Winning in the Fast-Access Wars, Part 2
By Jim Seymour
Special to TheStreet.com
1/16/99 12:15 AM ET
Yesterday I described some of the traps in the cable-vs.-ADSL fast-Internet-access
battle and tried to sort out the advantages and disadvantages of each technology.
Today, we'll look at how you can make money in this contest.
It's essential first to understand the hidden agendas at work here. They explain
why winning this war is so important to the combatants -- and to investors.
Beyond the substantial revenue from providing fast Net access, cable providers
want to draw you into their digital net so they can also start selling you alternative
local-loop voice telephone service, along with your cable Internet access and
cable-TV service. Cable access to the Web is the camel's nose under the tent for
cable operators.
Their "one wire/one provider" approach is a promising idea, but you'll have to decide
whether you trust your cable provider enough to be your sole supplier of something
as essential as telephone service. You can live without Judge Judy and Yahoo!
(YHOO:Nasdaq), but when you need to dial 911, you need a dial tone. Will the
cable providers around the country prove capable over the next couple of years of
delivering the kind of reliability we associate with today's ubiquitous dial tone? Will
we believe them? Fast cable access is a wonderful opportunity for cable operators
to build that bond and trust and to begin to erase, for many cable customers, bad
cable-guy memories.
The growth of cellular service will help overcome customers' worries about the
reliability of telephone service via cable. The correlation between homes in which
one or more residents carry a cell phone and homes likely to consider converting
to cable telephony for their basic phone service is probably very high. If you know
you can always use your cell phone, is the absolute reliability of your wired service
quite so critical?
On their side, the telcos' hidden agenda is similar. They not only want the
fast-access revenue, but they also want to head off cable's incursion onto what
they see as their turf, to keep local-loop competitors out of the game and to soon
be in a position to sell you discounted long-distance service as well, by hooking up
with partners such as Qwest (QWST:Nasdaq) (which I am long).
So How Do You Make Money?
Starting at the technology end of the food chain, probably the best place to invest
to play the fast-access market is Aware (AWRE:Nasdaq), which I am long. It
smells like a big winner on the ADSL side. AWRE has pioneered G.lite technology
and is now licensing it to the RBOCs. I first mentioned AWRE as a potential
winner here on Jan. 8, when it closed at 26.50; Thursday it closed at 37.31, a 41%
gain in about a week. During the same period, the Nasdaq composite was down
slightly.
Cable-modem and ADSL modem businesses may prove
profitable, but it's hard to find a play.
On the cable-modem side, chip maker Broadcom (BRCM:Nasdaq) looks like the
best technology play. In addition to a strong base in chips for cable modems,
BRCM also has irons in the fire in ADSL and VDSL, cable-TV set-top boxes,
Ethernet controllers and chips for MPEG encoding for satellite video transmissions
-- all hot markets over the next few years. I also noted BRCM here on Jan. 8, when
it was trading at 120.75; Thursday it closed at 135.94 -- a nice if less spectacular
12%-plus gain -- after a wild ride over the previous couple of weeks, when it
touched 190. Like AWRE, Broadcom looks like it has a good year coming up. (If
only they had put a dot in the middle of their name, they'd be headed for a fantastic
year!)
In the middle, the cable-modem and ADSL modem businesses may prove
profitable, but it's hard to find a play. Motorola (MOT:NYSE) sold a little more than
300,000 cable modems last year, but their cable-modem business is a drop in the
bucket for a $29 billion (in sales) outfit. Maybe it will be important in a year or two,
but not now. 3Com (COMS:Nasdaq) cable modems are being sold through
CompUSA (CPU:NYSE) in Spokane, Wash., by TCI (TCOMA:Nasdaq) for its
system there -- but again, the business is not material for 3Com, a $16 billion
company. Cisco and others will be in the cable-modem business soon, but their
cable-related revenues are even smaller.
ADSL modems are an even smaller and more diffuse business right now, but will
grow this year as the ADSL business explodes. Fujitsu, Orckit (ORCTF:Nasdaq)
and a few others are in, but no one's selling many boxes yet.
Move up to the next level, the service providers, and it's still hard to figure how to
play the fast-access market. The leaders in cable access are TCI, soon to be part
of AT&T (T:NYSE), in tandem with partner @HOME (ATHM:Nasdaq); Time
Warner's (TWX:NYSE) RoadRunner service; and MediaOne Group
(UMG:Nasdaq). All are pursuing much broader markets than just cable access.
The combination of T and TCOMA looks especially potent. Not only do you have
strong existing AT&T and TCI long-distance, wireless and cable businesses, but
this combo should be a fierce competitor in the near-term future, given T's long-line
and wireless businesses. Note too that with a straddle across both wireless and
cable businesses, the combined company will be able to work both sides of the
street on selling local-loop voice service. This may not be a buy on
cable-access-revenue prospects alone, but over time it can be a powerhouse in the
broadened "fat-pipe-into-the-home market.
For Time Warner, cable access is now only a very small part of their business --
though overall, RoadRunner's management of its cable-access business is
exemplary. TWX apparently cares about this business, and if it can accelerate its
rollout, it stands to own a big chunk of the cable-access market by midyear.
(A spinout of RoadRunner to TWX shareholders is a tantalizing possibility. If the
market values @HOME's 175,000 subscribers at $11B (Thursday's close), what
value might it assign to RoadRunner's only-slightly-smaller customer base? With
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