America Online--and on the Air
Business Week Online
Its DirecTV deal will leapfrog the PC. Take that, AT&T!
When America Online Inc. AOL decided against joining Comcast in a bidding war for MediaOne Group UMG, the online service looked like it was being left behind as deal mania swept through the communications and Internet markets. While other companies were grabbing high-speed Internet pipes, AOL was stuck in the slow lane. A week later, however, it was back in the game--announcing a deal on May 11 with DirecTV. The deal will help AOL achieve its immediate goal of expanding its audience beyond desktop computer users and could eventually result in a satellite-based Internet service.
There's a simple reason that AOL wants to vault from the confines of the phone system to television land: The potential market of 97 million American households with televisions dwarfs its current 17 million customers. AOL's rivals have already moved there--AT&T T and Microsoft Corp. MSFT are investing billions to bring Internet-style services to the small screen. ''It's clear the TV is the new battlefield,'' says Hal M. Krisbergh, CEO of WorldGate Communications Inc., an Internet cable service based in Bensalem, Pa.
The first step: Sometime next year, AOL and DirecTV, a unit of Hughes Electronics Corp. GMH, will offer a service that beams DirecTV programming from a satellite and lets users log on to AOL via the television using phone lines. According to sources close to the companies, however, there's a bigger deal brewing: AOL would invest as much as $1 billion in Hughes Network Systems, which is developing a two-way satellite service that would provide broadband communications, perhaps as early as 2002. Spaceway, as the venture is known, will rely on a constellation of low orbiting satellites to deliver services. It will sell mostly to businesses at first, although AOL says residential customers may be added later.
BIG DRAWBACK. The companies are vague about their plans and haven't decided on the cost to customers of the new DirecTV service. But William B.F. Kidd, an analyst with C.E. Unterberg Towbin, says that he expects the initial service to cost $300 to $400 a month for the set-top box plus $20 a month on top of the DirecTV fee.
Hughes likes to point out that its service can reach virtually anywhere in the country, so customers don't have to wait for a cable or phone company to upgrade wires. But so far, that has not outweighed the drawback to satellite-based Internet service: Subscribers who want to send E-mail must use a phone or two-way cable line. That's a disadvantage in areas where cable is already offering interactive TV. Analyst John Bernoff of Forrester Research Inc. says cable's two-way hookup will make it the ultimate TV victor. He predicts that by 2005, cable will account for 78% of the 24.5 million interactive-TV users. In other words, AOL may have to cut more deals as it tries to get its service onto a broadband path.
By Catherine Yang in Washington, with Richard Siklos and Steve Brull in New York and Larry Armstrong in Los
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