AOL's Hughes deal an interesting challenge to cable

The Outlook

Continuing quest for ubiquitous presence

June 27, 1999|By Rachel Sams

Challenging the cable TV industry's hopes of dominating the market for high-speed Internet connections to the home, America Online said last week that it would invest $1.5 billion in Hughes Electronics and jointly introduce a raft of new consumer services with Hughes' DirecTV unit. These include AOL-Plus, which will provide high-speed connections over satellite, and AOL TV for using TV channels for such functions as interactive shopping, Web surfing, e-mail and electronic chat.

The deal will widen the choices available in the potentially huge consumer market for high-speed Internet service and interactive television. Cable companies are leading the development of such services but have not yet made them available to more than a few hundred thousand customers. Local telephone companies are rolling out their own packages even more slowly.

For all that, Internet delivery via satellite has hurdles to overcome, including its relatively high price. DirecTV customers will also have to purchase as many as two new pieces of equipment to receive AOL TV and DirecPC.

Can AOL's household name recognition and marketing power overcome these obstacles? Will it become a viable option in areas where cable modems are available? Does this deal give AOL the national high-speed pathway it needs to compete against the more ubiquitous cable industry?

Daniel E. King, Ph.D.

Research analyst, LaSalle St. Securities, Chicago

Hughes has been offering Internet access over satellite for some time now, and they need to get additional marketing muscle behind that effort. In addition to signing up AOL and gaining access to a huge active customer base, Hughes has also committed to spending additional money on marketing.

I think this does provide a competitive alternative to cable modems. For some users who are especially price-conscious, cable is slightly cheaper at this point, but that doesn't mean it will remain that way. Prices typically start high as new technologies are introduced and decline over time.

With cable Internet, you have a hub for every so many households, maybe five or 10 households that essentially share a connection. There are security issues -- whether sharing leaves you open to neighbors hacking into your computer. There are none of those problems with satellites. I would think satellite would be a more attractive option in rural areas, but I don't think it's necessarily confined to that.

I think eventually we will see AOL cooperating with the cable industry in some sort of service agreement. AOL is trying to cover every possible avenue for others to access their content. I think AOL will partner with a cable-access front-end provider: Cable provides the connection, and AOL provides the content.

Michael King

Associate research analyst, META Group, San Diego

The difficult part of this is the high cost of equipment and installation. If anybody can overcome that, it's probably AOL, but even that is a big leap of faith. I don't think name recognition alone is enough to overcome those obstacles. I honestly don't think that, without significant subsidies from service providers, the rate of subscribers is going to increase.

With cable modems, you're talking about a vendor that already has an entree into the end-user environment -- you already have cable running into your home. You're talking about going with a new kind of provider in places where people are happy with the current provider. Only if satellite services are priced lower, or at least competitively priced, will that work out.

AOL is not just competing against cable companies, it's competing against communications companies. Companies like AT&T have a suite of services powerful enough to really lock in a user. AOL is going to have to find as many ways as possible to penetrate this marketplace.

Tom Wolzien

Senior media analyst, Sanford C. Bernstein, New York

I think the deal is advantageous. It's helpful to AOL to have this relationship, but it's not a replacement to doing a broadband cable deal. Eventually, both sides need them to do it. Cable could survive without AOL, and AOL could survive without cable, but both would be a heck of a lot better off together.

AOL needs a cable deal eventually to make sure it is able to reach the more prosperous demographic of consumers that will move to high speed. Down the line, data will go to both your TV set and your PC -- during a commercial on "ER," you can bang out a note to Mom and say all is well, or buy a product that's advertised. If you're in the information business, if you're not getting to the TV set, you're not really able to give people the "anywhere" sort of service that AOL wants to.

AOL has about 17 to 18 million subscribers, and cable has less than 1 million high-speed data subscribers. If AOL can convert even 20 percent of subscribers to high-speed lines, the return for cable shoots through the roof.

Dan Merriman

Vice president, Giga Information Group, Cambridge, Mass.

This deal is one of many things that need to be done on both sides. This is one of the many things that AOL needs to do to have a ubiquitous presence, and one of the many things providers will be doing to offer content to subscribers.

These services are going to really be targeted at power users, who are on quite a bit and are looking to maximize bandwidth and minimize response time. It won't be the primary way people will access AOL, but it's a nice option for the very high end of AOL's market segments.

At a point in time when both cable modems and satellite Internet services are available, you would expect cable services to be more affordable. DSL is really targeting the same market as cable. DSL is provided by telecommunications service providers, and cable is provided by cable operators. You're really talking about filling that element where cable and DSL are not available.

Pub Date: 6/27/99

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