ventures, explains: "Connecting people to the Internet with a PC is interesting, but the next big-money wave is when TV is fully integrated with the kinds of Internet use we have seen grow over the last four years." When Pipeline really gets rolling, it could become a significant force in the portal market, whether on TV or a PC.
Case and Vradenburg may not seem worried yet, but they cannot ignore the threat. AOL talks of plans this year to sell a service delivered through high speed digital subscriber lines (DSLS) and eventually a multimedia service called AOL TV. Also, along with GTE, it is lobbying for government regulations that would turn cable systems into common carriers required to rent space to all comers. A pitch to the Federal Communications Commission failed, so last month AOL and others took their case to Congress.
Hard to say what Congress will do. But Michael Harris, an analyst at Kinetic Strategies in Phoenix, Arizona, thinks AOL will eventually have to settle for selling itself as a premium service to cable users—on cable systems owned by the likes of Paul Allen.
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