eMailbag: Who Wins Cable Internet? @Home Vs. AOL
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First reader up this week:
"I think the idea of Internet through cable is fantastic. Just include it in the monthly fee. If you want Internet and a telephone too, you need 2 lines and 2 numbers, and doesn't the phone company love that."
Reply: Our analysis of upgrade costs for cable Internet shows that it may cost a minimum of $250 per subscriber, with a cable head-end serving just a few thousand people costing $500,000 to $1 million to upgrade for two-way services.
Which firms may be poised to win here? Despite its early languishing in sign ups, we believe @Home (NASDAQ:ATHM) has the breadth of offering between access and content that could vault it into the cable Internet space. Time Warner's (NYSE:TWX) RoadRunner also shows promise.
But from an investment perspective we think TWX is simply too big to invest in just for its cable Internet angle. Today anyway. Spin out the wired assets and let Wall Street decide.
Other beneficiaries of cable Internet (which requires a set top box) include both Sun (NASDAQ:SUNW) and Microsoft (NASDAQ:MSFT) who inked deals with the world's largest cable operator TCI (NASDAQ:TCOMA) to supply the software guts of the service. On the hardware side, General Instrument (NYSE:GIC), if it can deliver the boxes on time. Net net I think it will take about five years for the necessary ingredients (capital, technology, sellthrough) to come together here. If they do, @Home could be bigger than AOL (NYSE:AOL). If so, why doesn't AOL buy now?
"Double Click is taking a big ride right out of the box. Do you have any info on the company? How different is it to CKSG?"
Reply: DoubleClick went public Friday at $17 per share and surged more than 70%, an indication of how much investors appreciate an Internet ad pioneer.
We analyzed DoubleClick (NASDAQ:DCLK) back in the Dec. 17, 1997 edition of ISR, before the latest slew of analysts even had it on the radar. We looked at CKS in ISR Nov. 11, 1997, the day its shares plunged.
To update you, from our perspective DoubleClick represents a much more Internet-centric way of doing business than CKS, which has non-Internet aspects to it. DoubleClick was borne of the Internet--its way of managing ads across many Web sites is purely an Internet opportunity. CKS focuses on marketing communications.
Metric System Nods
"Steve: Thanks for the measuring tools (ISR, Feb. 19), particularly the value per page view. My conclusion is that all of these stocks are highly overvalued with current ad rates running at about $20 CPM. eCommerce will generate a huge chunk of the future revenues in this area."
Reply: Overvalued in relation to ad revenue but perhaps not the commerce potential. The challenge is that most Web firms' business plans are all "on the fly" as they go from traffic to ads to marketing to commerce to a fusion of all of these. So staying in tune with the marketplace and where it's going is crucial.
What's the value of a page view for someone that buys $1,000 PC off of it vs. one that merely shows a news article? That's why we believe ONSALE (NASDAQ:ONSL) is a good example of loading pages for value. Yes, there's much it could do, but we'll save that for an upcoming look at ONSL and the Web auction space.
"Yahoo! I am really Excite(d) about your Feb. 19 analysis. The stock price of YAHOO--Price/Sales ratio of about 70!, no earnings, defies my imagination. Seeing on your table how much overvalued it is even compared with the other ones, makes me feel good (I am short Yahoo!). Thanks."
Reply: After all is said and done, revenue and earnings are what matter. The rest of it--traffic, page views, eyeballs, user count--is noise, unless those elements can be harnessed into a commerce-content machine. That's the challenge. Yes, Yahoo! has done a better job at branding than anyone else (even Netscape in some ways), but this is a long race and sprinters must prove they can go the distance also.