Lacking cable tie-in may hurt

by Dirk Smillie

      Has AOL blown it?
      On the brink of a revolution in high-speed internet access, AOL, the internet's leading service provider, is taking a browbeating over its broadband strategy--or lack of one.
      Broadband is the term for high-speed internet access, where graphics, sound and full-motion video move seamlessly over telephone lines and cable wires. Most analysts believe that the transition to broadband is critical to AOL's future.
      Broadband is expected to take hold primarily on cable, a medium AOL owns no major stake in. Even worse, the one chance AOL had to roll-out broadband service was lost when AOL recently sold a telecommunications network it owned to WorldComm.
      At a meeting of analysts and shareholders in Washington this week, AOL Chairman and CEO Steve Case was chastised by some for offering a less-than-persuasive plan for a transition to broadband. Others worried that AOL could be beaten by AT&T in the battle for broadband customers, in light of its recent purchase of MediaOne, the nation's largest cable system.
      ''AOL made a very bad business decision by selling that network to WorldComm,'' says Abhi Chaki, director of bandwidth and access strategies at Jupiter Communications. ''Now they're stuck with having to negotiate with lots of different companies for pieces of the broadband space. That's not an attractive position to be in.''
      The scenario doesn't seem to bother Case, however, who argued that cable companies aren't the only broadband medium available. Broadband access can be gained through DSL over telephone lines and by wireless and satellite distribution, he told critics.
      In Case's view, broadband is just an extension of narrowband. Initially, users will order broadband as an upgrade to service, as they would order a faster modem. In a May 19 interview on MSNBC, Case said, ''Broadband is important but there are many facets of our 'AOL anywhere' strategy.'' The ''AOL anywhere'' strategy means eventually making the service available from pocket phones to portable PCs.
      Still, a piecemeal broadband approach represents only niches of the larger market, says Chaki. ''Cable will dominate the broadband world for the foreseeable future,'' he says.
      Some Wall Street analysts believe that if AOL doesn't find a stronger broadband strategy soon its stock valuation will plummet, as it did after AT&T announced it was buying MediaOne. The deal for MediaOne, which AOL had expressed interest in, brought AOL's stock down 30 percent from its high this year.
      Their concerns weren't eased any with last week's announced alliance between Hughes Electronics Corp. and AOL to offer combined satellite TV and internet access in one service. Satellite is seen by analysts as the broadband deliverer of last resort.
      But other analysts aren't nearly as worried. ''The problem isn't so much AOL's bandwidth strategy but their cable strategy,'' says Bruce Kasrel, senior analyst at Forrester Research.
      ''AOL wants to buy access to the cable networks for wholesale prices, but the cable companies don't see that as being financially sound,'' he says. Eventually, AOL will likely cut a deal of some kind with cable companies, predicts Kasrel.
      But Kasrel points out that AOL's 17 million subscribers represent a base of loyal customers who don't leave easily. The online service has one of the best customer retention rates in the online industry.
      With under one million consumers who have access to cable modems in the U.S., says Kasrel, ''It's early in the game right now.''