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THE MORNING BUZZ: Why The Killer App May Be A Suicide Victim

23 Apr, 2002 By: Holly J. Wagner

VOD is the killer app. Everyone in cable and satellite knows it. The studios and their pirate nemeses know it. Video dealers know it, too, they just aren't scared of it for the same reasons I am coming to doubt whether it will happen, at least any time soon.

The technology is there and so is the demand. All the elements are already in play, as the illegal file traders prove at a rate some put in the hundreds of thousands of downloads per month.

The real obstacles to VOD are that 1) all the folks who have to get together to provide it can't play nice together, and 2) the ones in position to deliver the goods are smarting now because they put all their respective resources into capital upgrades and loss leader bids for subscribers.

Most just don't get it and the rest appear to have been playing fast and loose with the books. The biggest threat to VOD that I see on the immediate horizon is signs that the cable and satellite providers are on the brink of an implosion like the ones we've seen in the telecommunications industry.

I recently related my experience with DirecTV (recap/update: the $140 installation rebate I sent for Jan. 4 was supposed to go out March 18, but customer service – and I use the term loosely – says it has been rescheduled for May 10 payment). The company is in hot water in Los Angeles court for allegedly failing to pay $300 million in rebates and commissions to installers for the last year or more.

Those are just a couple of warning signs that a company may be counting money in column A that should probably be in column B.

DirecTV's admission Monday that for years it counted chickens that never hatched – potential subscribers who put down a pittance and never got the service or paid a bill – support that notion. An executive's assurance that “four out of five” of those people actually did subscribe is little comfort. What other business gets away with padding its figures by 20 percent? Oh yeah, Internet providers.

Now the Securities and Exchange Commission is rooting around Adelphia's books and shareholders have sued, claiming the cable company “understated” $2.3 billion in debt for last year. That's some understatement. Within the last week the company's stock hit its lowest level in a year.

“Potential accounting issues and off-balance sheet issues is what sparked the downside for these cable stocks,” Jeffries & Co. analyst Frederick Moran said. While he called the market overly cautious, that caution seems prudent in light of recent events.

AOL's stock price dropped below $20, its lowest level since the Time Warner merger, and investment bankers are backing out. AOL is hemorrhaging subscribers as its dial-up customers defect to high-speed services and – surprise surprise! – can't see the reason to pay AOL's $23.90 monthly fee on top of $40 a month for high-speed access.

Several others are wrestling with saturation points, flagging stock prices and “concerns over accounting issues” that have become ubiquitous in the wake of Enron's collapse. These companies have been debt financing their buildouts, creating more infrastructure than the public will ever pay to use.

So why is anyone surprised to see this happening? For the last few years most observers and investors have been following the Internet players. Cable and satellite companies fed the frenzy with their own infrastructure to support that rising star they thought would never dim.

Now anyone who wants and can afford home Internet service has it. Their kids and pets have their own mailboxes and Web pages.

The thing that constantly amazes me is not that cable and satellite companies keep following the suicidal telco business model like lemmings, but that bankers who should know better keep extending them credit to pursue it.

Any MBA candidate who put forth a business plan that looked like that would get laughed right out of B-school.



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