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AOL may still have a chance at cable networks

Although it may be arriving late to the broadband race, America Online is looking for high-speed options to keep its leading Internet service ahead of pack.

For all of America Online's bluster concerning its high-speed cable rivals, one question remains: Why doesn't the world's largest Internet access provider just buy its own cable company?

A year ago, AOL--the world's largest dial-up Net service provider--could have acquired a cable operator, or, like its recent $1.5 billion investment in Hughes Electronics, taken a stake in a cable firm to gain access to its high-speed, or broadband, networks. The company's stock price was riding high and, at that time, several cable operators were on the block.

Instead, AT&T, driven by a desire to circumvent the Baby Bells and tap into the $110 billion local telephone market, beat its communications competitors to the punch by snagging Tele-Communications Incorporated and MediaOne Group--potentially reshaping the local phone market, if not the entire communications industry.

To a certain extent, there is a sense among industry watchers that the industry, following AT&T's decisive moves, has ceded the high-speed cable Net market to the telecommunications giant.

But industry observers believe AOL has not lost its chance to be a player in the expected cable-based Net access boom, choosing to sit out the first round of the industry's growth, while others--such as rival Excite@Home--work out the kinks.

AOL has spent months at the head of a local government-focused push for new regulations to allow Internet service providers (ISPs) access to cable TV networks. With the exception of two municipalities that have voted in favor of "open access," AOL's fight has been largely unsuccessful.

Shut out of the cable game for now, AOL is piecing together a high-speed access strategy based on alternatives technologies, including satellite and digital subscriber lines (DSL), the local phone firms' competing broadband access technology.

Some industry watchers still expect AOL to sign pacts with cable operators, particularly once Excite@Home's exclusive relationships expire in 2002. Many analysts believe AOL will ink deals with the cable industry soon, yet stress that the online leader will be better served by not buying its way into the cable club.

AOL's cable options
Net companies, many of which have overvalued share prices, frequently use their stock as currency in acquiring other "dot com" startups. But outside of the online world, Net stocks, including AOL's, carry less weight.

As such, some analysts believe AOL couldn't buy its way into the cable industry even if it wanted to.

"They just don't have the cash [to buy a cable TV company]," said Bruce Leichtman, director of media and entertainment strategies for market research firm The Yankee Group. "Would someone want to trade their solid cable asset for AOL's volatile stock?"

Not only would AOL's bank balance affect potential acquisitions, but fewer sizable independent cable operators remain following AT&T's foray into the industry with $110 billion in acquisitions in the past year.

Reports suggest AOL may be close to an alliance with AT&T, the largest shareholder in Excite@Home, the No. 1 Net-over-cable company.

Yet Excite@Home executives today denied that AOL is on the verge of ousting their company as the Web site most AT&T cable modem customers first see when they go online.

"There are no discussions going on with AOL by either Excite@Home or AT&T regarding current access of access in three years post our contract," Excite@Home chief executive Tom Jermoluk wrote in an internal memo to his company's employees today.

Looking ahead
Leichtman said alliances are not necessary because cable operators are busy signing up anxious early broadband adopters.

"What it comes down to is they don't need each other today," he said. "They need each other in about two years. They will need each other to tap into the next wave of broadband customers."

Analysts believe an acquisition or investment by AOL in a cable company would be unwise because AOL only would gain a few million potential customers. The company clearly wants to market its service to a national, and global, market.

"They [AOL] have a valuable asset in their subscriber base and marketing. They need to leverage that asset across the entire industry, not just one company," Leichtman said.

Different directions
Although the TCI deal gave AT&T a controlling stake in Excite@Home, company executives have consistently said their driving force behind the deal was to find a way into the lucrative local phone market.

Conversely, AOL--as a Net-based company--is interested in cable for high-speed Net access and possibly interactive television, making cable investments or acquisitions less attractive for the company.

AT&T's cable acquisitions make sense, as the firm's history as a facilities-based provider that owns its own networks is well established. For its part, AOL agreed to sell its proprietary network company, called ANS Communications, to MCI WorldCom nearly two years ago as part of a complicated three-way deal. In return, the online giant got $175 million in cash and the CompuServe online service.

"I don't think it really helps them to do an acquisition. They're sticking to what they do best," said Philip Wohl, a telecommunications analyst with financial publisher S&P Equity Group. "Trying to run these debt-laden [cable] companies is not easy. [AOL is] doing the smart thing."

Some industry observers have suggested that AOL will simply be one of several Internet access options for cable customers in the future. In the same way that cable operators offer multiple movie channels such as Showtime, Cinemax, and HBO. Excite@Home, AOL, and other ISPs may all be carried on cable networks, they say.

News.com's John Borland contributed to this report.