Skip to main content

There May Be Plenty of Tomorrows for AOL in Its Bid for Cable Access

Despite analysts' fears, the company contends that there is relatively little demand for broadband from the average consumer.

In public,

America Online


is fighting for access to high-speed cable access like there's no tomorrow.

But, in fact, there may be plenty of them.

AOL is lobbying around the U.S. for better terms to high-speed service over cable TV systems. (Recently there have been reports, denied by



, that AOL is nearing a distribution deal to provide content over the telecom giant's many cable systems.)

The fear among analysts and stock watchers is that the nation's largest online service will see its growth crippled unless it can cut a deal quickly for access to cable, even though it has already announced plans for distributing its service by both satellite and local telephone companies.

But although everyone agrees that AOL needs to find fast speed connections for its customers, the company has more time on its side than people realize. In fact, it may take as much as five years for high-speed Net access to overcome technical issues and really get rolling, suggests Barry Schuler, president of AOL's Interactive Services group.

AOL contends that there's relatively little demand from the average consumer for high-speed access. Sure, rival



had 620,000 high-speed cable modem subscribers as of June 30 paying about $40 a month apiece for the service. And sure, a fast connection is like motherhood and apple pie: You're not going to find anyone who's against it. The question is, though, is how willing people are to pay for it. And for a typical household with "normal" people, as AOL President Bob Pittman put it in a recent interview, $40 a month is too much to pay for a faster connection to the Internet. "People say, 'I just can't afford it,'" he says.

"It's expensive. It's complicated," Schuler says. "The value isn't there yet for the average consumer who is online today."

Pittman himself spends a great deal of time saying, "Speed is a feature, not a benefit." At the moment, it is an add-on. What AOL needs, say Pittman and other AOL execs, is an irresistible benefit employing the feature of speed -- a killer app for high-speed connections to the Internet, also known as broadband.

And what is the killer app? "We're trying to figure that out," Pittman says.

"We're looking at downloadable music. We're looking at a lot of things," Pittman says. "It's too early to tell. We have teams working on it ... Success for them will only be gained for them when they say, 'Eureka, we've got it!'"

Schuler is putting his bet on home networking.

If households are paying for more than one phone line so that more than one household computer, or other device, can connect to the Internet simultaneously, consumers will see real value, Schuler says. At some point, it will be cheaper and more convenient to buy a single broadband pipeline to connect household devices to the Net than it will be to maintain separate phone lines.

Even that is not likely to happen soon. Even though some households these days have a TV in every room, that wasn't the case when the medium was in its infancy. So it's unclear when having several computers online simultaneously in a household goes from being rare to commonplace. Schuler says both home networking and broadband will "evolve" in the next five years.

Another reason behind the slow growth of fast connections: cumbersome installation process. Whether you're getting DSL service -- which AOL is already lining up through local telcos -- or plugging into a cable TV modem, you need a technician to come by and get you started. "That's a big trap," Pittman says.

"It's going to take five years for various technical issues to be worked out," Schuler says. "We're not worried about the big market need tomorrow."

Of course, all this talk could be just posturing. Just like the Aesopian fox who announces that the grapes he failed to taste were probably sour anyway, AOL may be downplaying broadband's importance so it won't look so bad if its strategy doesn't work out.

But some investors agree with the company.

The market's attitude can be summed up as, "If they don't address broadband issues today, they're going to be out of business tomorrow," according to Paul Cook, lead portfolio manager of the



NetNet fund. But, he says, "Nothing could be further from the truth. I really think AOL is given time here -- at least a year, maybe two -- to formulate relationships and strategies to position themselves for broadband." The NetNet fund holds shares in both America Online and Excite@Home, the AT&T subsidiary that's shaping up as AOL's chief rival in the broadband access market.

It will be two or three years before there are 10 million broadband users, Cook says. "Before broadband gets to any critical mass, it's going to be some time," he says. In the meantime, he adds, "I believe their management has the foresight to put in place a winning broadband strategy."

Another portfolio manager, who doesn't own stock in AOL but has recently shorted other ISPs, says it's possible that AOL will never have to get onto cable systems, "assuming they can get a viable DSL strategy going. I think it's unclear who the winner is going to be."

The portfolio manager estimates that it won't be enough for AOL to just have a broadband strategy by Christmas 2000; the company will have to be executing on it as well. "By that point, you'd better be offering broadband for real, 'cause people are going to care," the manager says.

Schuler says the idea is to have something in place for when broadband access really does arrive. "The one thing we know is, it never happens as fast as you want."