AOL makes a $1.5 billion bet on the sky
By John Borland
Staff Writer, CNET News.com
June 21, 1999, 11:55 a.m. PT
news analysis America Online is betting $1.5 billion that the sky really is the limit for its
Internet and new TV services.
AOL said today it would invest $1.5 billion in Hughes Electronics, the parent company of
satellite TV and Internet services DirecTV and DirecPC. The cash investment will be used to
co-market satellite television and broadband versions of America Online.
The investment marks a new chapter in AOL's attempt to skirt traditional cable TV providers
which still won't let the online giant use their broadband networks to reach consumers.
AOL, with more than 16 million members, is far the largest online services provider in the
dial-up world. But its ability to use that market dominance as a means to attract customers to
high-speed connection alternatives has been called into question, as cable companies refuse to
carry the AOL service over their networks. AOL is pressing Congress and courts to open the
cable networks, but is also looking for other high-speed routes into consumers' homes.
As previously reported, AOL has been considering a deal with DirecTV for months. But news
of a specific investment did not surface until last month.
Many analysts have predicted that more consumers will access the Internet through cable
networks than though any other broadband medium over the next five years. With this in mind,
AOL is scrambling to make sure it isn't left out of the broadband boom.
"AOL is saying, 'We've got a dead-end on cable, so let's go this route,'" said Sean Badding,
senior analyst at The Carmel Group, a satellite communications consulting firm.
On a conference call with reporters today, AOL chief executive
Steve Case stressed that Hughes' systems could offer
coverage on a national level, in contrast to other high-speed
technologies that are limited to certain areas where networks
are in place.
"We'll be able to service the substantial part of the country not
served by DSL [digital subscriber line] or cable networks,"
Case said. "One-third of the country will have no broadband
options [other than this], even five years from now."
Space is the place
Hughes' most prominent satellite product is the DirecTV
satellite service, which is a direct competitor to traditional cable
television programming. Early next year, AOL will provide its
own TV services over this satellite feed, sending its interactive
e-commerce and information services alongside more
traditional television programming.
"Part of the future is building the television business and
building Internet business, and then building bridges between
these," Case said.
According to AOL's Interactive Services president Barry Schuler, the AOL television service
will have many of the same interactive components found online, such as giving users the
ability to chat about ongoing television shows, buy CDs, or trade stocks that are linked to
television show topics.
The AOL Plus broadband service will initially be launched in other mediums, such as the
high-speed DSL service, later this year. It will be offered over DirecPC's satellite service
beginning early next year, the companies said.
But Hughes' DirecPC service is not as elegant as most traditional cable offerings, analysts
noted. The service offers download speeds of about 400 kbps with uploads over a standard
phone line with a dial-up 56 kbps modem, according to Badding. But several newer satellite
technologies, which will allow high-speed two-way digital communications, are about three to
seven years away from the market, analysts say.
Among them is Hughes Network Systems' planned Spaceway service. Hughes plans to launch
its Spaceway satellites in 2002, and then begin offering the two-way digital service sometime in
2003, chief executive Mike Smith said today.
"[AOL is] going to have some technical issues initially. But over the long-term, they see the
huge possibilities of satellite," Badding said. "They want to get in on the ground floor."
Not the brightest star in the sky?
Some analysts still question how attractive the satellite service will be even with AOL's
marketing muscle behind it.
DirecTV is the leader in satellite television, with more than 7 million users. But the DirecPC
service has just 100,000 subscribers--largely, the company says, because Hughes has put little
financial or marketing resources behind the product.
Much of AOL's $1.5 billion will go toward cross-marketing television and broadband services,
the two companies said. That, combined with the AOL's brand name attached to the service,
should help both products gain quick new acceptance with subscribers.
But not everyone is convinced. Jupiter Communications has predicted that only about a
million Internet users will be going online through a satellite connection by 2003. Jupiter
senior analyst Abhi Chaki doesn't think that AOL's brand name will accelerate that
adoption rate much.
"DSL and cable services have better economics," Chaki said. "They can offer more
services and lower prices." Most consumers will use one of those two technologies as
their first home broadband connection, at least for the next five years, he added.
The television service also has been hampered by its inability to carry local channels, a
key attraction for many television watchers, some analysts note. This could change if
pending federal legislation is passed, but still marks a hurdle for Hughes and AOL.
In the meantime, analysts say, AOL's strategy is geared at making sure it can get on as
many platforms that compete with cable as possible.
"AOL is playing a game of enemy-of-my-enemy is my friend," Chaki said. "Cable
companies' biggest competitor are the direct broadcast players. So AOL, being rebuffed
by cable, is now allying itself with them."
News.com's Corey Grice contributed to this report. |
