Billionaire's Two-Way Cable Dream

Electronic News, August 3, 1998 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.