June 17, 1999
Paul Allen's Wide Wild Wired World
by Louis Corrigan ([email protected])
Part 2 -- Is Paul Allen a Savvy Investor?
Who are the three richest Americans? The vast majority of investors, and a fair number of non-investors, could probably name Microsoft (Nasdaq: MSFT) Chairman Bill Gates and Berkshire Hathaway (NYSE: BRK.A) Chairman Warren Buffett. But number three? That's a toughie.
Try Paul Allen, now worth somewhere north of $30 billion. Most of that comes from his still hefty $22 billion stake in Microsoft, which he co-founded and where he now serves as a board member. What makes Allen particularly interesting, though, is what he's done and continues to do with the rest of his resources by way of his Vulcan Ventures investment vehicle. Over the last decade, Allen has invested billions of dollars in literally dozens of companies that have some role to play in what he's long called the "Wired World."
These include major investments in cable operators, high-speed Internet access providers, entertainment companies, e-commerce firms, technology firms, and a would-be Web portal. Indeed, Allen either owns or has taken a significant position in companies that may eventually allow him to compete against America Online (NYSE: AOL), the AT&T (NYSE: T)/[email protected] (Nasdaq: ATHM) alliance, Microsoft, and other contenders for the future of converging interactive media. A spate of recent acquisitions suggests that the diverse pieces of this long-questioned quasi-empire are now falling into place and promising real synergies.
The story begins in 1975, when Allen teamed up with childhood friend Bill Gates to start Microsoft. At the time, Allen was working as a programmer for Honeywell. He and Gates had dreamed of bringing computing power to the masses. So when an article in Popular Electronics described an early microcomputer, Allen told Gates to bail out of Harvard because they had to get in on the action right away. They landed in Albuquerque, New Mexico at a start-up called Micro-Soft. By 1978, the company had $1 million in sales and relocated to Seattle as Microsoft.
Allen served as head of research and new product development at the fledgling software company, helping to engineer MS-DOS and other innovations. However, in 1983, after a successful battle with Hodgkin's disease, a treatable but potentially fatal cancer, Allen re-evaluated his priorities and decided to leave Microsoft. He did some reading, traveled, learned to scuba dive, and hung out with his family. He lost his father to a stroke that same year. In 1985, he founded Asymetrix (Nasdaq: ASYM), a software company that went through various permutations before coming public last year as an online learning company.
Still, his exploits didn't attract a lot of attention until the early '90s. I imagine the now 45-year-old Allen just spending time hanging out with his mom (who now lives on his estate in Seattle), listening to his beloved Jimi Hendrix, playing some guitar, and letting his once substantial beard grow. He was a very smart, very rich guy who had the luxury of feeding his soul while Gates busied himself dominating the software industry, graciously turning Allen's millions into more and more billions while Allen read through classics, old and new (Charles Dickens' A Tale of Two Cities and John Fowles' The Magus make his list of favorites).
Clearly, Allen spent this time doing a lot of thinking about the future because he eventually emerged from the Seattle wilderness as the pied piper of the Wired World. His vision amounted to an extension of the PC revolution and involved connecting consumers to open networks of easy-to-use, totally cool content via microprocessors. In effect, Allen envisioned the World Wide Web before it existed, before anyone knew they needed it. But his vision was one predicated on "broadband," on fat pipes that make rich, interactive, multimedia content possible. The rickety Web most of us know offers merely an intimation of the kind of networked future Allen has spent the last decade preparing for.
Through his Vulcan Ventures, an investment vehicle run by aid William Savoy, Allen has become a new media magnate. He started by wanting to invest in "enabling technologies" designed to provide the basic Wired World infrastructure, including bandwidth. Some early efforts, like an investment in satellite TV operator SkyPix, crashed on takeoff. Others, like an investment in Stan Hubbard's United States Satellite Broadcasting (formerly Nasdaq: USSB), didn't turn out as planned; it was recently sold to Hughes Electronics (NYSE: GHM). Some have been hits but proved more valuable to others. In 1992, for example, Allen started Starwave, a producer of online content sites. Starwave did such great work for ESPN SportsZone and ABCNews.com that Disney (NYSE: DIS) bought it for a total of $350 million last year.
While Allen was most interested in companies providing bandwidth, the near-term solution seemed to be cable. But in the early '90s, cable operators were still years away from upgrading their plants for the kind of two-way broadband traffic Allen envisioned. Ultimately, the technology for his vision was still too expensive, as the souped-up sub-$1,000 Pentium PC was still years away. So he had to remain content with small stakes in firms making software tools or multimedia content on CD-ROMs. He bided his time courtside with his Portland Trailblazers basketball team.
According to Allen's website, Vulcan looks to invest in "established companies with proven management talent, a solid business plan, demonstrated performance, and innovative products or services that can be part of the Wired World." Allen hopes to nurture such businesses with patient, long-term capital while fostering interactions among the companies he invests in. While synergy time had been delayed, it's now approaching with broadband speed.
Since April of 1997, Allen has acquired a string of cable operators. Buying Marcus Cable and Charter Communications last year gave him 1.9 million subscribers. Yet, with cable looking like a highly attractive pipe for the convergence of TV, the Internet, telecommunications, and commerce, consolidation has swept the industry. The process hit hyperdrive recently when AT&T followed up its acquisition of giant Tele-Communications Inc. with a winning bid for MediaOne (NYSE: UMG). Other players, like Comcast (Nasdaq: CMCSK), Cox (NYSE: COX), and Adelphia (NYSE: ADLAC) have been buying up smaller cable operators, too. Allen has stayed in the race with recent deals to acquire the nearly 2 million subscribers of Avalon, Falcon, and Fanch. Just a year after entering the business, Allen has spent $19 billion in cash and assumed debt to turn Charter Communications into the fourth-largest U.S. cable operator, with 5.5 million subscribers.
Vulcan has also invested in newly public high-speed Internet access providers, including a controlling 39% stake in exurban cable access firm High Speed Access (Nasdaq: HSAC) and an 8.5% stake in digital subscriber line (DSL) provider Northpoint Communications (Nasdaq: NPNT). And he's placed bets on both Replay Networks and TiVo, two start-ups offering next generation VCRs that use computer hard drive technology and interactive features to allow consumers to personalize their TV-viewing experience. Such technology could find its way into cable set-top boxes a few years from now.
Allen has also pumped money into plenty of Internet content and commerce providers. Vulcan owns stakes in Priceline.com (Nasdaq: PCLN), Beyond.com (Nasdaq: BYND), Egghead.com (Nasdaq: EGGS), Value America (Nasdaq: VUSA), CNet (Nasdaq: CNET), Net Perceptions (Nasdaq: NETP), Liquid Audio, and Hollywood Entertainment (Nasdaq: HLYW), by way of his earlier investment in Reel.com. He's put $40 million into drugstore.com and $56 million into Ziff-Davis' (NYSE: ZD) ZDTV. And Vulcan recently finalized a $100 million investment in Oxygen Media, a much-discussed women's online network and cable TV venture backed partly by Oprah Winfrey. According to Reuters, that will give Allen a 7% stake in Oxygen. Allen also owns a quarter of Dreamworks SKG, the Spielberg-Katzenberg-Geffen film studio, and nearly 16 million shares of Barry Diller's USA Networks (Nasdaq: USAI), which also controls the Home Shopping Network and Ticketmaster Online-CitySearch (Nasdaq: TMCS).
The USA Networks holding resulted from Allen's $240 million purchase of 80% of Ticketmaster back in 1993. The company eventually went public and was then acquired by USA Networks. Allen's interest in USA is now worth about $641 million, a good, but not breathtaking return given the bull market of the '90s. Yet, that investment now connects him not just to Diller's empire but to major USA investors like Edgar Bronfman, Jr., of Seagram (NYSE: VO), with its Polygram music business, and John Malone's ever-expanding Liberty Media (NYSE: LMG.A), with its assortment of cable content providers.
Part 2 -- Is Paul Allen a Savvy Investor?