Computers

Tycoon Is Tapping Into On-Line Service

By Michael W. Miller, Staff Reporter
The Wall Street Journal

May 24, 1993

VIENNA, Va. -- It has all the elements of a vintage 1980s takeover battle: a mysterious acquisitive billionaire, a feisty target, last-minute Securities and Exchange Commission filings and poison pills.

But the drama is unfolding in the red-hot 1990s field of high-tech multimedia. And the billionaire is Paul Allen, who co-founded Microsoft Corp. with his boyhood friend Bill Gates. Sidelined a decade ago with Hodgkin's disease, he has lately resurfaced as a playful but ultrasecretive tycoon in the Pacific Northwest.

At 40, he owns the Portland Trail Blazers basketball team and is pumping money into a Jimi Hendrix museum in Seattle. He is also quietly assembling a little empire of futuristic media companies. With names like StarWave, SureFind and Telescan, the concerns are designing programs and technology for a day when interactive digital services flood our TVs and telephones.

Mr. Allen's latest quarry is America Online Inc., which offers news, games, electronic mail and other services to 250,000 consumers via personal computer. Mr. Allen has been amassing its stock since it went public in March 1992, and he is now its biggest holder, with a 24.9% stake.

This month he abruptly went on the offensive. Just a week after publicly insisting he wasn't interested in acquiring America Online, he declared in an SEC filing that he might try to do just that. America Online insists it wants to stay independent, and the two sides are now locked in a tense standoff.

The tension mounted Friday when America Online's stock suddenly exploded, leaping $4.50 a share to $34.25 on heavy volume in over-the-counter trading. Reports that Mr. Allen was selling some Microsoft stock prompted speculation that he was raising funds to buy up America Online. Adding to the mystery, America Online directors were in a board meeting Friday.

But sources familiar with America Online say Mr. Allen wasn't buying more stock Friday or brewing any new plans for the company. Another possible reason for the frenzy: America Online officials gave an upbeat presentation Friday morning at a Morgan Stanley investors' conference.

It isn't hard to understand Mr. Allen's interest in America Online. In a frothy industry filled with red ink and far-fetched fantasies, the Vienna, Va., upstart has a real product, rising earnings and a surging base of customers.

Its young president, Stephen Case, also has a fantasy of his own, and it may not be entirely far-fetched. In addition to running his own network, he wants to be the Microsoft of multimedia, supplying the basic software standard for all rival interactive services.

In December, Mr. Case pulled off a coup that suddenly brought him a big step closer to fulfilling his fantasy. Apple Computer Inc., preparing a huge push into electronic consumer services, tapped America Online to provide its operating software and took warrants for a stake of nearly 9%.

Apple is one in a long line of heavy-hitters standing behind little America Online. Sprint Corp. last month gave it a major telecommunications discount in return for a big package of warrants. The Chicago media giant Tribune Co. has a 10% stake and a joint venture to create electronic newspapers. And if a takeover battle heats up, the company can count on strategic advice from board-member Alexander M. Haig Jr.

The company also has plenty of cheerleaders on Wall Street, where its $11.50 initial offering price has rocketed. Investors have been gobbling it up as the only pure play in the young on-line consumer services market. (Its arch-rivals: H&R Block Inc.'s CompuServe; General Electric Co.'s Genie; and Prodigy, a joint venture of International Business Machines Corp. and Sears, Roebuck & Co. Dow Jones & Co., publisher of The Wall Street Journal, operates an on-line business information service called Dow Jones News/Retrieval.)

Mr. Allen rarely grants interviews and isn't saying anything about America Online. But people close to him say he sees America Online as a launching pad for his ambitious ventures in electronic services.

One Allen company, StarWave Corp., has a small team in Bellevue, Wash., developing games, shopping and other programs for the powerful interactive networks Mr. Allen believes will become commonplace. Another, Asymetrix Corp., makes software for creating multimedia programs. He owns stakes in a Seattle company called SureFind, which offers classified ads by telephone, and Telescan, a Houston concern that sends financial data to investors' PCs.

Last year Mr. Allen formed a multimedia think tank in Palo Alto, Calif., called Interval Research Corp., and promised to pour in $100 million over the next decade. Among its eclectic interests: cognitive psychology and "on-line communities," the subject of an invitation-only Interval conference this month.

America Online "is one potential vehicle for implementing some of these new on-line multimedia information services," says Bert Kolde, Asymetrix's president. "It has an existing customer base and infrastructure."

Mr. Allen's SEC filings make it clear that he and America Online are decidedly at odds about his plans. In an April 30 filing, he complained that America Online refused to show him its poison-pill plan. He said he himself refused to sign a standstill agreement proposed by Mr. Case. He also warned that he might seek a board seat and launch a tender offer for the company.

In a second filing, Mr. Allen disclosed that he met with the company May 11 and proposed that his companies and America Online jointly develop multimedia software. "There was no assurance that a definitive arrangement along the lines discussed could be negotiated," he added.

America Online executives say that any outside owner -- and Paul Allen in particular -- could upset their delicate network of business alliances. In April the company adopted its poison-pill measure to thwart any holder of more than 25% of its stock.

"One of the reasons we're successful is that our alliance partners view us as being independent," says Stephen Case, a boyish 35-year-old with a resume of marketing jobs at PepsiCo and Procter & Gamble. Of Mr. Allen, he says: "The fact that he has $3 billion in Microsoft stock and sits on Microsoft's board might make some people nervous."

Mr. Case co-founded America Online in 1985 under the name Quantum Computer Services. It offered a few modest bulletin boards for the early hardcore techie with a PC and a modem at home. With the rise of cheaper PCs, easier software and more powerful modems, America Online boomed.

Today its subscriptions are soaring 50% a year. In the year ended June 30, it had net income of $3.5 million on revenue of $26.6 million -- its fifth annual profit in the past six years. By contrast, market leader Prodigy, with one million subscribers, has spent an estimated $800 million over the past eight years and hasn't seen a profit yet.

Mr. Case has been more adroit than most on-line executives in understanding his marketplace's peculiar hybrid quality. He has taken pains to make his software supple and friendly, a close cousin of the popular Macintosh format. While Prodigy bombards its customers with animated ads and shopping opportunities, Mr. Case argues that his customers want an "electronic community" and emphasizes e-mail and public bulletin boards.

Today America Online subscribers browse through electronic versions of the Chicago Tribune and the New Republic and then quarrel about the articles with each other and the authors. They can also make digital chitchat on the "People Connection." The recent interlocutors there included "Gleeful," "Rosey Dawn," "AFC Doug" and best-selling author Tom Clancy:

Rosey Dawn: Will you run for president, Tom????

Tom Clancy: Rosey, do I LOOK that STUPID????? . . .

AFC Doug: (saying goodbye) . . . off to jump out of an airplane

Tom Clancy: don't forget the chute, pal.

 

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