Road Runner may be a merger candidate

When Comcast announced it would acquire MediaOne Group yesterday, the $60 billion deal cast further uncertainty over the future of Road Runner.

The broadband Internet access service has huge potential, and with the help of large cable partners such as leading cable operator Time Warner Cable and MediaOne, its subscriber base is growing. Road Runner also has access to Time Warner's content, and financial backing from industry giants Microsoft and Compaq Computer.

But despite these assets and strong subscriber numbers in many of its early markets--Road Runner finished 1998 with 180,000 customers--the company is still without a full-time chief executive, is marketing its service under two different names, and is leaving many promises unfulfilled.

Now Wall Street appears to be ready for an alliance or a merger between @Home and Road Runner.

"The merger of Comcast and MediaOne is the first time that we see a direct link between @Home and Road Runner. We therefore feel that the probability of a merger between @Home and Road Runner is increased," Bear Stearns financial analyst Scott Ehrens wrote in a report today.

"Such a combination would bring together the leaders in broadband cable Internet access and create synergies in terms of cost reductions through the elimination of redundant infrastructure and services," Ehrens wrote.

Road Runner was not immediately available for comment.

"The potential for it being aligned with @Home is pretty strong," said Michele Pelino, a senior analyst at The Yankee Group, a market research firm. "It seems realistic that that would be the next deal."

Other analysts have said a deal between the two cable modem services would make sense, and @Home executives appear open to combining the companies to save costs. The two companies have held talks in the past that fizzled, in part, at the behest of MediaOne, observers said.

High-speed and headless
Since June of last year, Road Runner has been without a permanent chief executive.

The privately held joint venture is being led by Time Warner Cable executive Carl Rossetti, but Rossetti has made it clear he is only an interim CEO.

Road Runner has retained Ramsey Beirne Associates, an executive search firm that landed key hires for @Home and other Internet companies. But the company has remained mum on how close it may be to naming a full-time leader.

As a result, company executives have admitted that Road Runner has been reluctant to make many major strategic moves until a chief executive is named.

Analysts said the company's lack of a clear direction stems from its interim executive leadership.

"In this fast-paced market you need some people that think fast, act fast, and move decisively," Pelino said. "Road Runner has some strong assets that should be leveraged. I just don't think they have the guns right now to do that on their own."

Road Runner has of late made some strategic moves. The company did agree to a content deal from Fox last month. Also, Road Runner struck a significant pact with Qwest Communications International two weeks ago to use the upstart telecommunications carrier's high-speed network to carry data traffic.

Separately, Road Runner signed a deal today with Internet advertising company DoubleClick.

But just as many of the company's announcements have been limited to things such as new service roll-outs in places like Johnstown, Pennsylvania. And, yesterday, when the cable industry gained a new giant through the Comcast-MediaOne merger, Road Runner was busy announcing a deal with Stream International to provide outsourced technical support services.

"I don't think they do [have a strategy] because it certainly doesn't seem like it from their announcements," Pelino said.

Other analysts agree Road Runner has done a poor job of detailing its plans.

"It's been strangely quiet. They're certainly not high profile," said Patti Reali, a cable modem analyst at market research firm Dataquest. "Maybe these [Comcast-MediaOne] talks have been going on for a while and [Road Runner executives] are biding their time."

Meanwhile, @Home has partnered with 16 of the largest North American cable operators including AT&T, and acquired Excite, the No. 2 Net directory, in the Internet's largest deal to date. Although @Home and Road Runner do not directly compete for customers because their cable partners are located in different geographic areas, @Home appears to be ahead of Road Runner on several fronts.

For one, @Home is aggressively targeting small, rural operators with its new @Home Solutions venture. Additionally, the company is expanding internationally, and is working on an interactive TV set-top box strategy which could be ready as early as the end of this year.

Many Wall Street analysts have "buy" or "accumulate" ratings on @Home stock and shares in the company have nearly doubled since late December. Stock in @Home is trading at about $140 a share, and has traded as high as 156.5 and as low as 23.5 in the past 52 weeks.

One company, two services
Road Runner offers high-speed Net access under two names. Time Warner Cable customers get Road Runner service while MediaOne subscribers access the Net via MediaOne Express.

Company executives have said they expect to combine the services under one brand during the first half of the year. But some analysts said they've yet to see a solid marketing plan from Road Runner for combining the services and that Comcast could try to fold MediaOne Express into @Home.

Comcast has a smaller equity stake in @Home than it does now with Road Runner, but if @Home proves as successful as some analysts expect, that smaller stake could be worth far more.

Other analysts said it is too early to tell whether Comcast will offer services on its own, will back out of its @Home contract to work more closely with Road Runner, or will fold MediaOne Express into the @Home partnership.

"One thing that's clear, is there seems to be an increased gravitational pull between AT&T, @Home, Comcast, and Time Warner," said Michael Harris, president of Kinetic Strategies, a broadband market research firm. "We could see a time when everyone's offering a package of AT&T/@Home-branded IP services."

The web of connections between the companies is becoming increasingly tangled.

AT&T, which now owns a controlling stake in @Home after its purchase of Tele-Communications Incorporated, recently struck a local cable telephony deal with Time Warner. Meanwhile, Comcast had been negotiating with MediaOne and Cox Communications for a similar deal with AT&T. Comcast president Brian Roberts made it clear yesterday that his company remains interested in a telephony deal with AT&T.

Dataquest's Reali said she does not expect a merger of @Home and Road Runner anytime soon, but that the two companies could agree to a backbone partnership rather than using two separate redundant national networks.

Road Runner is currently available in certain areas in 11 states and has plans to offer service in at least five new states and Canada later this year, according to the company's Web site.