<THE EVENING NEWS>
Wednesday, June 23, 1999
MARKET CLOSE
DJIA           10666.86    -54.77   (-0.51%)
S&P 500         1333.06     -2.82   (-0.21%)
Nasdaq          2598.13    +17.87   (+0.69%)
Russell 2000     447.04     -0.29   (-0.06%)
30-Year Bond   87 27/32   -1 1/32  6.14 Yield

HEROES

Shares of Internet service provider EarthLink (Nasdaq: ELNK) rose $4 to $61 1/4 today, adding to yesterday's $9 5/8 gain on rumors that PC direct marketer Gateway (NYSE: GTW) was looking to buy the company. The rumors picked up speed today as "people close to the situation" told The Wall Street Journal the companies are talking but haven't discussed terms yet. CNBC, however, has reported that a $75 per share cash bid may be in the works. On its face, the move makes sense for Gateway, which wants to expand its service offerings to broaden its revenue base; besides, the company already offers Internet access through its successful gateway.net operation. But to actually own an ISP would mean a marked shift in approach, as gateway.net essentially resells connections purchased from MCI WorldCom's (Nasdaq: WCOM) UUNET division. Owning and operating an ISP is a different animal altogether.

Elsewhere in rumor central, shares of online software retailer Beyond.com (Nasdaq: BYND) jumped up $7 1/4 to $32 7/8 after rumors circulated that e-tail megalith Amazon.com (Nasdaq: AMZN) was considering a $48 per share bid for the company. The deal seems like a natural: Amazon.com would gain instant entry into the software retail market in the form of a company with experienced management and booming sequential sales and user registrations, while Beyond.com would benefit from a link with the Internet's retailing powerhouse and could leverage off the marketing and branding muscle of Jeff Bezos's sales empire. Such a deal would be even more attractive if it means the television viewing public is freed from future "naked man answering the door" commercials. Then again, given that Beyond.com CEO Mark Breier went topless on CNBC last week, there may be no relief in sight. Beyond.com made it into the Foolish news earlier this month after announcing a software deal with the IRS, coverage given freely despite the lack of executive nudity.

QUICK TAKES: Discount broker TD Waterhouse (NYSE: TWE) jumped $1 5/8 to $25 5/8 after selling 42 million shares in an initial public offering at a price of $24 per share. Toronto-Dominion Bank (NYSE: TD), which owns the remaining 89% stake in the company not sold in the offering, ended the day down $1 11/16 at $49 1/16.... Online health and medical information provider Healtheon Corp. (Nasdaq: HLTH), which inked a deal to have portal operator Yahoo! (Nasdaq: YHOO) carry its information in its health area, added $5 3/4 to $88 1/4 today... Online business-to-business procurement management systems firm Ariba Inc. (Nasdaq: ARBA) jumped $67 to $90 after selling 5 million shares in an initial public offering at a price of $23 per share.

Truckload carrier Swift Transportation Co. (Nasdaq: SWFT) sped up $2 to $19 1/8 on news that it will replace electronics retailer Best Buy (NYSE: BBY) in the S&P MidCap 400 Index. Best Buy, which is replacing AirTouch Communications (NYSE: ATI) in the Standard & Poor's 500 Index, gained $2 9/16 to $63 5/16... Meanwhile, network data storage equipment maker Network Appliance (Nasdaq: NTAP) jumped $3 1/2 to $48 5/16. It will replace Ascend Communications (Nasdaq: ASND) in the S&P 500 Index after the close on June 24, as Ascend is being acquired by Lucent Technologies (NYSE: LU). For a complete listing of changes in the S&P indices, click here... Analog chipmaker National Semiconductor (NYSE: NSM) rose $2 1/8 to $24 5/8 following a Lehman Brothers upgrade to "buy" from "neutral."

Biopharmaceutical company BioCryst Pharmaceuticals (Nasdaq: BCRX) picked up $1 1/8 to $9 1/4 after receiving a $2 million milestone payment from Johnson & Johnson's (NYSE: JNJ) Ortho-McNeil Pharmaceutical unit in connection with the initiation of Phase II clinical testing of an oral treatment for viral influenza... Internet service provider Internet America (Nasdaq: GEEK) wrapped up $1 7/8 to $19 after Scott & Stringfellow rated the stock a new "strong buy," setting a 12- to 18-month price target of $24 per share... Website co-location services and direct access provider AboveNet Communications (Nasdaq: ABOV) moved up $4 1/16 to $40 13/16 after agreeing to be acquired by fiber optic network builder Metromedia Fiber Network (Nasdaq: MFNX) in a $1.55 billion stock swap. Metromedia fell $5 to $37 1/2 on the news.

Coronary stent and medical device maker Guidant (NYSE: GDT) picked up $2 to $48 after an FDA advisory panel recommended approval of the company's graft, which will allow doctors to perform a minimally invasive procedure to repair an aneurysm in the abdominal portion of the aorta. Rival Medtronic (NYSE: MDT), which is awaiting panel approval for a similar device, rose $3/16 to $75 9/16... Global satellite-based wireless network firm Globalstar (Nasdaq: GSTRF) rose $2 1/2 to $19 11/16 after securing a $500 million credit facility from Bank of America, which should allow the company to complete the rollout of its network. Rival Iridium (Nasdaq: IRID), which is also seeking financing, gained $2 3/4 to $13 1/16 on hopes that it will soon announce positive news, possibly in the form of a restructuring... Semiconductor chip designer Artisan Components (Nasdaq: ARTI) tacked on $1 1/2 to $11 1/2 following a Hambrecht & Quist upgrade to "buy" from "market perform."

Telecommunications equipment provider Lucent Technologies (NYSE: LU) picked up $3 to $65 11/16 after fiber optic network operator Level 3 Communications (Nasdaq: LVLT) agreed to buy $250 million of Lucent Internet protocol (IP) software switches, or softswitches, over four years. The agreement could grow to $1 billion over five years, the companies said... Enterprise resource planning (ERP) software firm Baan NV (Nasdaq: BAANF) gained $1 3/16 to $17 5/8 after executives reportedly made positive statements about the company's cash position and future e-commerce initiatives at the company's annual meeting.

GOATS

Fiber optic network operator Qwest Communications (Nasdaq: QWST) slipped $2 3/4 to $32 9/16 after increasing its dual bids for Baby Bell US WEST (NYSE: USW) and telecom services provider Frontier Corp. (NYSE: FRO). Qwest is now offering $69 per share in stock for US WEST and $20 per share in cash and $48 per share in stock for Frontier, subject to a collar on Qwest's stock between $30.50 per share and $43.50 per share. Both US WEST and Frontier said they will consider the higher bids. Global Crossing (Nasdaq: GBLX), which said it has "no plans" to change its merger agreements with the two companies, lost $1 9/16 to $45 7/8. Considering Qwest's shareholders weren't especially thrilled with the company's original bids, made when Qwest's share price was about 25% higher than it is now, it's not a shocker that the higher offers pushed Qwest's shares down today. Most fears center on Qwest's growth rate post-merger, with certain investors on one side believing that the proposed merger will cut the company's growth rate in half and Qwest's management on the other side believing the merger will not greatly change its earnings potential or business fundamentals.

Shares of networking company 3Com (Nasdaq: COMS) hit the skids today, falling $4 3/8 to $27 1/8 after releasing both good news and bad news. The good news: Q4 ongoing net income of $0.24 per share was up 33% from last year's comparable quarter and a penny above published consensus estimates. The bad news: the firm warned in a conference call (which Fools can listen to over the Web) that its revenue growth for the upcoming year will be below overall industry growth as it fights slowing sales of client access products, such as analog modems and network interface cards (NIC). While those products' share of the overall revenues pie is falling, they still represented 45% of sales in the most recent quarter, masking the growth in more lucrative product lines such as 3Com's PalmPilot personal digital assistant (PDA). For more details, see today's Fool Plate Special.

QUICK CUTS: Chipmaker Advanced Micro Devices (NYSE: AMD) slipped $1 1/16 to $18 3/16 today. The company said during a conference call after the bell that falling prices for its K6 chips will lead to a Q2 loss of $200 million, or roughly $1.37 per share, which is more than three times the loss previously expected by analysts. The company also introduced its new K7 chip, which will be sold under the name "Athlon"... Supermarket operator Albertson's Inc. (NYSE: ABS) dropped $2 3/4 to $51 5/8 after reportedly saying in a conference call that it sees earnings at the low end of current analysts' expectations for fiscal Q3 and Q4 and for fiscal 2000 as well. Yesterday, the company said it reached an agreement with the Federal Trade Commission that will allow it to complete its merger with American Stores (NYSE: ASC), so long as the companies divest 145 stores in California, Nevada, and New Mexico.

Online bill payment services firm CheckFree (Nasdaq: CKFR) lost $8 15/16 to $28 3/4 today. The company said the market had "grossly overreacted" to plans by three major U.S. banks to form electronic bill routing system, saying the banks' announcement contains "nothing that threatens CheckFree"... NASCAR souvenirs and die-cast collectibles producer Racing Champions Corp. (Nasdaq: RACN) was run over for a $10 3/16 loss, or 60.4%, to $6 3/16 after saying competition from Star Wars-related toys and a tough comparison to 1998 will result in a Q2 loss of $0.30 to $0.35 per share in the period. The Zacks mean estimate had called for EPS of $0.20... Online computer products retailer Cyberian Outpost (Nasdaq: COOL) dropped $1 17/32 to $9 27/32 after posting a fiscal Q1 pro forma loss of $0.38 per share, worse than last year's loss of $0.25 per share. Both Deutsche Bank Alex. Brown and Dain Rauscher Wessels cut their ratings on the firm to "buy" from "strong buy."

Semiconductor and thin film head production equipment maker FSI International (Nasdaq: FSII) fell $1 1/8 to $7 11/16 after reporting a fiscal Q3 loss of $0.17 per share (excluding a $0.71 per share charge for a valuation reserve), worse than last year's loss of $0.09 per share. The company said its Q4 sales will be flat compared to Q3, adding that it does not expect to return to profitability until Q4 of 2000, at the earliest... Packaging products supplier Crown Cork & Seal Co. (NYSE: CCK) leaked $3 1/2 to $28 15/16 after pe-announcing Q2 EPS between $0.75 and $0.77 per share, missing the First Call mean estimate of $0.92... Fashion accessories retailer Claire's Stores (NYSE: CLE) slid $2 3/8 to $26 today on earnings fears. Late in the day, Claire's affirmed that its Q2 operating EPS will "meet or exceed" analysts estimates of $0.33... Web advertising firm DoubleClick (Nasdaq: DCLK) fell $5 3/4 to $84 15/16 on a Janney Montgomery Scott downgrade to "accumulate" from "buy."

Canadian enterprise software developer Cognos Inc. (Nasdaq: COGN) fell $2 7/8 to $21 after reporting fiscal Q1 EPS of $0.25, flat with last year's results. Both Merrill Lynch and First Albany cut their ratings on the firm today... Digital imaging prepress services firm Schawk Inc. (NYSE: SGK) was squeezed for a $1 1/16 loss to $9 7/8 after saying soft demand and delayed package changes from clients will lead to Q2 EPS of $0.16 to $0.18, short of the Zacks mean estimate of $0.21... Railway operator Wisconsin Central Transportation (Nasdaq: WCLX) derailed for a $1 1/8 loss to $19 1/2 after A.G. Edwards cut its rating on the firm to "reduce" from "maintain position."

FOOL ON THE HILL
An Investment Opinion
by Louis Corrigan

AOL and Hughes: A Serious Warning Shot

The partnership announced Monday between America Online (NYSE: AOL) and satellite company Hughes Electronics (NYSE: GMH), provider of DirecTV, has been interpreted partly as a warning to cable system operators. The extent of this warning, though, has been underestimated.

Cable companies have been reluctant to negotiate a deal that would allow AOL to offer its customers high-speed Internet access via cable given the cable systems' control of broadband access companies -- and AOL competitors Excite@Home (Nasdaq: ATHM) and Road Runner. Yet, AOL had already struck deals with Bell Atlantic (NYSE: BEL) and SBC Communications (NYSE: SBC) to offer customers high-speed digital subscriber line (DSL) Internet access via telephone lines. Add in the pact with Hughes, and it's obvious that AOL has other high-speed access options, options it will pursue, perhaps along with broader partnerships. As AOL Chair/CEO Steve Case told the Wall Street Journal, "Maybe this creates a little more incentive on [the cable operators'] part to work with us sooner rather than later."

Both sides in this struggle have been keen to protect and enhance their negotiating position. As fellow Fool Bill Barker and I discuss in today's Dueling Fools, that battle has been fought in the courts and, increasingly, in the court of public opinion, where controlling how the debate is framed rhetorically may prove important to controlling the outcome. Yet, I continue to believe that investors have misconstrued the fundamental power dynamics at work here.

Much has been made of broadband cable's threat to America Online. And perhaps rightly so. The cable system operators, led by new cable king AT&T (NYSE: T), would like to fundamentally alter the value chain in this important market. Today, dial-in access is largely a commodity sold and resold for cheap. The real value resides with companies like AOL that deliver a great consumer experience, including content, community, and service. These companies resell inexpensive access while reaping fat profits from their customer base thanks to high-margin advertising and e-commerce revenues. With its top brand and 16 million plus customers, AOL today rules this value chain. But cable system operators want to leverage their control of high-speed pipes into an online consumer franchise that would usurp AOL's crown.

The thinking is simple. We all want faster access to the Internet than standard 56k dial-in modems can deliver. The cable operators have been first out of the gate in offering high-speed Internet access, mainly via @Home. The Bells have been slower to roll out their DSL service. And high-speed satellite and wireless connections haven't had much impact and probably won't for a few years. So to get high-speed access, you now pretty much have to go to @Home, which becomes your $50 a month Internet service provider (ISP). Want AOL, too? Fine, but it's going to cost you more. Some customers may opt to pay the extra monthly charge; others may embrace the Excite@Home ISP experience and forget about AOL.

This sounds pretty good for @Home. Sure, the recent court decision in Portland threatens to throw a roadblock in the path of @Home by forcing cable operators to lease AOL and other ISPs the same access to their broadband pipes that they've leased to @Home. But let's assume AT&T wins this case on appeal or the Federal Communications Commission changes the rules and says cable systems can do what they want. Even then, would cable operators and thus @Home really be in the drivers seat?

In my view, no. The reason is simple. America Online is in a position to form partnerships with providers of digital broadcast satellite services (DBS), satellite and wireless Internet access providers, local telcos, and various long-distance providers, such as MCI Worldcom (Nasdaq: WCOM), which already provides AOL's dial-up access. Through such partnerships, AOL potentially could destroy the U.S. cable industry -- or at least leave it reeling.

The fact is, cable operators want to do it all, offering over a hundred crisp digital television channels, movies on demand, local and long-distance telephone services, high-speed two-way data transmission, and e-commerce. Cable's potential for selling loads of new services to existing cable customers while attracting new customers or winning back recent defectors has pumped up valuations in this consolidating industry.

The calculus holds that the current revenue stream (X) is secure while new streams can pump overall revenues up significantly in the future (maybe 2X or more). But with AT&T and cable operators going after business now held by competitors in various fields, there's really no guarantee that cable won't induce the kind of cooperation among its competitors that could leave the average cable operator looking at declining revenues (maybe 0.5X). As much as they stand to gain in the new world of converging technologies, cable operators also have a lot to lose. But nobody seems to be doing the math on that part of the equation.

The Hughes deal calls for AOL to invest $1.5 billion for convertible preferred stock paying 6.25% per year. After three years, the preferred converts to Hughes common at a rate determined by the market price of Hughes at the time. What does AOL get for this investment? A lot, including a total of $205 million in direct Hughes' advertising and commerce spending over the next three years. The pact also will allow AOL to reach the estimated 30% of the U.S. populace that still won't be able to get any broadband access via cable or DSL by 2003.

Altogether, Hughes will spend over $500 million to market AOL-Plus (AOL's broadband service). It will also purchase $150 million worth of marketing over AOL as part of a $500 million marketing effort to boost DirectTV subscriptions, which now total 7.3 million. It will also spend another $400 million to subsidize the cost of rolling out AOL TV-enabled set-top boxes to DirecTV's subscribers. Hughes will shell out another $100 million to market DirectDue, which lets one satellite dish provide access to both DirecTV and DirecPC, its Internet access service that allows downloads at 400 kilobits per second. Finally, the deal will support Hughes' $1.4 billion investment to design and launch its new two-way high-speed connectivity solution, dubbed Spaceway, due to become available in 2002.

Sure, only 40,000 people get broadband access today via DirecPC's somewhat clunky system whereas about 750,000 customers use broadband cable access. And @Home alone expects to top a million customers by year end. AOL's alliance with Hughes, though, marks just one of many that it has formed and no doubt will form in the future. The stakes are high not just for AOL but for AT&T and other cable operators that think they have a chance to control the value chain in the multimedia connectivity market. As I see it, the cable operators are playing a game of chicken they cannot win. They know that, and that's why they will eventually swerve from their current course and negotiate an access deal with AOL.

CONFERENCE CALLS

Please see the Motley Fool's Conference Calls page for call information and links to synopses.

Would you work for a bunch of Fools?

See something moving a stock that we didn't cover?
E-mail the Fool News Team
and we will start working on the story.
Unfortunately, we cannot answer every e-mail
or respond to individual questions.

Contributing Writers
Brian Graney (TMF Panic), a Fool
David Marino-Nachison (TMF Braden), a new Fool

Editing
Brian Bauer (TMF Hoops), another Fool
Bob Bobala (TMF Bobala), a Fool's Fool
Jennifer Silber (TMF Amused), Fool at last

Today's Headlines

Feedback about News & Commentary? Send us your comments.