SBC Communications Inc., the nation's largest local telephone company, yesterday announced a partnership with Internet service provider Prodigy Communications Corp. in a move aimed at accelerating both companies' push into the emerging world of high-speed Internet service.
Under the terms of the deal, San Antonio-based SBC will take a 43 percent stake in Prodigy. Prodigy, based in White Plains, N.Y., will assume control of SBC's 650,000 Internet customers. The vast majority of those customers now connect to the Internet the old-fashioned way, dialing in over a modem. But SBC--and now Prodigy--have far bigger plans.
Under an initiative announced last month, SBC will spend about $6 billion over the next three years to upgrade its system to allow approximately 80 percent of its roughly 100 million telephone customers to gain always-on, rapid connections to the Internet using DSL, or digital subscriber line, a technology that turns copper phone lines into swift conduits.
Under the partnership, SBC will use the Prodigy brand name as it markets its DSL service throughout its 13-state coverage area and beyond. Prodigy now has more than 2 million customers. SBC has committed to sending the company at least 1.2 million new subscribers in the next three years. Prodigy will gain those connections to customers without having to pay the fees Internet service providers usually must pay to phone companies.
Analysts hailed the move as strategically sound, saying it will give SBC an advantage as it competes with other phone companies, DSL providers and similar high-speed Internet access delivered by cable television powers such as AT&T Corp.
"It enables them to quickly gain a presence in their region," said Frank J. Governali, a telecommunications analyst with Goldman Sachs Group Inc. "Speed to market is the issue here."
Others suggested that the Prodigy brand would prove particularly useful if, as widely anticipated, industry leader America Online Inc. reaches a deal with AT&T to sell high-speed service over cable.
"This gives SBC more control over their destiny," said Robert B. Wilkes, an analyst with Brown Brothers Harriman & Co. "It bulks them up."
For Prodigy, once considered an archaic and minor player in the Internet world, the SBC partnership is a signal that the service provider is making a comeback, analysts said.
Since its initial public offering in February, Prodigy has swallowed two smaller ISPs--FlashNet Communications Inc. and BizOnThe.Net, both based in Texas--and Cable & Wireless USA's Internet subscribers. The three deals along with the SBC partnership have almost quadrupled Prodigy's consumer membership in the past year to more than 2.1 million. Prodigy is now the nation's third-largest Internet provider, after Dulles-based America Online and Atlanta-based EarthLink Network Inc.
David Trachtenberg, president and chief operating officer of Prodigy, said the company plans to launch an aggressive marketing campaign in the next few months.
"We are not going to be blanketing five disks per household," he said, taking a shot at AOL's ubiquitous CDs, "but you will know we are out there."
The deal could help the two companies exploit their ties to Spanish-speaking communities. SBC boasts local telephone customers in nine of the country's top 10 Latino communities and its territory holds more than 60 percent of the nation's Latino population. Prodigy lays claim to the country's first fully bilingual Internet service, En Espanol.
The dazzling popularity of Prodigy's Spanish-language services poses a special threat to AOL, which has invested millions in plans to expand to Latin America, the fastest-growing market in the world. Even as AOL prepares to launch a Mexico service sometime in 2000, Prodigy has already captured the dominant market share through a partnership with telecommunications giant Telefonos de Mexico SA de CV.
Business: Internet service provider with a subscriber base of more than 2 million
Based: White Plains, N.Y.
1998 sales: $136.1 million
1998 net loss: $65.1 million
Yesterday's closing stock price: $31, down $1.12 1/2
Ticker symbol: PRGY on the Nasdaq Stock Market
Web address: www.prodigy.com
SOURCE: Hoover's, Bloomberg News