"Forbes" on Paul Allen:
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BAM
Chased away by AOL, Paul Allen left $41 billion on the table. Now it's time for revenge.
If you can't join 'em, beat 'em
By Robert La Franco
IN 1992 MICROSOFT cofounder Paul Allen tried to acquire all of America Online, then a tiny Internet community. Not yet 40, the billionaire keenly saw AOL as a magnet for millions of eyeballs he knew would soon be trained on the World Wide Web.
He settled for buying a 25% stake in the public market, enough to make him a nuisance to AOL management. AOL boss Steven Case also resented Allen's dispatch of a 28-year-old financial whiz, William Savoy, to oversee his investment. Case denied operating control to Allen, who sold his shares for a $70 million profit by 1994. Today that 25% would fetch $41 billion—double Allen's net worth.
So who can blame him for seeking a new ticket to what he calls the "wired world"? In the past year Allen has acquired six regional cable systems worth $11 billion, amassing the sixth-largest provider in the country. His Charter Communications has 3.7 million subscribers stretching from Los Angeles to North Carolina. It recently floated $3 billion in bonds and may go public this year, raising maybe another $3 billion of capital.
The money goes for upgrades and acquisitions—and a chance to show up AOL. Cable these days doesn't just mean television programming. Increasingly, it's a high-speed data conduit loaded with other uses. It is the wire of Allen's world.
Right now AOL dominates the Internet dial-up business with 16 million subscribers and a 44% market share. What could cut into such dominance? A new technology. When the only on-ramp is a standard telephone line, AOL is the default choice of consumers bombarded by introductory disks and high brand-awareness. But when a high-speed data line is introduced and flogged through local TV, radio and direct mail ad campaigns, AOL shows signs of weakness. Allen is now the fastest-growing entrant in that business.
You can see the potential in Nashville, where an outfit called InterMedia Partners has signed up 16,000 homes to the At Home Internet portal on its cable system. According to InterMedia data, that's a runner-up 27% market share among subscribers who have the portal access. AOL's share of those users, InterMedia says, fell from 57% to 47%.
Allen isn't involved there, but this past winter he bought a 400,000-subscriber cable system from InterMedia that covers the enlivened Greenville-Spartanburg, S.C. region. They're being offered At Home now, but will likely get Allen's own portal service, Pipeline, within the year.
Allen can use high-speed cable Internet access to chink pieces in AOL's armor.
In Fremont, Calif., At Home's service is distributed through cable giant TCI, and it also has jumped to second place among Web users with a 24% share, despite some serious technological snafus. AOL, according to At Home, has a 38% share.
AOL won't confirm any numbers, but Michael Harris, an analyst at Kinetic Strategies in Phoenix, says: "AOL is starting to see the impact of these services. Where they are available, it tends to be the primary victim."
It's still early in the game. There are only 725,000 North American cable modem subscribers today. Many analysts see cable getting just 15% of the U.S. Internet market at maturity. AOL, meanwhile, is booming: It took just 42 days this year to jump from 15 million to 16 million customers (90% in North America).
The majority of AOL 's customers are still connected at the antiquated 28.8-kilobit-per-second modem speed, more than 50 times slower than cable modems. One of the company's strategists, George Vradenburg, says customers have not demanded high-speed service, and when they do AOL will find a way to bring it to them. At a current cost difference of $20 to $30 per month, who needs that extra speed when all you want is e-mail, chatting and some shopping?
"People buy service, not technology," says Vradenburg. "As yet there has been no effect on our growth."
But the cost of cable technology will come down and Allen, who is compiling an arsenal of content (stakes in Dreamworks, Priceline, Go2Net and Value America), will offer Pipeline on a data highway wide enough to achieve his notion of what a wired world is all about, a combination of service and entertainment. Allen's whiz kid Savoy, now president of his Vulcan Ventures, explains: "Connecting people to the Internet with a PC is interesting, but the next big-money wave is when TV is fully integrated with the kinds of Internet use we have seen grow over the last four years." When Pipeline really gets rolling, it could become a significant force in the portal market, whether on TV or a PC.
Case and Vradenburg may not seem worried yet, but they cannot ignore the threat. AOL talks of plans to sell a service this year delivered through high speed digital subscriber lines (DSLs) an eventually a multimedia service called AOL TV. Also, along with GTE, it is lobbying for government regulations that would turn cable systems into common carriers that would have to rent space to all comers. A pitch to the Federal Communications Commission failed, but last month AOL and others took their case to Congress.
Hard to say what the authorities will do. But Kinetic's Harris thinks AOL will eventually have to settle for selling itself as a premium service to cable users, just as HBO does today--on cable systems owned by the likes of Paul Allen.
This story, published in Forbes Magazine (www.forbes.com) on May 03, 1999.
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