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Paul Allen, Cable's Defender of the Faith

By Ronald Grover The media world is a shambles. AOL Time Warner (AOL) is under investigation for some accounting practices and its No. 2 exec, Bob Pittman, recently resigned. No too long ago, Vivendi Universal (V) and Bertelsmann said adios to their top guys. Lackluster ad sales have ravaged stock prices everywhere and Walt Disney (DIS) has so many problems that its stock price is trading at about where it was eight years back. It seems everyone who has invested in the media world is just plain glum.

And who's leading the parade of glumsters? You might think Paul Allen, the 49-year old Microsoft co-founder, is up there somewhere looking for the baton. Allen is the self-anointed high priest of the cable-TV industry, preaching his vision of the Wired World, where cable will be your link to everything from The Sopranos to the neighborhood grocery story. But instead, Allen just keeps on opening his checkbook. By my reckoning he has plunked down something north of $9 billion since 1998, buying up shares in cable operators Charter Communications (CHTR) and Marcus Cable, as well as New York-based RCN (RCNC), which offers both cable and TV service, and a once-promising Internet portal called High Speed Access.

MORE? WHY NOT! Allen clearly isn't done spending. In recent weeks he has bought $500 million more in Charter stock and, in a filing with the Securities & Exchange Commission, Allen says he may buy all of Charter's remaining stock. Allen owns 55.6% of Charter through his Vulcan investment company, which refused to comment on his holdings.

You have to respect his faith. The $9 billion Allen has put in all those cable and associated companies over the last five years is now worth somewhere around $900 million. That's because Charter and RCN, which are both publicly traded, have been riding the burst bubble of technology expectations downward for months.

Also, the scandals surrounding Adelphia's founding Rigas family haven't helped the cable business. Like Adelphia, Charter is loaded with debt -- indeed, it has some $17.6 billion on its balance sheet, about 60% more than just three years back. While there has never been a hint of scandal attached to Paul Allen, investors aren't looking with much fondness at individuals who control such large, debt-plagued, technology-driven, vision-inspired companies.

POWER OF BELIEF. A potentially bigger problem: The accounting bug might be buzzing around the Wired World as well. Charter has been hit with a pair of shareholder lawsuits alleging that it improperly accounted for labor and advertising costs to lure new subscribers in a bid to inflate earnings -- a charge that the company has strenuously denied. And, like other cable companies, Charter lost subscribers in its most recent quarter, shedding some 21,000 paying customers and seeing its base reduced to around 6.8 million. It has disappointed analysts like Merrill Lynch's Jessica Reif Cohen, who reduced some of her estimates based on slower-than-anticipated sales of data services to Charter customers.

Still, Cohen rates Charter a "strong" long-term buy. And long-term is the key here. For now, says Charter CEO Carl Vogel, the company intends to slow its expenditures -- and may sell off some assets -- to help reduce debt. In the meantime, the betting is that Allen won't be content to sit back. He tried in May, 2002, to acquire Adelphia's 1.1 million cable subscribers in the Los Angeles area, where Charter already has more than 1 million subscribers. Adelphia turned down his $2 billion offer then, and the stock market hammered Charter's stock in response.

So, why does Allen keep buying? Well, he's a true believer. And Charter, despite its hefty debt burden, boasts the most technologically advanced cable system in the country, with about 95% of its subscribers able to receive digital TV and 75% able to access the Internet via its cable service.

TOMORROW'S BIG SPENDERS. Those are world-class numbers, and if Charter's game plan is right, many of those customers will one day increase their cable service -- and pay higher bills -- to get hundreds of TV channels and order all manner of stuff from Charter. True, they aren't doing so right now. According to the company's most recent financial statement, only about 10% of its customers get data service from Charter, and 35% pay for digital TV. Both numbers are up over the previous period, but the costs of signing up such customers are huge.

To a true believer, such matters are mere details. And Allen isn't the only one keeping the faith. Longtime friend Bill Gates (that other Microsoft guy) just quietly increased his stake in the cable industry, paying more than $600 million to up his stake in Cox Communications (COX) from 1.6% to 5.8%. (The stake is actually held in two Gates vehicles, his Cascade Investment holding company and the Bill and Melinda Gates Foundation.)

Gates and Allen both jumped into the cable world together back in 1998, with Gates buying a 5% stake in Comcast and Allen going shopping for Charter, Marcus, and the rest. Heck, at its current price, Allen could probably buy up the remaining shares in Charter for around $700 million, or about what he makes in annual interest on his investments. And you know that's exactly what he intends to do. He's a believer after all. And the Wired World still beckons. Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BusinessWeek Online

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