Media: The Internet
Can Road Runner Get Up to Speed?
Time Warner's Net-access wonder has growing pains
To hear Time Warner Inc. Chairman Gerald M. Levin tell it, Road Runner is one hot product. Still in the early phases of its rollout, the service offering superfast Internet access over cable-TV lines has signed up more than 200,000 households paying $40 per month--on top of their cable bills--and is adding more than 5,000 per week. Says Levin: "It is the clearest path to large Internet profits."
But as corporate animals go, Road Runner has also been a strangely quiet bird. Fourteen months after being announced by Time Warner and MediaOne Group, its owners still seek a CEO to run it. And while its chief cable-modem service counterpart, At Home Corp., has been making waves with a soaring stock price and the planned $7.5 billion acquisition of Web portal Excite Inc., Road Runner has remained a private company that seemed uncertain even of what to call itself.
This has led to much speculation that Road Runner is merely being fattened for a merger with At Home; after all, it encompasses cable markets reaching a potential market of 30 million homes, while At Home covers separate territory twice as big. But Levin and other Time Warner executives insist that despite failed merger talks last year, Road Runner plans to go it alone for now. That, along with the service's wobbly start, has some analysts and media rivals alike puzzled. "I think Road Runner is at a real disadvantage if it remains independent," says ING Barings Furman Selz analyst Frederick W. Moran. "It will be critical to be a fully integrated national player when the landscape gets more competitive in two years or so."
For now, Road Runner is not lacking for big-name partners or funds. Last June, Microsoft Corp. and Compaq Computer Corp. threw in a combined $425 million for 10% each, enough to fund the rollout. And Road Runner's backers say it's not missing out on buying portals with rich stock, as At Home did. "My belief is that the Excite deal is about getting access to a lot of customers," says Glenn Britt, president of Time Warner Cable. "We are installing cable modems as fast as we can."HARD TO INSTALL. Certainly the hot realm of broadband Web access is attracting everyone from AOL to phone companies. Cable-modem services can download Web information 100 times faster than residential telephone lines and are always "on" when subscribers flick on their computers. Still, there are drawbacks. Installation is complex and can cost an extra $100, although simpler modems should hit retail stores in a few months.
Analyst Abhi Chaki at Jupiter Communications estimates there will be 6.8 million cable-modem subscribers by 2002, roughly 2 million via Road Runner, vs. 45.2 million households using cheaper, slower dial-up services. "To really trigger mass adoption, prices will have to come down," says Chaki. Time Warner officials aren't so sure. In their Portland (Me.) cable system, 13% of homes being offered the service are taking it--a remarkable figure, considering only 25% of U.S. homes take Web access.
Each of Road Runner's owners has its own reasons for wanting a piece of the action. In addition to the obvious gains in subscriber revenues--with as much as 75% going to the cable system--Time Warner also gets to dictate much of Road Runner's content and could make it a platform for a range of E-commerce businesses it plans. Microsoft views Road Runner as a "showcase" for its Web wares, says Chief Financial Officer Gregory B. Maffei; its Windows NT software drives much of the system, Internet Explorer is the default browser, and Microsoft also plans to make its Hotmail the service's E-mail provider. Later this year, Compaq, which Microsoft brought into the deal, will begin shipping computers designed to connect more easily to cable modems.EXECUTIVE SEARCH. For all the powerful players, there are kinks. One is the long delay in finding a CEO all agree on. Road Runner is using the same headhunters that placed At Home CEO Thomas A. Jermoluk, and Britt says it hopes to announce one soon. But until then, any attempt at an initial public offering--which could value the company at $7 billion--is on hold. Then there's the Road Runner parent company's odd name: ServiceCo LLC, which sounds like a carpet-cleaning outfit. Time Warner brass say delays securing use of the Road Runner trademark from their Warner Brothers Inc. subsidiary stem partly from trouble persuading MediaOne--with which Time Warner has butted heads in the past--that the name was worth paying for.
If a merger with At Home does happen, it too would need the blessing of MediaOne, which owns 34% to Time Warner's 37%, but has an equal say. Another key is Tele-Communications Inc. Chairman John C. Malone, set to be a big shareholder in AT&T once its acquisition of TCI closes. TCI in turn controls At Home, and the Feb. 1 announcements that AT&T will offer local phone service over Time Warner cable lines drew the companies closer. Moreover, TCI's Liberty Media Group Inc., which Malone runs, holds 9% of Time Warner, giving him considerable clout to finesse a deal.
If no merger materializes, analysts say, Road Runner could have trouble down the road competing with bigger At Home for content and to sign on more cable outlets once its existing subscriber base is mined. In the short term, Michael W. Harris, president of broadband consulting firm Kinetic Strategies Inc. in Phoenix, notes that Time Warner and MediaOne are signing up cable-modem customers faster than anyone in the industry. "It's funny," says Harris. "At the system level, they're kicking butt, but at the corporate level they're still having problems." There's no question the bird has legs. But how far can a headless, nameless Road Runner go?By Richard Siklos in New York, with Ronald Grover in Los AngelesReturn to top