While the cable industry speculates on the next big initial
public offering by an MSO, at least three companies that provide Internet service over
cable systems are conducting their own tests of the public markets.
Last week, High Speed Access Corp. filed a registration
statement for an IPO intended to raise $120 million. And SoftNet Systems Inc. -- the
parent company of ISP Channel, a turnkey provider of high-speed cable-modem service --
filed a secondary offering for 3 million shares in the hopes of raising about $68.6
This flurry follows by about a month the $64.4 million IPO
filing by WorldGate Communications Inc., a Bensalem, Pa.-based Internet-TV-service
Also last week, New York-based Internet portal MiningCo.com
Inc., run by cable veteran Scott Kurnit, issued an IPO at $25 per share. The stock more
than doubled to $60 before closing at $47.50 last Wednesday.
Internet portals have been hot properties for cable
companies, with Excite Inc., Lycos Inc. and Go2Net Inc. all involved in recent merger
deals with cable firms.
Comcast Corp. also has an interest in MiningCo.com: It
bought 106,000 shares for $2.5 million in a private placement the day of the IPO.
HSA got a big boost at last year's Western Show, when
Microsoft Corp. cofounder Paul Allen's Vulcan Ventures Inc. said it would invest $20
million for a 54 percent stake.
WorldGate -- which also has ties to Allen by providing
Internet-TV service to some of his Charter Communications cable systems -- plans to use
its IPO booty for further expansion.
HSA was formed in April 1998 as the result of a merger
between HSAnet, a Littleton, Colo.-based Internet-service provider, and CATV.net, a
Louisville, Ky.-based provider of high-speed cable-modem service.
The company targets "exurban" markets, or those
that pass fewer than 100,000 homes.
HSA had 1998 revenue of about $300,000 and net losses of
$10 million, but it landed deals with Charter to provide Internet service to about 750,000
The company currently serves about 5,000 customers --
including 2,800 cable-modem users -- in 14 markets in 11 states
HSA will use the offering proceeds to fund capital
expenditures -- mainly for deploying its service in new and existing cable systems -- as
well as to fund operating losses and for working capital. The company said it might also
use some of the money for acquisitions, although none is planned immediately.
Since its formation, HSA had pro forma revenue of about
$450,000 and net losses of $131.6 million. And although that may be a little disheartening
to some investors, the company believes that there is significant potential in the market.
According to Boston-based research firm Forrester Research
Inc., 13 million U.S. households will connect to the Internet via cable modem by 2002. By
2005, Forrester sees that total rising to 26 million.
Forrester estimated annual revenue for the U.S. residential
cable-based Internet-access market in 2005 at approximately $11 billion, up from virtually
zero in 1997.
While the bulk of that market is expected to be snapped up
by the larger cable-modem services, such as @Home Network and Road Runner, there appears
to be plenty of room for second-tier providers.
According to SoftNet's prospectus, about 2,500 of the
11,400 cable systems in the country -- representing some 60 million homes -- are already
committed to other high-speed-data providers. Of the remaining 8,900 systems, ISP Channel
is targeting about 2,200 that pass around 24.6 million homes.
While that seems to be a rather healthy market for the
players that want to target secondary systems, companies that offer turnkey cable-modem
solutions also assume hefty costs.
Ian Aaron, president and CEO of ISP Channel, added that
SoftNet believes that second-tier markets will start to become more attractive once larger
cities are upgraded.
"TCI [Tele-Communications Inc., now AT&T Broadband
& Internet Services] has 700 small systems that have below 30,000 subscribers
[each]," Aaron said. "If they started today, how long would it take [to deploy
high-speed service]? They have a lot of work to do. There are over 11,000 cable headends
in the country. When you look at the number of headends, that's a lot of work for
Having public-stock currency can also be an advantage for a
company, especially when it is in an acquisition mode. Although consolidation among the
second-tier Internet-access companies has not approached that of large MSOs, some believe
that companies like HSA, WorldGate and SoftNet are headed for a similar fate.
Aaron also believes that Allen's entrance into the
market has sparked other investors to recognize its value.
"People are recognizing some real benefit in the
secondary market -- there isn't the same DSL [digital-subscriber-line] pressure, PC
[personal computer] penetration is not as strong and there is not as strong pressure from
dial-up ISPs. It's a real good opportunity once you secure the homes passed," he