Good article on Two-Way Cable (and Paul Allen)...........
sumnet.com
From Page One of Electronic News: August 3, 1998 Issue
Billionaire's Two-Way Cable Dream
Paul Allen's $4.5B Charter buy, merged with Marcus Cable, could signal true
interactive media
By Cynthia Bournellis
St. Louis, Mo.--Is billionaire Paul Allen the one guy who can prove to the cable television
industry that there is money to be had in interactive media services over cable? With the recent
$4.5 billion bid Mr. Allen entered to acquire privately-held Charter Communications, the nation's
10th largest cable operator, the answer could very well be yes. The move is being viewed as one
that could give Mr. Allen enough clout to realize his, and the computer industry's, dream of
two-way interactive media services.
Mr. Allen has previously said that he would continue to invest in the cable industry, as part of his
plan for a "connected future marked by the merger of high-bandwidth data channels, the power of
the personal computer and the availability of compelling content."
In regard to the merging of Charter and Marcus Cable, his other cable entity, he will be closely
involved in shaping the new organization's strategic direction. He will also likely encourage
synergy between his investment companies, said one of his spokespeople.
"There is a huge opportunity for revenues to be generated (here)," said William Savoy, president
of Vulcan Ventures, the holding company for Mr. Allen's investments. "If you believe my theory,
then cable is a reasonable investment and you need scale to amortize these services."
The value of the deal, which is expected to close by year-end, represents approximately 14 times
that of Charter's projected 1999 operating cash flow. The acquisition is Mr. Allen's second cable
operator buy, and his largest to date. In April he bought Dallas-based cable operator Marcus
Cable for $2.8 billion. Once the Charter deal is completed, Charter will be integrated with
Marcus Cable, and a new company will be formed. The new venture will become part of Mr.
Allen's 40-plus investments in his Wired World portfolio of new media, entertainment and
technology companies.
Jeffrey Marcus, chairman, CEO and president of Marcus Cable, will serve as chairman of the
combined company, which will become the country's seventh largest cable operator, serving 2.4
million customers. Charter CEO Jerald Kent will become the CEO of the new organization and
will report to the board of directors.
Mr. Allen will also be on the board and the combined company will consolidate its executive
offices in St. Louis, while retaining a presence in Dallas. The management groups of Charter and
Marcus Cable will be combined under the direction of Mr. Kent.
Questions Exist
Going to two-way digital cable still poses questions. Most industry observers agree that cable's
broadband pipe into the home is one of the best ways to access consumers. But continued
attempts to pump interactive media to the home have been less than fruitful.
Time Warner tried it with its Full Service Network which allowed consumers to rent movies on
pay-per-view and stop them midstream or rewind them via a remote control. The service had also
featured interactive capabilities but it didn't make money. Time Warner is trying it again with its
Roadrunner Business Services package, which is being offered to companies and residential
customers in central Ohio, with deployment to certain areas in New York state this summer.
@Home Network Corp. and Cox Communications are two other companies offering two-way
interactive cable services to the home. Yet, despite these efforts, revenues in this area are
insignificant compared to those derived by the traditional means of enticing consumers with more
and more television channels.
"The computer industry thinks that the interactive stuff is a great idea, but the cable companies are
saying 'we have to spend millions of dollars to outfit it,' " noted Gerry Kaufhold, principal analyst
at In-Stat. The biggest question is, can they make money at it? So far, no one's breaking the
bank.
Conversely, modem adoption by consumers has lagged. Last year, most households (99 percent)
were using 28.8 kilobit-per-second or 33k analog modems, while a mere one percent got online
either by digital subscriber line, ISDN or cable modems, according to a Yankee Group study.
The fast speeds of the new 56K analog modems may please consumers and eventually persuade
them to adopt cable modems, but it's too soon to tell.
Doing It His Way
Enter Mr. Allen. With his interests in higher bandwidth and digital data, owning a cable company
might be the best way to go after interactive media services, rather than wait for the cable industry
to do it for him. This acquisition, along with Mr. Allen's other diverse Wired World investments,
could become the test bed for interactive media delivery systems, speculated Mr. Kaufhold.
Mr. Allen has been vocal about using the Internet in myriad ways to provide digital data to many
industry sectors, such as education. And he's put his money where his mouth is. For instance
NETSchools Corp., a Wired World company, is focused on improving learning productivity in
America's schools. Portable computers are central to NETschools. Connected to a wireless LAN
that runs Internet-based educational software, NETschools provides Internet connectivity to
every student.
Through additional investments, Charter's cable operation will be upgraded to accommodate
two-way interactive services by 85 percent beginning in 30 months. The Marcus Cable upgrade is
already under way and will be 85-percent capable by the end of 1999. Sounds like a long time?
In computer years perhaps yes, in cable years no.
"The cable infrastructure is a platform...a long-term investment," said Mr. Savoy. "It will take a
long time for the services consumers will want to use and pay for to be developed, which will
result in added growth for cable companies. But, it won't happen in six months. The investment
(we've made) is significant, because now you can see the end game."
He said the opportunity lies in the hands of the cable operators, who can only "blow it" if they
aren't judicious about it. "They have the infrastructure, we have the tech, and now we can build
the bionic man." This vision will rely on low-cost computing power connected to the network
either through PCs or set-top boxes.
Telephony Possibilities
Mr. Savoy said Vulcan is also anxious to understand how IP telephony works over cable, but he
didn't comment on specific attempts to execute it through the new venture. Telephony services are
one way for cable operators to create instant revenue.
While Vulcan explores its options, others such as Sprint have already begun to act. And last
month telco giant AT&T shocked the industry when it bought Telecommunications Inc. for $48
billion. AT&T will set up a consumer unit designed to combine its long-distance, wireless and
Internet services with TCI's cable, telecom and high-speed Internet businesses. Cox
Communications also offers telephony over its co-axial network.
Meanwhile, the computer industry continues its expansion into this market. Microsoft sent a
positive message to Wall Street in June when it invested $1 billion in cable giant Comcast Corp.,
the nation's fourth largest cable television operator and a diversified telecommunications company,
to bring high-speed online access to millions of U.S. homes. At that time, Bill Gates, Microsoft
chairman, said consumer demand for broadband networks will become "greater than most people
expect."
Despite competition in other areas such as asymmetrical digital subscriber line, which uses analog
telephone lines to deliver data at high speeds, and ISDN, Mr. Gates said cable has a strong
advantage over the telephone companies in carrying digital programming. Time, and more
importantly revenue, will tell if the cable industry agrees. |
