From Investor's Business Daily, 5/10/99:
For most Internet surfers, the waves still come slowly - and mainly in text. But the dream of a broadband pipe serving up rich, interactive content is becoming a reality as high-speed access providers rapidly expand to new markets.
I N V E S T O R ' S C O R N E R
The demand for high-speed access is expected to explode in the next few years, creating huge opportunities for Internet service providers, e-commerce firms and creative-content providers on the Web. The nation's largest and most-powerful technology firms are positioning themselves to benefit.
Last week, AT&T, Microsoft and Comcast all agreed to shell out billions of dollars to carve out a bigger role in the market for broadband communications, including high-speed Internet, digital TV and telecom services. They think there's money to be made, and portfolio managers agree.
''It's our belief that consumers are going to get hooked,'' said Garrett Van Wagoner, who heads San Francisco- based Van Wagoner Capital Management. Where the Internet is concerned, ''there is no speed that's great enough.''
The enormous growth of voice, video and data traffic over the Internet should continue for the next 25 years, he says. ''We are playing it from every angle we can find. It's probably the major theme in the portfolio.''
With the purchase of Tele-Communications, which closed earlier this year, and last week's deal to buy MediaOne Group, AT&T is plunking down more than $100 billion to buy a cable link to more than 28 million homes, to which it can deliver high-speed Internet access and cable TV, as well as local phone service. (Through agreements with Comcast and Time Warner, the company could provide phone service to 30 million more homes.)
In calling off talks to make a higher bid for MediaOne, Comcast agreed to pay AT&T $9 billion in exchange for 2 million cable subscribers. Microsoft, another potential rival for MediaOne, said it will invest $5 billion in AT&T in return for a broader commitment to include its Windows CE operating system in cable set-top boxes that manage delivery of digital video and the Internet over television sets.
Now the firepower of the nation's largest telecom player, most of the cable industry and the world's biggest software company is focused on making cable-Internet access pervasive.
With that kind of backing, it's no surprise that Brian Salerno, co-manager of Munder Capital Management's NetNet Fund, likes the long-term potential of AtHome Corp., which provides high-speed Internet access over cable lines. AT&T gained a majority stake in the firm through the acquisition of TCI.
AtHome's stock has been on fire this year, surging 112%. The company, which is buying Internet portal Excite, saw its revenue soar more than 500% last year to $48 million.
Salerno also likes Com21 and Terayon Communications Systems, both makers of cable modems. ''They should be short-term beneficiaries of the build- out'' of Internet-ready cable systems, he said.
International Data Corp. forecasts the number of homes equipped with cable modems will jump from fewer than 1 million now to more than 8 million by 2002. By comparison, the number of homes with digital subscriber line (DSL) modems, which enable high-speed Internet access over copper phone lines, should increase from about 40,000 at the beginning of this year to 4.2 million in 2002, says analyst Jeannette Noyes.
''At this point, cable modems have a running start,'' Noyes said. The relative success of cable and DSL modems will be determined by ''availability, pricing and service bundling,'' she said.
Van Wagoner expects a ''knock-down, drag-out fight'' between those companies pushing cable-Internet access and others, such as Bell Atlantic and SBC Communications, whose fortunes are tied to DSL and other methods of delivering Internet service over traditional phone lines.
''It's going to drive pricing down and consumption way up,'' he said.
No matter who wins this battle, several things appear certain, Van Wagoner says. Telecom-equipment firms will benefit from the surge in interest and data traffic will grow. Among the equipment firms he's bullish on are TranSwitch Corp., SDL Inc. and Com21. His data-traffic plays include Qwest Communications and Metromedia Fiber Network.
Van Wagoner also likes NorthPoint Communications, a provider of DSL-based Internet access that came public last week. Microsoft, which is by no means betting exclusively on cable-Internet access, has said it will invest $30 million in NorthPoint, and also made an investment in another recent DSL-related IPO, Rhythms NetConnections.
As broadband access becomes widely available, Internet content firms will have to stay on the cutting edge to drive traffic to their sites, says Raymond James Internet analyst Phil Leigh. That trend can be seen in the acquisition of Broadcast.com, which offers audio and video content, by Yahoo, the No. 1 search engine.
With the need to offer richer content, e-commerce firms ''will require more server capacity,'' Leigh said. That indirectly benefits companies like Exodus Communications and Concentric Network, which host the Web sites for large e-commerce players.
Instead of purchasing a video online, consumers may eventually be able to download a movie, says Salerno of the NetNet Fund.
When there's no longer a worry about ''clogging the pipeline,'' e-commerce firms will provide ''3D virtual showrooms,'' said Alex Cheung, portfolio manager of the Monument Internet Fund.
But for all the potential, Van Wagoner says he's trimmed some of his positions recently, taking some profits and guarding against a seasonally weak period for technology stocks.
''We've made great returns in the last seven months that I've only dreamt of on a multi-year basis.''
>>>>> |
