DLJ remains most positive of AOL's broadband strategy:
May 06, 1999
DLJ roots for AOL
By Charles Dubow
Indexes (May 7, 1999 05:00 PM)
DJIA 11032.00 +85.00 +0.78%
S&P 500 1345 +12.95 +0.97%
NASDAQ 2503.62 +31.34 +1.27%
EW YORK. 12:30PM EST—In a conference call held this morning by Donaldson, Lufkin & Jenrette, Internet analyst Jamie Kiggen addressed several of the issues that are concerning investors about the future of AOL (nyse: AOL) following the completion of AT&T's (nyse: T) $54 billion acquisition of Denver-based cable company MediaOne (nyse: UMG).
The primary concerns are that in the aftermath of the MediaOne deal, AOL, the nation's largest online service, will find it harder to offer high-speed Internet connections. MediaOne was originally the acquisition target of Philadelphia-based cable operator Comcast (nasdaq: CMCSA), which was prepared to pay $48 billion for the company. When AT&T made its unsolicited bid, Comcast brought in a number of potential partners to rescue the deal, one of which was AOL.
Having a stake in MediaOne would have given AOL the broadband cable it so badly wants. Having missed out on MediaOne, DLJ's Kiggen sought to reassure analysts that AOL was still on solid ground. By 2005 DLJ estimates that there will be 65 million households with broadband access in the U.S., a 95% penetration rate of all homes with a PC. It is still too early to say with certainty whether cable or DSL (digital synchronous line) will become the dominant broadband technology.
"We think AOL's broadband strategy is a very sound one," said Kiggen. "They are pursuing a platform neutral strategy and are bringing a lot of assets to the table regardless of which companies they partner with."
Kiggen points out that AOL's biggest asset is its 19 million customers. "AOL is bigger than any other subscription-based business in the world," he says, predicting that the company will ramp up to 50 million customers by 2005.
Because of AOL's infrastructure and ability to administer its immense client base, the company also brings unique intellectual capital to any potential partner. According to Kiggen, broadband providers, whether cable, DSL or wireless, will need to look to AOL for scalability.
"It's not a technology issue," he said. "It's not about how to get to the Internet but what you do once you get there."
Kiggen went on to speculate about the possible partnering relationships AOL could make for itself.
In the cable industry, he thinks AOL would be best off linking with one of three companies: AT&T, Comcast or Time Warner (nyse: TWX).
As far as DSL partners went, Kiggen pointed out that AOL already has relationships with Bell Atlantic (nyse: BEL) and SBC (nyse: SBC) and is in discussions with long distance carrier MCI WorldCom (nasdaq: WCOM). AOL has also been working on a wireless alternative with Hughes (nyse: GMH).
"The assets AOL has built over the past 10 years will be very hard to reverse-engineer or replicate," said Kiggen. "We expect them to get through their near-term market static very soon and expect their strategy to change very little. Whoever wins the platform battle, AOL will be there because they're bringing in the customers and that's where the money is." |
