AOL Time Warner Names Third ISP, Then Goes After VoD Market

The media giant selects PSINet's Internet access arm as its third cable access partner and picks a fight with MSN over Video on Demand content as both companies rush their offerings to market.

by Jim Wagner of internetnews.com [October 22, 2001]

AOL Time Warner (NYSE:AOL) filed an application with the Federal Trade Commission Friday to accept PSINet spin off Inter.net as an unaffiliated Internet service provider (ISP).

In order to meet FTC conditions set at the time of the merger of AOL and Time Warner, the media giant must launch an unaffiliated ISP on its Time Warner cable network before it can launch a high-speed version of its America Online service on the network. Furthermore, 90 days after it launches its AOL service, two more independent ISPs must launch on the network.

National ISPs EarthLink, Inc. (NASDAQ:ELNK) and United Online—the aggregate of Juno Online Services and NetZero—have already signed agreements with Time Warner Cable.

Inter.net is a worldwide ISP that was formed as a result of PSINet's decision to lump all its ISP holdings together and spin it off to save on costs as part of its bankruptcy proceedings. It has a relatively small presence in the U.S. with approximately 500,000 customers worldwide. U.S. numbers were not available.

The FTC is accepting public opinion on the proposal until Nov. 14, when it will make its decision.

Inter.net is AOL Time Warner's replacement pick after a deal with Paul Allen's cable ISP High-Speed Access Corp. fell through last month. Anti-trust advocates expressed concern over the fact that Vulcan Ventures, which has a stake in HSA, had too many other agreements with AOL to be considered truly unaffiliated.

Video-on-Demand brawl
In related news, the continuing war between rivals AOL Time Warner and the Microsoft Network (NASDAQ:MSFT) is focusing on the increasing popularity of video-on-demand (VoD) and delivering it over a high-speed platform.

It's all part of both ISPs strategy to marry media rich content with broadband AOL on its nationwide cable network and MSN with its growing digital subscriber line (DSL) presence.

For the past several years AOL and MSN, the largest and second-largest ISPs, respectively, have fought over everything from instant messaging (IM) to browsers, and open access to desktop icons. It's been months since the two have sparred over anything, but the increased efforts by both in the past week to increase their VoD product lines are sure to lead to a future confrontation.

To date, video-on-demand has been seen as a viable option only for the cable television companies, though they have been unable to attract the attention they've wanted. DSL, while theoretically possible in today's environment, has been written off as an unstable environment, due mainly to the provisioning problems and technical support issues plaguing the DSL industry.

Slowly but surely, DSL is making a comeback as a viable option for VoD, MSN is set to capitalize on that fact. A report by Cahner's InStat, an online analysis firm bears that out.

A recent report shows DSL alone will accrue more than $7 billion in revenues and have more than 11 million DSL users in 2005. The only uncertainty is which application will be most popular.

"Each segment of the market is attempting to find the best combination of hardware and software to provide added value to consumers and drive demand," says Cindy Wolf, an InStat analyst. "Growth barriers include the need for consumer education, the need to modify the business models for services, and the current downturn in the economy."

Microsoft has quietly been building up its high-speed and entertainment fare over the summer, brokering deals with incumbent local exchange carriers (ILECs) Verizon Communications (NYSE:VZ), SBC Communications (NYSE:SBC) and Qwest Communications (NYSE:Q) for digital subscriber line (DSL) service.

The software giant's ISP arm then announced last week the rollout of its VoD offering through Intertainer, a privately-held company backed by Microsoft and others which promises better-than-VHS movie quality. Microsoft had a similar arrangement with its interactive TV box, Ultimate TV.

Will Poole, Microsoft Windows digital media division vice president, said Interntainer's deals with studios like Universal, Warner Bros., Dreamworks SKG and New Line Cinema.

"Intertainer has put all the pieces together to make video-on-demand work at last for home viewers,'' Poole said. "Intertainer's outstanding library offers the kind of top-tier entertainment people have been waiting for, and the technology is here today to deliver a great viewing experience.''

Meanwhile, Time Warner Cable, a subsidiary of AOL Time Warner, ordered 475,000 set top boxes from Scientific-Atlanta as part of its continuing efforts to market VoD.

Mike Hayashi, TWC senior vice president, said the deal is the opening salvo in its upcoming deployment.

"We have an aggressive plan in place to deploy VoD and SVoD services across the vast majority of our Scientific-Atlanta systems, including all of our major metro areas, by the end of next year,'' Hayashi said. "We expect significant demand for these new services as well as for new services such as personal video recording and high definition TV." The only difference between the two VoD services each ISP plans to deploy is the platform movies will be delivered, cable and DSL.

Bill Gates, who signed a similar agreement with Samsung Electronics in South Korea last week, said the day is coming fast when most houses in the U.S. will have integrated entertainment systems.

"We are entering a Digital Decade where smart, connected devices and advanced home-entertainment solutions will enable people to utilize technology in new ways and maximize its full potential," Gates said.

Both companies stand a good deal ahead of the Hollywood studios, which have been penning deals themselves this summer to capitalize on VoD and stay ahead of the ISPs. Disney, Sony and Universal Studios have all announced their own service at their Web sites.

But it's a given that the studios, or any other Web site for that matter, will not have the marketing power that AOL or MSN will be able to throw into the mix. AOL, with its vast media holdings through its ownership of Time Warner, and MSN, with its marketing deals with Vivendi and such, will create the largest focus for broadband entertainment.

The two companies seem to be reading the same reports, if the recent attention to video-on-demand and set-top boxes is any indication.

Jupiter Media Metrix earlier this week publicized a report that lends credence to the VoD buildup, despite America's bad experience with DSL to date. In its report, author Joe Laszlo predicts that a whopping 40 percent of Internet users will use a broadband connection by 2006. That's a sharp increase from this year's nine percent.

"Despite the recent failures of several broadband pioneers, and slower growth of the overall online population, broadband will find the masses in the US shortly," Laszlo said. "While consumers' awareness of broadband has grown considerably, improved and increased marketing by cable and DSL providers will finally help overcome lingering resistance to the cost of broadband subscriptions. It is absolutely critical for companies with relevant content, products and services to time their business initiatives to reach the anticipated broadband audience."

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