Chartering a New Course?

Billionaire Paul Allen’s appearance at the annual cable industry convention this month had tongues wagging. And not just because the reclusive mogul arrived aboard the world’s largest privately owned yacht, a 413-foot stunner that Allen docked on the Mississippi River.

Allen returned to the convention stage for the first time since 1999 to carry the flag for his new set-top-box technology, which some in the industry say could be a winner.

His unusually high profile here also set off speculation that the chairman and controlling shareholder of troubled Charter Communications Corp., the nation’s third-largest cable TV operator, was contemplating another acquisition as the industry undergoes a new round of consolidation.

“His presence was notable,” said Aryeh Bourkoff, a media analyst who covers the cable industry for UBS Warburg. “It means that Paul is not a seller as much as a buyer of cable.”

Allen, who also owns 25% of movie studio DreamWorks SKG, has long coveted the Los Angeles cable properties of Adelphia Communications Corp., the largest local provider of TV service. Coupled with Charter’s cable systems in Pasadena, Burbank, Glendale and Long Beach, they could give Allen’s company, which serves mostly small and mid-sized cities, a much-needed beachhead in a major market.

Financially strapped Charter couldn’t afford Adelphia, which put itself up for sale last month as it prepared to emerge from bankruptcy protection. But the 51-year-old Allen, co-founder of Microsoft Corp. and the third-richest man in America, could write a check for select systems.

Many investors had previously pegged Allen as a seller. While speaking as part of the opening panel at the cable convention, however, Allen -- who was joined by cable leaders Brian L. Roberts, chief executive of Comcast Corp., and Richard Parsons, CEO of Time Warner Inc. -- broke a long silence about his cable plans and said he would consider expanding Charter’s reach.

Allen was not available to elaborate on his comments. But industry executives say he could end up being part of one of the consortiums discussing a bid that would split up Adelphia, which would sell for about $20 billion.

“It’s safe to assume that if Adelphia is broken up, Allen will be in there,” one cable leader said.

Allen, who also owns the NBA’s Portland Trail Blazers, the NFL’s Seattle Seahawks and a mansion in Beverly Hills, invested heavily in media and technology in the go-go 1990s, when his net worth was about $30 billion. But many on Wall Street figured that he would throw in the towel on his “wired world” vision after many of his bets on the convergence of computers and entertainment fizzled and his net worth dropped below $20 billion.

Allen’s biggest gamble, Charter, was the costliest: He has spent about $8 billion on cable systems at top prices since 1998, only to see Charter’s stock plunge in the wake of a federal probe of its accounting practices that is still pending.

Charter’s enormous debt, which stands at $18 billion, almost choked the company.

When Charter’s value dropped below $1 billion last year, many on Wall Street figured that Allen would swoop in and take it private to protect it from filing for bankruptcy. But he didn’t make a move, and his silence spooked investors.

Allen’s declining fortune, however, seems to have spurred him to reposition himself.

Last fall, he cleaned house at his investment firm, Vulcan Inc. Allen replaced chief investment strategist William Savoy, who had become his public face, with his sister, Jody Patton. Many investments were written down or sold off.

In January, Allen liquidated 40% of his stake in RCN Corp., which ran out of money duplicating networks into the home to compete with cable. He recouped $2 million for a stake that cost him $660 million in 1999.

Last week, Allen sold TechTV, a channel on new technologies, to Comcast. Industry sources say Vulcan lost money on the sale despite the $300-million price tag.

With Savoy out of the picture, Allen has become more involved at Charter, where CEO Carl Vogel has been busy cleaning house. Since arriving two years ago, Vogel has replaced virtually the entire top management team, including some executives indicted in the federal probe.

An $8-billion debt refinancing last month gave Charter breathing room with its banks and freed up capital needed to compete against satellite TV and telecommunications rivals.

Charter’s stock, which dipped below $1 a share last year, has rebounded. It closed at $3.65 on Friday, down 7 cents, on Nasdaq.

“The refinancing really unified the board toward a common mission,” said cable pioneer Marc Nathanson, a Charter director and its vice chairman.

Symbolic of the new esprit de corps, the April board meeting was held not at a hotel, as usual, but at one of the company’s customer service call-in centers. The painfully introverted Allen didn’t slip away after the meeting but shook hands, talked sports and mugged for photos with employees at the site, according to Charter sources.

In New Orleans, Allen also was more visible than usual.

At a cocktail party for about 100 cable executives on his new ship, Octopus, he showcased Digeo, his set-top-box software that integrates a host of services. He also played host to a “ladies lunch” on board for Oxygen, the women-oriented channel that Vulcan backed with $100 million.

Conventioneers, who wore plastic galoshes over their shoes to keep from scuffing the immaculate teak deck, reveled in the experience for days.

Time Warner’s Parsons, when asked about his acquisition prospects at the opening panel, joked: “We’re going for a boat.”

Touring cable executives said the 8-month-old vessel cost Allen $200 million and had a permanent crew of 60 people, including several former Navy Seals. It has two helicopters, seven boats and a remote-controlled vehicle for crawling on the ocean floor.

An accompanying submarine, under construction, will have the capacity to sleep eight people for up to two weeks underwater.

Allen gave a personal demonstration of the professional recording studio that is also on board, playing electric guitar with his rock band and treating guests to renditions of “Brown-Eyed Girl” and “Mustang Sally.”

Inside the convention center, at the Digeo exhibit, Allen talked with techies as if “he were doing booth duty,” one cable executive said.

Digeo, which cable operators agree has a dazzling navigational TV guide, integrates such functions as video on demand, digital video recording, HDTV content, instant messaging, photo imaging, a music jukebox, home networking and video gaming into a single box.

Allen, who founded Digeo Inc. in 1999 to bring the power of the PC to the living room, personally engineered several of the box’s features, according to company CEO James Billmaier.

“Paul is a perfectionist,” Billmaier said. “He’s extremely competitive. He wants to introduce a product that isn’t just better but that shames the competition.”

Curiously, Allen’s high school chum and Microsoft partner, Bill Gates, failed to break into the cable set-top-box business despite years of trying.

Digeo’s success would give Allen a legacy all his own, deflating those who label him an “accidental zillionaire” and who downplay his role at Microsoft, where he was the chief technologist before leaving in 1983 because of a brush with Hodgkin’s disease.

Skeptics say Digeo is highly ambitious and, for now, costly. It also remains to be seen whether consumers will embrace all the sophisticated gadgetry. Yet several cable operators, including Comcast, Adelphia and Charter, have placed orders.

“Digeo impressed everyone at the show as very innovative and forward-looking,” Comcast’s Roberts said.

From the Big Easy, Octopus set sail for Gibraltar with a full tank of gas that cost an estimated $300,000.

Allen left town with a full head of steam.

“Charter is moving in the right direction and Digeo is ready to be tested,” said Nathanson, who sold his Los Angeles-based cable company to Charter in 1999. “Paul is on a roll.”

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Sizing the rivals

Here is how Paul Allen’s Charter Communications stacks up against other cable TV providers.

*--* Number of subscribers (in millions) Comcast 21.4 Time Warner Cable 10.9 Charter Communications 6.5 Cox Communications 6.3 Adelphia Communications 5.4 Cablevision Systems 3.0

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Source: Kagan World Media