Allen, like many in the industry including his former Microsoft buddy Bill Gates, is betting on hybrid cable networks to be the broadband system of choice for delivering advanced digital services. Now, with his deep pockets, Allen's Charter is quickly joining the ranks of the leading companies in the cable industry.
The privately held company, led by chief executive Jerry Kent, was founded in 1993 by three former Cencom Cable Associates executives. Since then, the company has grown quickly, having acquired 25 companies in the past five years.
Charter has about 1.5 million subscribers in a number of markets, but the cable operator expects to claim more than 3 million subscribers when its various deals close, putting it close in size to East coast player Cablevision.
But Allen isn't content to stop just yet. The company also is considering Century Communications as its next takeover target.
Building through acquisitions
Allen and his Vulcan Ventures investment arm have held talks with Century in the past and remain interested in the company, according to a spokeswoman. Century, which hired investment banking firm Donaldson Lufkin & Jenrette in December to examine the cable TV operator's strategic options, has a strong footprint in Southern California--an asset many cable operators would covet.
Charter has cable systems in the Midwest, Northeast, and the South, but few in the Western half of the nation.
Last week, Charter agreed to acquire certain cable systems from Greater Media for an undisclosed sum and purchased networks owned by Rifkin Acquisition Partners. Combined, last week's deals will net another 600,000 subscribers for Charter.
The company has announced several other acquisitions in recent weeks, including a deal with American Cable Entertainment and an exchange of systems with InterMedia. Charter also is in the process of closing its deal with Marcus Cable.
"We are not through yet," said Charter spokeswoman Anita Lamont. "When Paul Allen jumped headlong into using cable to bring the wired world to more people he said he was looking to get some critical mass. He said he was looking to be No. 3," a spot which currently belongs to MediaOne Group.
The cable industry has long been led by Time Warner Cable and Tele-Communications Incorporated with a second-tier that includes MediaOne, Cox Communications, Comcast, and Cablevision. Now many analysts count Charter among that group.
Continuing movement among the second-tier cable operators--including system swaps, mergers, and joint ventures--could change the face of the industry over the next few years, analysts have said.
"If [Allen] could add MediaOne to the mix, then you'd see another cable powerhouse emerge," said Abhi Chaki, senior telecommunications analyst for Jupiter Communications.
Much of the movement and partnerships in the cable industry are based on the desire to own cable systems in geographically clustered regions. Cable operators aim to gather cable systems together in strategic regional groups to better maximize marketing, advertising, and deployment dollars.
But some analysts say that Charter's cable systems are not clustered together well, and many of the company's systems still need to be upgraded to two-way cable--a technological prerequisite to delivering many higher profit-margin services, such as digital TV or high-speed Internet access.
Charter has strong clusters in several Midwest and Southern states, "[But] Missouri, Tennessee, and Georgia are not really where the wired world is at," said Bruce Leichtman, director of media and entertainment strategies for The Yankee Group.
Analysts expect Charter to begin swapping systems with other cable operators soon. "They've got some cards in their hand, so they can match the Kings with some other people's Kings, and the eights with their eights," Leichtman said.
Charter's plan calls for gaining systems in the higher-income suburban areas and outlying regions around major inner-city markets.
"These really are strategic acquisitions," Charter's Lamont said. "The goal was to concentrate on the rings around larger cities."
Offering advanced services
When Gates invested in Comcast in 1997, media players began to focus their attention on cable networks as an ideal medium for delivering next-generation digital services. AT&T's now-approved acquisition of TCI was further validation of cable as a delivery platform.
Now cable TV operators are furiously trying to upgrade their networks to two-way cable in order to offer high-speed Internet access, enhanced TV, and other services such as telephony, e-commerce, and video-conferencing.
Allen has also invested in or partnered with companies such as High Speed Access (HSA), a cable modem service, enhanced TV technology company Wink Communications, and Internet-over-TV provider WorldGate Communications.
"You can see some kind of strategy where he has the pipes, the interactive services, the Internet access, and it's all part of his wired plan," Jupiter's Chaki said.
Charter offers its cable modem service, dubbed Pipeline, in St. Louis, areas of Connecticut, and several Southern California markets. Pipeline starts at $50 per month for speeds of 256 kbps (kilobits per second) download with a higher-level service capable of data transmissions at 2 mbps (megabits per second).
The company also offers its TV-centric service through WorldGate. The set-top box service allows for Web surfing at speeds of 128 kbps with initial pricing in the St. Louis test market starting at $9.95 per month.
"We're hoping to have two different levels of service. We'll have WorldGate as a sort of Internet lite, and then we also have the Pipeline service for the people that need the speed," said Peggy Boucher, Charter's new products marketing manager for the Western region.
(Paul Allen's Vulcan Ventures is an investor in CNET: The Computer Network, publisher of News.com.)