June 17, 1999

Paul Allen's Wide Wild Wired World
Part 2

        by Louis Corrigan (TMFSeymor@aol.com)

Despite having his hands in nearly every corner of the Interactive Multimedia Industrial Complex, observers have long wondered whether Allen is really a savvy investor. Plenty of commentators have dismissed him as a dabbler who's gotten involved in too many companies, paid too much, or provided long-term investment capital that sapped the innovative sprit of high-tech firms that often do best with a little survival-of-the-fittest pressure at their backs. The chorus of skepticism will almost surely prove to have been unfair. Still, in thinking about Allen, I keep circling back to a seemingly simple fact: Allen may have made the two worst investment decisions of the century.

Number one. You own a wad of Microsoft from day one, what do you do? In retrospect, nothing. You hold on to as much as you can, happily, while selling off a few shares whenever you need a new jet or vacation house. Allen, however, has been a persistent seller, going well beyond the kind of asset diversification that Gates, at least, has pursued. Looking back just to 1994, we see that Allen held 57.2 million shares of Microsoft, or a 9.9% stake then valued at $3.2 billion. After three 2-for-1 stock splits, the same stake would now amount to 457.6 million shares worth $36.9 billion. As of February, though, Allen had just 276.7 million split-adjusted shares left. He's sold another 4 million shares since then. At the recent price of $80 a share, his Microsoft holdings were worth just $22.1 billion. Prudent though such diversification may be, Allen's Microsoft profits arguably have always been pumped into less promising investments.

Number two. Leaving billions of dollars on the table once is bad enough, but twice? Let's say you own nearly a quarter of America Online back in 1993 when it's the number three online service, behind CompuServe and Prodigy. Should you buy, sell or hold? Well, Allen made the right decision: He wanted to buy. That is, he wanted to buy it all so he could redirect Steve Case and company from a closed system of proprietary content to an open architecture tied not to slow narrowband access but to broadband.

As Kara Swisher tells the story in her excellent book aol.com, AOL's Case liked Allen's vision but thought it premature. Vulcan gradually accumulated more and more of the stock, and friendly talks soon turned sour. By April of 1993, AOL's board ratified an employee stock ownership plan, or "poison pill," designed to keep Vulcan from accumulating more than 25% of the stock. Thwarted in his attempt to influence AOL's direction, Allen cashed out his stake, including half in July 1994 at a split-adjusted price of less than $1. Swisher says Allen made $70 million on his AOL investment, which was certainly not bad given his holding period. By my reckoning, though, Allen's maximum position of 1.5 million shares would have grown into 96 million shares valued at more than $10 billion today!

Vulcan investment manager William Savoy has argued that Allen might have helped AOL head off the threat of the Internet itself. "The failure of AOL to embrace an open platform is what gave rise to the Internet as we know it today," he told Broadcast & Cable in an instructive interview this past February. However, it seems clear to me that AOL made the right move in rejecting Allen's overtures. It just seems unlikely that America Online could have held back the Internet explosion, which now seems as inevitable as the Big Bang. Moreover, by dominating the narrowband world, AOL has positioned itself as the industry leader with a hearty customer base and brand that gives it meaningful leverage in negotiating service contracts with the high-speed access providers.

Indeed, Allen has complemented his cable acquisitions with serious spending on the kind of content plays that might be rolled into a portal to compete with AOL and Excite@Home. On March 15, Allen invested $300 million in Go2Net (Nasdaq: GNET), a network of websites focused on personal finance (Silicon Investor and StockSite), search (MetaCrawler), commerce (HyperMart and WebMarket), and games (PlaySite). Go2Net recently rose to number 19 on the MediaMetrix (Nasdaq: MMXI) roll of most visited websites. As part of the deal, Vulcan purchased $165 million in convertible preferred stock and paid $90 a share for 1.4 million shares of common stock owned by Go2Net's officers and directors. It also launched a $90 a share tender offer to acquire 3.6 million additional shares, a move that would have given Allen a 54% stake in the company. But the stock soon shot past that mark, and the offer expired with no shares tendered. Even so, Allen now owns a controlling 34% stake in the company.

He followed up this investment with deals that could significantly strengthen the financial services area of such a portal. In late May, Allen was one of three parties that injected a total of $300 million into Datek, the fourth-largest online broker. On June 10, Allen invested $25 million for a 12% stake in a Datek subsidiary, Island ECN, the second-largest third-market system, or electronic communications network (ECN). Reuters' Instinet is number one. Because they can offer more competitive prices than the traditional Nasdaq system, where market makers try to scalp the difference between the bid and the ask price for a stock, ECNs have been rapidly gaining market share and are in the midst of transforming Wall Street trading.

Part of what separates Allen from a well-known Internet investor like CMGI's (Nasdaq: CMGI) Chair/CEO David Wetherell is that an individual investor can't simply buy one stock and invest in his vision for the future. Perhaps that's a good thing since the potential synergies among the companies Allen has invested in may still take years to materialize. Indeed, compared to an AOL, Allen's burgeoning empire still has the unsightly, haphazard look of a Frank Gehry building, which may explain why Allen hired the architect to design the Experience Music Project, a new rock 'n' roll museum located near Seattle's Space Needle and featuring memorabilia from Allen's Hendrix collection.

Yet, Allen seems tired of being called "reclusive" and "shy" given that he does have business contacts with virtually everyone you can think of and has played an active civic role in Seattle, preserving an old movie theater, backing numerous building projects, and buying the NFL's Seahawks to keep them in town. So he's clipped the beard and dumped the tinted glasses that made him look like a UC-Berkeley sociology professor. Instead, he's opted for the look of a clean-cut thinker with a vision. It's a vision that comes a little more into focus every day.

* All current valuations use prices as of June 16, 1999.

For more on Allen and Vulcan Ventures:

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