It's been a tough year for Internet and broadband-related investments, testing the confidence of even the most voracious bulls in the market. But William Savoy, president of Vulcan Northwest and chief confidante to billionaire Paul Allen, is not stressed.
In this e-mail interview, Savoy said he fully expects the Internet downturn to continue, but strong companies with sustainable business models will survive. He's also pleased with the progress of Charter Communications Inc. in digitizing its subscriber
base, as well as the company's other broadband-platform investments. Contributing editor Matt Stump discussed these issues with Savoy recently in an e-mail exchange. Edited portions of the conversations follow.
MCN: Many sectors in the Internet economy have fallen out of favor on Wall Street this year, and many companies in which you've made investments have been hit. Do you feel the market has overreacted this year, or is the downturn a necessary and healthycorrection?Savoy:History tells us the stock market will routinely correct itself after a long bull run. By the fourth quarter of 1999, it was clear to us that the values of the dot-coms could not hold in the long-term. So, in an orderly fashion, we monetized a large amount of the public securities in our portfolio. Now, we are cautiously looking for the right opportunities (those with solid business models which will survive these short-term market changes) and continue to strategically invest.
The downturn we've seen since this spring was predictable, and is not yet over. I expect to see the technology sector continue to be under pressure for at least the next year. After that, some solid Internet companies-those with sustainable business models-will rise from the ashes and will succeed. We are already investors in many companies I believe will be in that group.
MCN: Closer to home, you've taken some hits. Charter's stock is in the doldrums, while the fortunes of Allegiance Telecom, the digital subscriber line provider, and RCN Corp., the cable overbuilder, have fared a bit better. What's your reaction?Savoy:Our infrastructure investments, and indeed all of our investments, are long-term bets that broadband has great value to the consumer. That is not to say we are not concerned when some do not fare as well as others, but we believe the long-term broadband plant is the winning play and we are willing to ride out the market on the way to that success. Allegiance Telecom is more accurately described as an integrated communications provider-as they offer voice, data and Web services for the business market-than as a pure DSL play.
MCN: On the content side, iFilm seems to be doing OK, but the much vaunted Pop.com never got off the ground. What happened?Savoy:Pop.com has many of the same challenges that other online film providers have recently faced. We continue to have faith in our partners at DreamWorks [SKG], and are confident that when the market is right and a broadband infrastructure is in place, pop.com or a similar business will be successful.
MCN: How do you assess Charter's performance year-to-date, especially in terms of new-service rollouts?Savoy:Charter's progress to date is on plan and commendable. As you may remember, after acquiring Charter we very quickly acquired and merged multiple smaller MSOs under the Charter umbrella to amass the nation's fourth-largest operator. Now, our challenge has been to coalesce those assets, and quickly build out the plant so we can offer our customers the benefits of a broadband environment as soon as possible. We are on track to have more than 80 percent of our plant upgraded by year-end 2001.
MCN: Video-on-demand and interactivity are on the horizon. Cable modems are rolling out. Cable telephony is around the corner. Where do you see Charter's greatest revenue upside in the next 24 months?Savoy:Charter sees significant revenue upside from digital and high-speed data services over the next few years. With a growing digital customer base and enhanced digital services like VOD and interactivity, there is abundant opportunity to see revenue growth from the digital side of the business. Charter should also see a substantial increase in high-speed data penetration over the next couple of years, which will contribute to the growth in revenue. In addition, there is still revenue upside in the traditional cable business through internal growth, and Charter will see this from the acquisitions over the past 18 months.
MCN: How frustrated are you over the pace of cable-modem and DSL rollouts, since that's impacting your content investments?Savoy:New technologies always take longer to catch on with consumers then the business world would like. Cable modems and DSL are no exceptions. The pace of acceptance is about what we had expected, and we have planned accordingly in the forecasts of our content investments.
MCN: Another areawhere you've hedged your bets is with TiVo Inc. and ReplayTV Inc. Consumer acceptance of personal-video recording devices has been slow, and there has been a lot of talk about future set-tops incorporating generic PVR capabilities. Do TiVo and Replay have independent futures, or will they be fully assimilated into future set-tops?Savoy:TiVo and Replay's services and software can be deployed across multiple hardware platforms-either their own PVR devices or set-top boxes from various manufacturers. Their business models enable them to take advantage of whatever the market selects as the delivery platform.
MCN: As a cable operator, do you see audio and video streaming as a threat or an opportunity? If it's an opportunity, how should the industry proceed?Savoy:Any application that is enhanced by a broadband delivery system, and serves a proven customer need, is beneficial to the adoption of broadband. The industry should understand and embrace this, and work on making those applications more robust in a broadband environment.
MCN: What's Digeo Broadband Inc. up to?Savoy:Digeo is creating an integrated TV and PC portal from the ground up, including the delivery of the network infrastructure and aggregation of the content, allowing MSOs, beginning with Charter Communications, to lead the next generation of home-based entertainment, communication, and commerce-all via broadband.
MCN: You've invested inWink CommunicationsInc., which is trying to convince advertisers that interactive TV makes sense. But in general, Madison Avenue seems slow to rush to new ad vehicles, like the Internet and interactive TV. How much does the slow pace of "interactive advertising" bother you?Savoy:Again, adoption rates for new technologies and models are always slower then many expect. We believe Wink has a viable long-term business model, and Maggie Wilderotter has been doing smart things there to take advantage of the current and projected future market environments.
MCN: Do you have any concerns with the Time Warner Inc.-America Online Inc. merger, with regard to access, marketplace domination, etc?Savoy:Not per se. My only concern is that the regulatory bodies, in their efforts to place some checks and balances in the governance of the new company, not negatively affect the smaller MSOs and their business opportunities.
MCN: Does Vulcan have a significant wireless investment? How much of a threat are wireless-broadband operators to your wireline platform focus?Savoy:Our most significant wireless investment is our long-time holding in Metricom. As investors in many infrastructure areas-including wireless, cable and satellite-we believe there are opportunities for all.
MCN: From an investment standpoint, what sectors or companies are you interested in today?Savoy:We will evaluate any company that fits under the "wired world" umbrella, but in the past two years, you've seen our most significant investments being in the cable and broadband space.
MCN: Are there sleeper investments in your portfolio?Savoy:Yes. But we will let them sleep a bit longer.
MCN: What's your view of television-PC convergence, particularly the increasing number in which both devices are in the same room and, often, on at the same time? Is this at the heart of the business opportunities of Paul Allen's "wired world" vision?Savoy:At the moment, you see both devices in the same rooms in the same homes, one primarily used for business and one for entertainment. Over time, there is no reason those devices will not merge into one-in fact, it is already happening. This ubiquitous, simple, valuable access to information and entertainment is indeed at the heart of Paul Allen's "wired world" vision, and we spend every day looking for opportunities that will be part of it.
