World Lately Seems to Be Catching Up to Paul Allen’s Vision

Paul Allen is no longer the “accidental zillionaire.”

That was the tag attached to him in a 1994 Wired magazine article summing up the Microsoft (MSFT) co-founder’s investment program as dabbling and driven by a half-baked view of the future.

Yet five years later, Allen has become one of the Internet economy’s most successful and influential investors. He is also among the planet’s wealthiest inhabitants, thanks largely to the relentless appreciation of his 270 million shares of Microsoft, worth about $25 billion.

Primarily through his holding company, Bellevue, Wash.-based Vulcan Ventures, Allen exerts financial force at virtually every link in the interactive chain. This year’s IPO boom has brought a flood of liquidity to Vulcan’s portfolio, stuffed with stakes in such richly valued Internet upstarts as Priceline.com (PCLN), Drugstore.com (DSCM), Wink Communications (WINK) and NorthPoint Communications (NPNT). In fact, there are pieces of about 100 firms in Vulcan’s accounts.

Allen’s cable TV networks have emerged as the core of his strategy, the fat pipe through which to deliver the Internet-based content and services that define his vision of a “wired world.” After spending at least $14 billion to assemble the nation’s fourth-largest cable conglomerate, with 6.2 million subscribers, Allen is expected to sell a chunk of it in a huge public offering in mid-October, raising $3.5 billion for technical upgrades and further acquisitions.

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How did Allen engineer such a splendid reversal of fortune?

Vulcan declined to discuss the question because it is in the SEC-mandated quiet period prior to its IPO, but people who work with Allen, as well as less partial observers, say it’s more a matter of the world catching up to him than an effort on Allen’s part to capitalize on trends.

“Vulcan has not really evolved. Rather, the world has evolved,” said Michael Yagemann, an investment banker who has structured most of Allen’s larger deals. “It has started to appreciate some of the things Paul has been doing for a decade. Remember, this is the guy who figured out that operating systems is the business Microsoft should be in.”

Allen left his job at Microsoft in 1983, though he is still on the board of directors. He survived a bout with Hodgkin’s disease and pursued his many passions, including the music of Jimi Hendrix, endowing a Hendrix museum in Seattle, and professional sports--he owns both the Portland Trail Blazers and the Seattle Seahawks. At the dawn of the networked age, he saw glimmers of booming computer-based consumerism, but his early investments earned him a reputation as a spendthrift and a weak manager.

Skypix was formed with the idea of delivering movies on demand via satellite years before DirecTV. It went bankrupt in 1992 after the principals were hit with a series of lawsuits and investigations. Asymetrix (ASYM), a multimedia tools software company that Allen started, lacked direction as well as revenue streams, though it went public in 1998. Allen also funds a think tank called Interval Research that, although led by the former head of Xerox’s famed Palo Alto Research Center, has been responsible for few marketable innovations, by most accounts.

But these are ever-shrinking parts of the Paul Allen story. Besides, as the high-risk venture capital business has matured, early failure has come to be considered an invaluable learning experience, if not a prerequisite for success.

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Maybe, as much of Silicon Valley now sees it, he was just ahead of his time. Case in point: Starwave. The CD-ROM and Internet content shop that Allen set up in 1992 eventually broke new ground in Web media with ESPN SportsZone and other sites. Disney bought the company from him in two transactions, completing the deal last year for a reported $350 million, a sparkling premium over Allen’s estimated costs. Ticketmaster, sold to Barry Diller, and Metricom (MCOM), a wireless technology firm, are further examples of Allen holdings whose prospects took time to be reflected in their valuations.

“The VC business is a marathon, not a sprint,” said James Breyer, managing partner of venture capital firm Accel Partners, which has participated in several deals with Vulcan. “Market timing is always one of the most difficult challenges, and it’s better to make your bets a bit too early than a bit too late.”

In 1993, Allen made an early--and big--bet on America Online (AOL), accumulating a whopping 25% of the shares. He then butted heads with Chairman Steve Case in an unsuccessful bid for greater control--some say Allen aimed to buy the entire company--and decided to dump his stock for a profit of at least $70 million.

Today, that 25% would be worth more than $26 billion. Allen was pilloried for leaving so much cash on the table, but with AOL having built a business that challenges even Microsoft, it is the foresight of the investment that seems remarkable.

“He was visionary to see how AOL would grow,” said analyst Adam Schoenfeld of Jupiter Communications, a New York-based Internet research firm. “If it weren’t for the battle of wills with Steve Case, he would now own AOL--after starting Microsoft.”

Since then, AOL and Microsoft, along with AT&T;, have burgeoned into the warring kingdoms of the Internet industry, building alliances and segmenting their territories. Vulcan has to be considered the newest member of this circle.

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A sampling of Vulcan’s portfolio illustrates either Allen’s oft-mentioned “scattershot” approach to investing or the industry’s broadest attempt to create synergy.

He owns stakes in Web merchants such as Priceline.com, Drugstore.com, Stamps.com (STMP) and software seller Beyond.com (BYND), along with enabling technology firms CyberSource (CYBS), Net Perceptions (NETP) and Liquid Audio (LQID). His content assets include about 20% of DreamWorks SKG (for which he shelled out $500 million in 1995); $100 million worth of Oxygen Media, a ballyhooed new women’s-entertainment firm that counts Oprah Winfrey as an investor; and leading technology-oriented Web site CNet (CNET). The value of most of these investments has mushroomed since the companies completed their IPOs.

But if portals and e-commerce were the Web’s most bankable themes in 1998, this year it’s broadband. Since the days of Skypix, Allen has been interested in high-speed data delivery, but the rapid consolidation of cable providers has pushed him to move quickly.

He paid relatively high prices for some properties, all of which he combined under the umbrella of Charter Communications, but observers say he is positioned as well as anyone to make the best use of two-way cable in the nascent high-bandwidth world.

A key element of Allen’s grand design is the 34% of Go2Net (GNET) that Vulcan bought this spring. Hambrecht & Quist analyst David Levy expects this fast-growing operation to become the “broadband portal for the Vulcan properties,” analogous to how AT&T; is likely to use Excite (ATHM). Such sites are being positioned as focal points where users can join Internet communities, fire up search engines, catch up on news and purchase any number of goods and services.

“He’s got content, services and broadband delivery,” said Schoenfeld. “In 1994, there were plenty of ways to place your bets in many unknown areas. Now there’s some concrete evidence about what consumers will or won’t do online, so his strategy has become more focused.”

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Yagemann says that experience has taught Allen and his lieutenants to size up management better and analyze business plans more carefully. How could it be otherwise, as the Internet itself has evolved from a free-for-all to a parallel economy, the new turf of investment bankers?

Having come this far, Allen is still only sinking the foundations for his vision. There’s a lot more company building to do and risks to negotiate. “Early on, Paul knows where things are headed and he tries to pick the right horse, but sometimes he has had to shift strategy,” said Yagemann. “But he’s very patient. He has the longest-term view of anyone I have ever seen.”

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Times staff writer Edward Silver can be reached at [email protected]. Disclosure: He owns shares in Net Perceptions.