It's hard to characterize a billionaire investor with ties to the world's largest software company as a meek player in the booming cable television industry, especially after his recent acquisition binge.
But Allen, a Microsoft co-founder and sports franchise owner, is taking an unconventional approach to cable consolidation that some analysts say may prove to be hugely successful.
Allen's Charter Communications has gobbled up dozens of cable systems serving millions of subscribers in smaller suburban, "ex-urban," and rural markets. Once the merger deals close, Charter will become the nation's fourth-largest cable company with a stable of more than 5 million customers.
"We think the cable industry will continue to consolidate down to about five or six large players ? Looking at how aggressive [Allen] has been, I'm sure he'll be one of them," said Alan Gould, a cable analyst at Gerard Klauer Mattison. "He's got the capital to spend. He's got the Microsoft bucks."
Charter's acquisition strategy, however, is very different from its new rival in the cable world, AT&T.
The long distance giant of late has made some blockbuster cable deals aimed at delivering cheaper phone service and high-speed Net access for consumers. AT&T bought Tele-Communications Incorporated and MediaOne Group, two of the nation's largest cable companies serving large metropolitan markets like the San Francisco Bay Area and Los Angeles.
"[Allen is] buying small profitable cable companies, which can remain profitable, and then he can add interactive services as he goes along and experiment," said Gerry Kaufhold, an analyst at Cahners In-Stat Group, a market research firm. "Then he can figure out what works best and go to a Time Warner or an AT&T and say, 'Look, we can help you do this in your larger systems.' At that point Paul Allen isn't just a cable operator, he could become a media mogul.
"Paul Allen, if he plays his cards right, is the next [USA Networks'] Barry Diller," Kaufhold said.
Charter couldn't be immediately reached for comment.
Kaufhold said he thinks Charter will offer more creative interactive services than the likes of AT&T, which is focusing its broadband ambitions on local phone service in a move to skirt the Baby Bells. AT&T also plans to offer high-speed Internet access on a national scale.
"I think Paul Allen has figured out the real interesting interactive services are going to be a better fit for very small, targeted audiences," Kaufhold said. "There's a market for interactive services if they're tightly integrated to the community."
|Fanch Communications||547,000||$2 billion**|
|May||Falcon Communications||1 million||$3.6 billion|
|May||Vista Broadband||30,000||$125 million**|
|May||Avalon Cable||260,000||$845 million**|
|March||Helicon Cable||173,000||$550 million|
|Feb||Renaissance Media Group*||130,000||not disclosed|
|Feb||Greater Media||173,000||$500 million|
|Jan||InterMedia Partners||260,000||$1/3 billion**|
|Jan||American Cable*||68,000||not disclosed|
|Jan||Marcus Cable*||1.1 million||$2.8 billion|
* = deal closed (others are pending)
** = estimated
Sources: Charter Communications, news wire services
Some analysts speculate that Charter hasn't yet finished its acquisition binge. But Charter's strategy of acquiring smaller cable players isn't without its challenges.
Many of the systems Charter has bought, including Falcon Cable and Fanch Communications, are not upgraded for two-way cable--a necessary feature for interactive services such as Net access, telephony, and interactive television.
Allen is reportedly considering an initial public stock offering for Charter that, analysts said, could raise the necessary money to invest in costly network upgrades required for many of Charter's new systems.
And, analysts said, because Charter's new systems are small and geographically disperse, Allen may have some logistic problems that larger players like Time Warner Cable and AT&T aren't concerned with.
"You do gain some economies [of scale] and you have bigger bargaining power with the equipment vendors," said Jeannette Noyes, a cable industry analyst at International Data Corporation. "But the odds seemingly are against [Allen] given where his systems are at. The question is, Can he quickly organize these systems into something more useful?"
Many analysts expect Charter to begin trading systems with other cable operators to cluster holdings into certain geographic regions. Clustering allows cable companies to market services to a larger audience yet save money by reducing overhead costs.
But despite the potential hurdles facing Charter, and whether Allen opts to offer niche services to suburban customers or compete with the likes of AT&T in metropolitan markets, analysts expect Allen to bring a new flair to the cable industry.
"I'm sure [Allen] is looking at this for voice, video, data, and anything else he thinks can go down that pipe," Gerard Klauer Mattison's Gould said.
With his deep pockets and well-placed connections, few doubt Allen's commitment to making his dream of a wired world come true. "He and the folks at Microsoft have been thinking about interactive TV for about the last ten years," Cahner's Kaufhold said.