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From The Newsroom
Internet Stocks Face 1998 Test
U.S. Exporters Eye Hong Kong's
Website Unloads Unwanted Stuff
Cable's New Passion: Web Market
Broker Offers Services For Gays
Steep Mood Swings In Techville
Microsoft Vs. Justice, Round 1
Trade Stock In Movies And Stars
Bloody Thursday for Tech Stocks
The Myth and Merit of Buybacks
Making Music, and Cash, Online
Changing Sands Of Investment Banking
Rumors Have Dow Jones Selling Information Unit
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Moving From
Beta to Billing By Jeffrey L. Newman
"Accessing the Internet through cable lines is without a doubt the next big wave for the cable industry," says Alex Karamanoglou, president of NGA.net, a Fort-Lauderdale based Internet marketing and communications firm. "The main reason is the speed. For the same price as users pay now, they'll be able to access the Internet at 50 times the speed they can through the phone line. Within five years, the need for the small access provider, the ISP guy, will be obsolete. People will be looking to their cable operator for the full-service experience." And So The Rush Begins A boom in Internet access through cable lines will undoubtedly shake up the Internet industry. Analysts say initially these cable connections will threaten traditional ISPs—Internet service providers—often small homegrown operations that connect users to the Internet through phone lines. As well, it might provide a much needed boost to the cable industry, and subsequently to speed-thirsty Internet commerce and online publishing ventures.
More Signs of the New Times Providing further evidence, Microsoft Chairman Bill Gates last month met with top cable executive to discuss his company's plans to develop a digital device that would connect to television sets and cable systems to provide a variety of interactive programming. This comes on the heels of Microsoft's $1 billion investment in Comcast earlier this year to finance such endeavors. At the same time, Los Angeles-based Internet Ventures filed for a regulation `A' offering of $5 million of common stock with the Securities and Exchange Commission. The firm intends to offer Internet access through phone and cable lines. "Two years ago everyone was betting that telephony was going to be the next wave for the cable industry. Everyone thought cable would take a big piece of the telephone pie. But it never happened," says James Jungjohann, a telecom analyst with A.G. Edwards. "The difference here is that data has been a focus for the past year. It's out of the beta testing stage and the model has proven to work. Now it's a matter of time, but it will eventually happen. The move to the Internet won't go the way of telephony." Early Rumblings of Consumer Stampede Currently, 40 percent of U.S. households use computers and about half of those households access the Internet. And of those, most do so at a speed of 28.8K. They also spend $20-$30 a month on a second phone line, plus $20 a month for Internet access. With a cable access, Internet connections would be achieved at the equivalent of an ISDN line for an average monthly cost of $45. So far, about 2 million homes have been upgraded for two-way cable Internet access, according to Kinetic Strategies, a market research company that tracks the cable and Internet industries. Of those, about 25,000 are subscribing to the service. Leading the pack of providers is Time Warner, which offers the service to 650,000 homes in four markets (Akron, Ohio; Binghamton, N.Y.; San Diego, Calif.; and Portland, Maine). The telecom giant already has 10,000 paying subscribers. By early 1998, Time Warner expects to make the service available to 4.5 million households. Following closely behind are Comcast, which offers service in six areas, TCI and Cox, which have operations in four markets and Media One (a subsidiary of U.S. West) and Adelphia, which both have two territories each. Sweet Dreams and Data Streams Michael Harris, president of Kinetic Strategies, says the cable industry's expansion into the Internet market is the best new opportunity for revenue growth beyond the industry's core business. He estimates that by mid 1998, 13 million households will be wired for Internet access through cable and by 2002, more than 52 million homes can subscribe. "It's also the best defensive strategy in terms of retaining customers and providing competition against its video and satellite competitors," he says. Spencer Grimes, a cable analyst with Smith Barney, says @Home's public offering will be a good barometer of how the market looks at this new technology. " It will be a good indication of how investors feel about cable companies and cable modems and the potential they have in the market place," he says. But getting into the Internet business is no cheap undertaking. To do this, a cable provider must tackle several costly ventures, including upgrading physical plant infrastructure, adding new fiber-optic lines and upgrading the system for two-way transmission. (Currently, most cable lines are one-way, meaning they transmit data into the home, but not out from it. Internet interaction requires two-way communication.) The estimated cost to do this is approximately $200-$250 per home. Once that is done, the cable provider must then layer in a sophisticated data networking infrastructure, including installing new connections in each home, purchasing cable modems for each home (which currently cost between $300-$500), and installing routers and servers. In the case of @Home, the cable giants are responsible for upgrading their systems, while @Home picks up the capital expense of supplying content. Further, @Home will earn between 30 percent to 40 percent of subscriber fees. (Its primary competitor is a similar service offered by Time Warner.) "The cable industry needs a new revenue stream and Internet access can provide that," says Grimes. "Over time, this will become the way of the future. But it's not going to happen over night. It's very labor intensive. By 2002, this will be the standard." Or Maybe It's Just Another Pipe Dream Not everyone is as bullish. A.G. Edward's Jungjohann says he views the situation with more of a wait-and-see attitude. He recently downgraded all his cable stocks, notably U.S. West Media, Comcast and TCI. "There are still questions out in the investment community as to whether these companies can make money with providing Internet service. Consumers and investors should know it's a sequential process, a laborious task. It requires a significant amount of coordination between cable operations and installers and operators," he says. "While I think initially it will be warmly accepted by The Street, cash flow from new services won't come on for several years," he adds. "There is a lot of water that has to go over the dam before we see a resurgence in cable growth. I think the next 12 months will be really telling as we see how the model areas perform." Still, many analysts predict that once Internet access through cable becomes standard, it will only boomerang into other growth areas, such as offering local content, and bolster the prospects for these cable stocks. "For the long-term, cable stocks will come back into favor. They will go back into a growth mode," says Alan Lancz, president of Alan Lancz and Associates, a Detroit money management firm. "Most of these stocks are trading near their lows, so the risk is out of it. Many are providing good value, with limited downside risk. We'll eventually see these stock enjoy a renewed growth cycle. They'll go from the dogs in the eyes of analysts and The Street to good growth vehicles and become highly recommended as they were yesteryear. 
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