AOL Faces Threat from AT&T's MediaOne Purchase

Strategic Insights -

The world's largest Internet service provider, America Online Inc. (AOL), with 17 million customers, appears vulnerable to a telecommunications giant, AT&T Corp., after its $55.8 billion offer for MediaOne Group Inc. was accepted. AT&T's acquisition of MediaOne's cable infrastructure, serving 5 million U.S. cable television subscribers and 8.9 million overseas subscribers, poses a significant risk to AOL's market position. Analysts suggest that cable access to the Internet, which is expected to replace traditional telephone line access, could leave AOL at a disadvantage.

Key Takeaways:

  • AT&T's purchase of MediaOne could leave AOL vulnerable to a telecommunications giant capable of delivering a faster Internet connection and marketing phone and Internet service together.
  • AOL had been in Comcast's camp with Microsoft Corp. to buy MediaOne, but the company bowed out of the bidding process, citing unconfirmed reports.
  • AT&T and Comcast Corp. are bidding to buy MediaOne, with Comcast offering an estimated $48 billion in stock, which was abandoned in favor of AT&T's offer.
  • AOL will offer high-speed Internet access over digital subscriber lines through agreements with Bell Atlantic and SBC Communications Inc. beginning this summer, but cable Internet access typically delivers data faster.
  • Analysts, such as Phil Leigh and James Preissler, suggest that broadband has a limited number of subscribers, but this will change rapidly, making it a competitive market for AOL.
  • AT&T's purchase of Tele-Communications Inc. earned federal approval in March, and the company already owns At Home Corp., the leading provider of high-speed cable Internet over broadband.
  • Cable Internet access is likely to appeal to residential users, and DSL providers may have to settle for the business market, according to Michael Matty, principle at Connecticut-based investment banker Capital Reflections.

Statistics:

  • 17 million: AOL's number of customers worldwide.
  • $55.8 billion: AT&T's offer for MediaOne Group Inc.
  • 5 million: MediaOne's U.S. cable television subscribers.
  • 8.9 million: MediaOne's overseas subscribers.
  • 48 billion: Comcast's offer for MediaOne in stock.
  • 460,000: At Home Corp.'s subscribers now.
  • 50%: Annual increase in At Home Corp.'s subscribers, according to Phil Leigh.

Sources:

  • Associated Press (unconfirmed reports)
  • Bloomberg News (unconfirmed reports)
  • Raymond James & Associates (Phil Leigh, Internet analyst)
  • Capital Reflections (Michael Matty, principle)
  • PaineWebber (James Preissler, Internet analyst)