eMailbag: Who Wins Cable Internet? @Home Vs. AOL

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.

Costs are coming down, however, and the cable companies begin to look for
the alliances necessary to make it happen. Microsoft’s $1 billion
investment in Comcast was a sign of good faith (or hedging its bets).

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,
edition of ISR, before the latest slew of analysts even had it on
the radar. We looked at CKS in ISR Nov. 11,
, 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.
), 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.
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.

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