Will the rapidly consolidating media landscape and the U.S. government finally accomplish what
Wile E. Coyote
could not: Finish off
This is a prospect that Road Runner, the No. 2 provider of high-speed Internet access, may be facing as a result of government antitrust actions involving its biggest shareholders.
On Thursday, the
Department of Justice
approved the proposed acquisition of cable operator
Media One Group
on the condition that the company must sell MediaOne's 35% stake in Road Runner.
AT&T already owns a controlling stake in
, the leading provider of broadband Internet access, and the MediaOne acquisition would have given it dominance in this market.
Moreover, Road Runner appears to have a bigger problem: its largest stakeholder,
, may also be forced to divest its nearly 40% stake in the company once the Justice Department considers Time Warner's pending
. AOL already is the dominant Internet services provider, and giving that company the second-biggest cable ISP in Road Runner might stretch the acceptable limits of antitrust law from the government's point of view.
The question that two-year-old Road Runner faces is, can it survive without the backing of well-heeled partners with huge subscriber bases?
"Servicing one cable company
Time Warner Cable
and one cable company only is not going to do the job," said Dylan Brooks, an analyst with the Web research firm
. Time Warner Cable is the unit through which Time Warner owns its stake in Road Runner.
The logical partners -- cable companies such as
-- have regulatory obstacles of their own. Both Cox and Comcast own stakes in Excite@Home.
Most analysts are not optimistic that the company will survive in its current form. "My read on this is, this may be the beginning of the end for Road Runner as an independent entity," Brooks said.
While it is the second-biggest broadband service provider, it lags far behind Excite@Home. Excite@Home counts some 1.5 million subscribers, while Road Runner has about 730,000.
For the most part, broadband service providers have relied upon exclusive rights to the cable lines of their partners and parent companies to add to their subscriber bases. As a result of the "open access" fight, however, AT&T and Time Warner have both agreed to open those lines to other Internet service providers within the next couple of years, forcing Excite@Home and Road Runner to negotiate deals with other cable operators.
But because AT&T will maintain its ownership stake in Excite@Home, that company will have a huge advantage over Road Runner.
"After Road Runner's exclusive arrangements with MediaOne end in 2001, we expect AT&T to market the Excite@Home service to the MediaOne customer base," David Levy, a
analyst, wrote in a report he put out Friday. Currently, MediaOne has about 278,000 Road Runner subscribers, Levy said, or nearly 40% of Road Runner's current subscriber base. Levy projects that MediaOne could have about 400,000 RoadRunner customers by the end of the year and 750,000 by the end of 2001.
Once the deal with MediaOne is completed, AT&T will lay claim to about 16 million cable customers, making it the largest cable operator in the country. Time Warner Cable is second, with 13 million subscribers.
If Road Runner is unable to maintain its current relationship with Time Warner Cable, it might struggle to compete with Excite@Home, which despite losing its exclusive rights to AT&T will still be able to market to those AT&T customers. Road Runner will have no such relationship to exploit.
Road Runner's exclusive deals with both Time Warner Cable and MediaOne expire Dec. 31, 2001, the same date by which AT&T must sell its stake in the company. Road Runner hopes to negotiate access to AT&T's cable systems when that deal expires, said Sandy Colony, a Road Runner spokeswoman. She wouldn't comment on the possibility that regulators might force Time Warner to divest its stake. Time Warner Cable representatives declined to comment.
In March, Excite@Home extended its distribution contract with AT&T through 2008 and its deals with Cox and Comcast through 2006. Those deals are not exclusive.
Of the remaining investors in Road Runner --
, which each own 10%, and investment firm
-- only Microsoft seems positioned to offer the company the help it might need.
Microsoft, through its MSN Internet service, is a distant second to AOL in providing consumers with Internet access. But before Road Runner turns to Microsoft for assistance, it might have to consider that Microsoft took a $5 billion stake in AT&T last year. Microsoft declined to comment.
Even if the Justice Department allows a merged AOL/Time Warner to hold on to Road Runner, the Road Runner brand name may disappear altogether, analysts said. Road Runner -- and its subscribers -- could just be absorbed into an AOL broadband unit once the merger is completed.
Excite@Home shares declined Friday, falling 9/16, or 3%, to 17 15/16.