January 26, 2004 12:05 PM PST

AOL's unrequited cable love

When Time Warner unveiled a deal to bundle America Online with Comcast's cable broadband service in August 2002, executives compared the agreement to the early days of cable TV, when viewers started paying extra for HBO.

News.context

What's new:
A 2002 deal between AOL and Comcast to bundle premium Web and cable services has still not launched, delayed by changing market demands and conflicting interests.

Bottom line:
Web companies shifting gears from dial-up to broadband are facing competition from high-speed Internet access providers, making it harder to market their services.

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A year-and-a-half later, the comparison has turned into an unfulfilled promise. To date, an AOL service has not launched for Comcast's broadband Internet subscribers as originally envisioned. Instead, the deal has taken a detour, spurred by changing market demands and conflicting interests.

The delay in the AOL-Comcast pact underlines the cable industry's reluctance to strike deals with Internet companies, according to analysts, a stance that could hurt Web companies seeking to shift consumers from dial-up to broadband-based versions of their services.

Lessons from past experience and continued strong subscription growth have diminished cable's appetite to partner with companies such as AOL, MSN and Yahoo. Cable is still the dominant provider of broadband to U.S. households with 65 percent of the market, compared with the 35 percent held by rival digital subscriber line (DSL) providers.

"These (cable) companies are putting up wonderful numbers, and they don't feel the imperative to share the opportunity," said Matthew Harrigan, an equity analyst at Janco Partners.

For AOL's part, the Time Warner division has said that its broadband ambitions have changed since the Comcast deal was struck. For the past year, AOL has touted its "bring your own access" (BYOA) strategy, internal company parlance for selling its flagship service to broadband users, regardless of their provider. The company is trying to convince people to pay $14.95 a month on top of their broadband bill for AOL's package of content and services.

The August 2002 agreement entailed Comcast selling high-speed Internet bundled with AOL's service for about $55 a month--much higher than Comcast's standard $42.95 monthly fee to cable subscribers. AOL thinks this arrangement no longer makes sense for its ambitions and would prefer to market to people broadly rather than to those on one cable network.

"AOL has made it clear that the BYOA strategy, not bundles, is the future of our broadband offering," AOL spokesman Jim Whitney said. "We have a very good relationship with Comcast and are discussing with them the most productive, mutually beneficial ways to work together."

A Comcast representative did not answer a request for comment.

Tug-of-war
The shift in AOL and Comcast's agreement offers a glimpse into the ongoing tug-of-war between Internet services and cable's coveted broadband networks. Internet companies such as AOL, MSN and Yahoo have been scrambling to convince broadband providers to carry their services on their high-speed networks.

In recent years, MSN and Yahoo have struck deals to bundle their Web portals with the Baby Bell phone companies, whose DSL services compete with those using cable modems. These deals allow MSN and Yahoo to control the DSL provider's home page and usually involve sharing the revenue from monthly subscriptions, online advertising and additional paid services.

Earlier this week, Yahoo added its first cable partner when it signed a deal with Canada's Rogers Cable to power its home page.

Cable in the United States, on the other hand, has been a much harder nut to crack for Internet companies. Operators such as Comcast, Time Warner Cable and Cox Communications have needed little help from outsiders to attract broadband Internet subscribers--a fact that cable companies point to when talking about the value of doing a portal deal.

"We're not having any trouble signing up high-speed Internet subscribers," said Steve Gorman, vice president of high-speed Internet product marketing at Cox Communications. "More (of our) high-speed Internet subscribers are keeping us as their start page than AOL, Yahoo or MSN."

Outside the portal
Cable's market-share lead has emboldened companies to take their Web ambitions into their own hands. Comcast has undergone a series of home page redesigns to become more portal-like. The redesign added more multimedia, such as streaming video and graphics, and a flashier user interface. Cox has created a network of start pages that reflect the local communities that it serves.

Earlier this month, Time Warner Cable's Road Runner broadband service launched a redesign of its home page, in hopes of luring prospective customers away from DSL. The move flew in the face of speculation that Road Runner would turn to AOL--both companies are owned by Time Warner--to add online programming to its front door. Instead, Road Runner, like Comcast, set off on its own course by adding more graphics and multimedia on its site.

Cable companies' reluctance to rush into a portal deal may also stem from lessons learned during a painful chapter in their history.

Many of them, including Comcast and Cox, once handed over operations of their broadband Internet service providers (ISPs) to the now-defunct Excite@Home. That venture died a very public death in 2001 as a result of a conflict of interest between its cable partners, which was exacerbated by the dot-com crash that wiped out its online advertising business.

In the aftermath of the Excite@Home debacle, its cable partners decided to take matters into their own hands. The ordeal colored their opinion about striking deals with Internet companies to help grow their subscribers.

"When (cable companies) broke off that (Excite@Home) relationship...they found out they could do the same job of aggregating content and performing as an ISP themselves," said Mike Paxton, an analyst at In-Stat/MDR. "They really didn't need a third party."

Analysts added that the cable industry's independence will continue as long as it maintains its lead over DSL providers. Part of the reason MSN and Yahoo have been successful in signing up DSL partnerships is that the Baby Bells, which run the largest DSL services, are desperate to catch up with cable.

Earlier this summer, the Bells launched price promotions that sent subscriptions as low as $26.95 a month, in the case of SBC Communications. DSL providers have so far made some gains against cable, but nothing to significantly shift the competitive landscape. If DSL price cuts begin to make inroads, however, or if broadband subscriptions slow, cable companies may change their hesitant approach toward doing deals with Internet giants.

"If cable hits the wall on subscriber adds, or DSL competition becomes frenetic, then they'd have to look at it more seriously," Janco Partners' Harrigan said, in reference to cable-Internet deals.

 

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