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Road Runner, MediaOne join forces

The two companies announce they are combining their businesses to provide high-speed Net access through cable systems.

Time Warner's Road Runner and US West's MediaOne Express confirmed today they are combining their businesses to provide high-speed Net access via cable systems.

As reported yesterday by CNET's NEWS.COM, the combination is designed to eclipse @Home, jointly owned by Tele-Communications Inc., Comcast, and Cox, in terms of subscribers. The strategy behind the combination is to attract cable TV operators as affiliates to the network to help fuel expansion and make it profitable. It also is aimed at leveraging the content from Time Warner's media empire as well as the Web content being provided by US West Media Group, such as the city guide DiveIn. Despite the benefits of high speed, the cable modem providers know they must lure subscribes from dial-up providers such as America Online

The combination is expected to be operated as a joint venture and be independently financed, sources said. Time Warner and US West each will have an ownership stake in the operation. The operation also will seek outside investors. Both companies will be represented in the management. The two companies already have a business relationship; US West holds a stake in Time Warner.

Road Runner operates in ten markets, including parts of New York, Ohio, Texas, Hawaii, Tennessee, Maine, and California. MediaOne operates in seven markets, including parts of Massachusetts, Michigan, Florida, and California. A stronghold for the two companies would be Southern California.

"We believe the announcment will benefit the entire cable industry," said a spokesman for @Home. "The industry needs to consolidate to drive these services forward."

At last count, Road Runner had about 25,000 subscribers and MediaOne had 20,000 customers, for a total of 45,000. @Home, by contrast, had 26,000 subscribers. The @Home numbers are for the end of the third quarter. Analysts expect @Home to double the number of subscribers each quarter.

The companies said their existing online services are offered to more than 3.6 million households, and the joint venture ultimately will be able to reach more than 27 million U.S. homes.

"Combining our resources will allow us to provide a more robust and powerful offering to our customers," said Doug Holmes, executive vice president of MediaOne, the broadband services arm of US West Media Group, in a statement.

Added Glenn Britt, chief executive of Time Warner Cable Ventures: "We believe that the high-speed online business will ultimately be very profitable."

The new venture, expected to be operational in the first three months of next year, will focus on online services delivered to PCs via cable modems, television sets using set-top boxes, and other "information appliances."

Executives also said they are "exploring partnerships and alliances with technology companies and other potential strategic partners." A likely candidate, analysts say, would be software giant Microsoft, which is eager to sell software for broadband deployment.

The ownership in the joint venture is complex, reflecting the number of homes passed by each entity. It is: 25.75 percent by Time Warner Entertainment Company, a joint partnership of Time Warner and US West; 31.48 percent by Time Warner Entertainment Company-Advance/Newhouse Partnership; 12.36 percent by Time Warner Inc.; and 30.41 percent by US West Media Group's MediaOne. US West and Time Warner will have an "equal say" in the governance of the venture.

The business strategy being adopted by Time Warner and US West closely resembles what @Home has put together.

The market for high-speed Net access is promising, although it remains minuscule. One hurdle is the costs associated with upgrading networks to handle two-way cable. The alliance should help reduce costs.

In addition, the providers say that quality of content increasingly will be a factor in winning consumers. As previously reported, Road Runner and @Home this week are announcing software upgrades for their customers to include more multimedia and user-friendly features. Road Runner also is announcing a roster of new content providers, both from inside and outside Time Warner.

The cable modem service providers are gearing up to compete against telecommunications carriers in providing high-speed Net access to consumers. The battle is expected to be fierce and could provide money to help jump-start the sluggish cable TV industry. (See related story)

The companies face an uphill battle to make their products profitable, however, analysts warn. @Home executives said yesterday that the company wouldn't become profitable until 1999, although it expects to continue narrowing losses. @Home also is looking at expanding abroad. Like @Home, Road Runner recently expanded to Canada.

High-technology companies aren't standing idle waiting to see which side wins this battle. Microsoft, for example, recently invested $1 billion in Comcast and is expected to spend more money in cable. It also has teamed up with telcos such as Ameritech, however, in providing high-speed Net access over copper wires, dubbed DSL (digital subscriber line).