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High-speed hunch

Microsoft co-founder Paul Allen has invested—and lost—millions from his computer fortune hunting for the next big thing in the broadband business.

Burned by the failures of dot-com companies and mounting losses of other broadband operations he has supported, he's now betting that the best way for cable systems to add high-speed data services is to handle the business themselves.

Last week, Allen offered High Speed Access Corp., a Littleton, Colo., ISP, $73 million plus cancellation of preferred stock in exchange for assets HSA uses to serve cable-modem customers of Charter Communications, his cable MSO. Allen holds a 50% stake in HSA.

Allen may be just slightly ahead of the curve in offering to take over much of HSA's business. Cox Communications and Comcast are considering a move to take over cable modem services from outside ISPs, as well, say industry sources.

HSA and other cable-focused ISPs are suffering financially. In first-quarter 2001, HSA's net loss was $33.4 million on $7 million in revenue. Exite@Home, the ISP launched to serve AT&T's cable customers, lost $346 million on revenue of $139 million for its most recent quarter. Finances for Road Runner, the provider once co-owned by Time Warner and MediaOne Group, are private but it is said to be faced with continuing losses, as well.

If HSA accepts Allen's offer, the company may close shop rather than continue. Charter accounts for 85% of HSA's revenue. HSA officials said that, if they agree to a deal with Allen, they would consider an "orderly shutdown" and distribution of net proceeds to shareholders. Other options are maintaining all current business lines, which also include telephone digital-subscriber-line Internet service, international cable-modem operations, digital server hosting and ISP service to AOL Time Warner customers.

"One thing we have to decide is whether we can serve other cable operators effectively without the economies of scale created by the Charter business," said Daniel O'Brien, HSA chief executive.

If Allen's offer is accepted, the Federal Trade Commission won't be on the hook to decide whether HSA qualifies as one of the three unaffiliated ISPs AOL-TW must carry as a condition of last year's merger between America Online and Time Warner Inc. Public advocacy groups have argued that the FTC should bounce HSA from the lineup because Charter has joint ventures and shared investments with AOL-TW.

Precursor Group analyst Scott Cleland said the cable industry's decision to carry multiple Internet providers rather than risk government ISP-access rules has wrecked the economic model of cable-focused ISPs, which agreed to pay as much as 50% of their revenues to cable companies in return for exclusive contracts. Cleland said, "Their original purpose for being blew up."