Time Warner Chases Road Runner

Did Time Warner Cable ruffle some industry feathers Monday when it increased its ownership of the Road Runner Internet service?

By increasing its stake and restructuring the operating platform for Road Runner, Time Warner Cable is clearing the way to offering multiple ISPs on its systems on an accelerated basis, according Michael Luftman, a spokesperson, for Time Warner Cable. The restructuring will end Road Runner's exclusivity on Time Warner Cable, which was to run through the end of 2001.

The announcement comes on the heels of the FTC approval of the AOL/Time-Warner union, which is the biggest merger in U.S. history. Upon approval of the merger, federal investigators and industry players felt that a combined AOL-Time Warner will guarantee open access to Time Warner cable lines.

Yet, a statement released by Time Warner, notes that a 20 percent combined interest of Road Runner held by Microsoft Corp. and Compaq Computer Corp. will be redeemed, while a joint venture between AT&T and Road Runner will be dissolved.

Luftman insists that buying out Microsoft's share is a step in opening up competition, not shutting it out. "Microsoft held minority ownership in Road Runner and we are buying back shares," he said.

"Today's announcement helps us to remove limitations within the affiliation agreement and accelerate our ability to offer multiple ISP systems. This has nothing to do with the MSN network. As far as ISP negotations go, talks with the MSN network are under way."

Calls to a spokesperson for Microsoft were not returned as of this writing.

Buying out Microsoft's share is an effort by Time Warner to solidify the control over Road Runner and brand the product, noted Michael Goodman, senior analyst, The Yankee Group. "AOL and Time Warner ultimately want the equity stake in Road Runner so that the service can be branded high-speed service," he said. "AOL has proved that it knows how to grow an ISP. This move is playing to AOL's strengths."

Patti Reali, senior analyst at Gartner Group, agrees. "This was a requirement needed for AOL and Time Warner to open up access," she said. "Now that the ownership has consolidated, the exclusivity has ended and the time table for providing open access has accelerated."

Presently, Time Warner, AT&T Broadband and Advance/Newhouse jointly own an 80 percent fully diluted interest in Road Runner LLC.

Starting in April, AT&T broadband will continue to offer the Road Runner service to its cable customers for a transitional period of up to 15 months under a new service agreement with Time Warner Cable's new Road Runner company.

It is doubtful that AT&T will continue offering Road Runner after the 15 month interim period ends, according to Bill Whyman, president of The Precursor Group.

"@Home and Road Runner have been trapped in huge, unwieldy alliances. People knew it could not last" he explained. "Both sides need to uncomplicate these structures and focus on their own. I think AT&T will work to promote its @Home service. They have little incentive not to."

The transition will be seamless, according to David Caouette, a spokesperson for AT&T. "AT&T Road Runner customers will continue to receive the same service," he said. "This is simply a change in ownership structure at the national level."

Time Warner and its affiliates expect to incur approximately $570 million in cash expenditures related to the restructuring, and they will receive the national assets of Road Runner. Time Warner expects to recognize a one-time restructuring charge of $20 million to $40 million in the fourth quarter of 2000 in connection with this transaction.

The Road Runner restructuring, resulting from a consent decree between AT&T and the Department of Justice in connection with AT&T's acquisition of MediaOne Group, is expected to be completed by April of 2001.


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