From the WSJ:
Road Runner, AtHome Discuss
Possible Partnership, Merger
By NICK WINGFIELD
THE WALL STREET JOURNAL INTERACTIVE EDITION
SAN FRANCISCO -- Two leading providers of high-speed Internet
access over cable networks, Time Warner Inc.'s Road Runner unit and
AtHome Corp., are in discussions about a variety of potential partnerships,
including a merger, according to people familiar with the matter.
Although no deal between the two companies is imminent, the talks
underscore how cable Internet providers are scrambling to strengthen their
position as other high-speed alternatives from telephone companies race to
market. Telecommunications firms are banking that a multibillion-dollar
market will materialize in the next century for Internet access that is much
faster than the speeds of conventional phone modems.
Cable Internet providers have a head start in this arena. AtHome has been a
pioneer of speedy Internet access using cable modems. Roughly 50,000
subscribers use its service, which allows them to surf the Internet from
personal computers at rates of about 1.5 million bits per second through the
same cable line that delivers their television programming.
Time Warner's Road Runner has roughly 30,000 subscribers.
But pressure is growing for the companies to expand their meager base of
customers, and closer partnerships appear to be one opportunity to do that.
AtHome and Road Runner have discussed a wide range of possibilities,
including Time Warner licensing At Home the on-line service component of
Road Runner, according to people familiar with the talks. Although AtHome
has its own on-line service -- which generated 10% of its revenues last
quarter through electronic commerce transactions and advertising --
analysts say New York-based Time Warner is more savvy, with its huge
portfolio of television and magazine properties, which includes CNN, Time
and Sports Illustrated.
Potential Merger
Another possibility discussed by the companies was a merger, though
people familiar with the matter emphasized the talks had not reached a
serious level yet. Reports of a potential merger between the two companies
first surfaced earlier this week in industry trade magazine Broadcasting &
Cable. The report also said AtHome is in talks with AT&T Corp., which
may be looking for a way to provide local phone service over cable lines.
"Has the possibility of a merger surfaced? I wouldn't deny it," one person
said. "We have met with them and talked with them because this is a growth
business."
Road Runner officials declined to comment. Matt Wolfrom, a spokesman
for AtHome, said: "We are in lots of discussions with lots of operators."
While AtHome is publicly traded, cable giant Tele-Communications Inc. has
voting control of the company, and some of AtHome's cable partners,
including Comcast Corp. and Cox Communications Inc., also own small
stakes. This complicated structure could make any deal more difficult.
Alliances have become more important for cable players as other
high-speed Internet options emerge. In November, Road Runner
announced it would merge with MediaOne Express, the cable Internet
business of U S West Media Group Inc.
Time Warner and MediaOne executives met outside of Denver this week,
where the latter firm is based, to determine where the merged company will
be based, what ownership stake each parent company will have and what
its brand will be, people familiar with the talks said.
If Road Runner, AtHome and MediaOne combined their operations, they
would cover about 75 million homes, or 70% of the potential market for
cable Internet service, according to Michael Harris, president of Phoenix
research firm Kinetic Strategies Inc.
Competitive Threat
More deals may become increasingly crucial because of the competitive
threat from telephone companies, which have recently stepped up efforts to
deploy digital subscriber line, or DSL, service, a technology that boosts
speeds over ordinary phones lines by up to 50 times. While cable-based
Internet access requires massively expensive upgrades to the cable
network, telephone companies and many analysts argue that DSL is a more
realistic option since it entails fewer changes to the telephone network.
Recently, a group of technology and telecommunications companies led by
Microsoft Corp., Intel Corp. and Compaq Computer Corp. backed an
effort to create a DSL modem standard, a move that could rapidly
accelerate the rollout of the service, which had lagged behind cable. Richard
Doherty, an analyst with the Evisioneering Group, a market research firm in
Seaford, N.Y., predicted that cable shipments of DSL modems could
outpace those of cable modems sometime next year if the technical
specifications for the standard are finalized on schedule. He estimated that
there were about 100,000 cable modems in use last Christmas and that
about 250,000 will be in homes by the end of 1998.
Mr. Doherty said cable industry executives have told him that talks between
AtHome and Road Runner have taken on more urgency since the DSL
modem announcement. One sticking point in Time Warner's talks with
AtHome, though, could be the latter's price. At Home currently has a
market valuation of over $2 billion, making it an extremely expensive target.
Road Runner -- and its new joint venture partner MediaOne Express --
could be waiting until some of the luster comes of AtHome's stock.
"It's a match made in heaven," Mr. Doherty said. "Now it's a question of
economics."
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