Not @home: too late to get excited

Citation

Curwen, P. (2002), "Not @home: too late to get excited", info, Vol. 4 No. 1. https://doi.org/10.1108/info.2002.27204aab.003

Not @home: too late to get excited

A regular column on the information industries

Not @home: too late to get excited

Peter Curwen

One of the most interesting casualties of the recent troubles in the telecommunications sector is Excite@Home. It is exactly three years since the mega-portal was created via Excite's take-over of @Home amid a flurry of anticipation that this would help to create a blueprint for the future of the industry consisting of broadband connectivity plus content. So what went wrong?

In January 1999, @Home, a high-speed cable ISP which passed 60 million homes although it had only 333,000 subscribers, offered to purchase Excite, the sixth most visited site on the Internet, in order to create a new "mega-portal" to be called Excite@Home. The offer price was $6.7 billion, a 57 per cent premium to Excite's market value at the time. Since the payment consisted exclusively of @Home's then highly rated stock, it was nevertheless regarded as a bargain. It is fascinating, in retrospect, to note that the reaction of America Online (AOL), despite its own near 20 million subscribers, was to appeal to the Federal Communications Commission to grant it privileged access to cable networks in order to protect its much slower service.

As a result of @Home's flotation in July 1997, it had acquired as its main (39 per cent) stakeholder Tele-Communications Inc. (TCI). In June 1998, AT&T attempted to acquire AOL for a rumoured $33 billion, but was rebuffed. Rather than engaging in a protracted battle for control, AT&T chose in October 1998 to make an alternative bid for TCI, offering $37.5 billion in AT&T stock, plus $11.0 billion of debt taken over. Its bid was successful.

By mid-1999, the mega-portal sector had all the appearance of a major struggle for supremacy between AOL, Excite@Home, Yahoo! and AltaVista. All believed that the successful business model in the future would consist of combining broadband access with attractive content. In pursuit of this objective Excite@Home paid exorbitant prices for the likes of online greetings card company Bluemountain.com which cost $780 million in 1999 (only to be sold for $35 million in 2001). However, by the end of March 2000, Excite@Home's share price had fallen by 60 per cent from its 1999 peak in response to fears that cable operators carrying its services would look elsewhere when their contracts expired in June 2002. This was because Excite@Home had opted for exclusive relationships with these operators, barring them from access to its competitors. This strategy ensured that Excite@Home's subscriber numbers would grow rapidly, but meant that the cable operators were able to annex 65 per cent of subscriber fees.

Excite@Home appeared to be secure because it had the backing of AT&T which, while espousing open access, intended to use the Excite@Home portal as its home page for its cable subscribers. Comcast and Cox Communications (co-owners of TCI with AT&T) agreed a contractual extension to 2006, and AT&T to 2008, and to give Excite@Home a preferential position on their cable networks, but Comcast and Cox were given options to abandon their arrangements, and also to require AT&T to buy their stakes in Excite@Home at $48 a share after June 2001, although they were also given incentives to continue with their contracts which would become non-exclusive in June 2002. AT&T agreed to take management control of Excite@Home and to raise its voting interest from 56 per cent to 74 per cent – as against its by then diluted economic interest of 25 per cent – thereby obliging it to consolidate the portal's earnings into its balance sheet.

At this point Excite@Home had 1.15 million subscribers – the low number reflecting its high monthly fee of $40. However, the major drawback to its broadband service was a lack of attractive content, and Excite@Home decided to give away narrowband access in the hope of attracting more broadband subscribers. Comcast and Cox began to become fretful as losses mounted, and arranged to part-exercise their options via an exchange of $2.9 billion of Excite@Home shares for shares in AT&T, raising AT&T's economic interest to 38 per cent and its voting interest to 79 per cent. This did not appear to be altogether unfavourable for AT&T since, despite rumours of executive departures and technical hitches at Excite@Home, its subscriber figures had leapt to 2.3 million by October 2000 – including 45 per cent of all broadband access in the USA. However, confidence in the latter faded at the year end when it pulled out of a deal to merge its international assets with Chello, the broadband ISP of United Pan-Europe Communications of The Netherlands, thereby denying itself the possibility of economies of scale outside the USA since it had only 175,000 non-US subscribers. By April 2001, it was widely believed that Excite Europe would be put up for sale.

By mid-2001, Excite@Home was running out of cash to invest in its network, but was able to raise $100 million via convertible bonds and a further $85 million from AT&T via a renegotiated equipment leasing deal. The sale of media assets was under discussion, but there were no takers because the collapse of online advertising, on which the Excite.com Internet content site and other media properties depended for revenues, showed no sign of bottoming out let alone ending. In effect, Excite@Home was in a "catch-22" dilemma – it could not close down Excite.com because it had ongoing subscribers, but, equally, it could not afford to pour any more money into it in an attempt to make it profitable. In July, it reported a substantial second-quarter net loss of $346 million despite strong growth in broadband subscriptions, pushed back its target time for achieving a profit and declared the need to raise more cash by the year end.

At this point both Comcast and Cox announced that they intended to exercise their contractual exit provisions in June 2002, and it became doubtful, given debts of $1 billion but assets worth only $400 million and only $150 million in cash reserves, that Excite@Home would be able to avoid bankruptcy. Its share price fell to a mere 40c, threatening its stock market listing and hence the convertible financing contingent upon its maintenance which would otherwise have to be repaid immediately in cash. Chapter 11 bankruptcy was duly declared at the end of September, and AT&T promptly offered to buy the broadband ISP business for $307 million. Meanwhile, arrangements were made to keep the service operational.

The proposed purchase was opposed by creditors, including bondholders, who argued both that the price was too low and that Excite@Home's contracts with cable operators had siphoned off a disproportionate share of its revenues. But unhappily for the creditors, no other offer was forthcoming, and the three cable operators began to transfer their share of Excite@Home's 4.1 million world-wide subscribers across to their own fibre-optic backbones.

At the time of @Home's take-over of Excite, the general consensus was that the merged entity had the makings of an industry leader given its early entry into the broadband access market, backing by major players in the telecommunications industry, heavy traffic and a popular technology. Unfortunately, the marriage between the broadband ISP and the portal never really got off the ground. As ever, there are several reasons for this. In the first place, having AT&T as a controlling parent was probably a mistake since AT&T was inherently conservative while Excite@Home was far more entrepreneurial. It was no secret that the various board members at Excite@Home were constantly at loggerheads. Indeed, AT&T board representatives opposed the take-over at the time and tried to have Excite demerged at the earliest opportunity. Furthermore, although AT&T was formally in control, Excite@Home also had to contend with the ambitions of co-owners Comcast and Cox – to contend, in effect, with three otherwise competing operators. Second, the cable operators made sure that their contracts with Excite@Home were favourable to themselves. Third, Excite@Home's acquisitions at the height of dot.com mania were very ill-judged. Finally, when all looked to be lost, the possibility of salvaging at least part of Excite@Home was tossed away by creditors who gambled incorrectly that AT&T would not dare to walk away. What they failed to realise was that AT&T was capable of transferring Excite@Home's subscribers rapidly onto its own network, and faced the prospect that it would anyway lose the subscribers to Comcast and Cox.

So was the bankruptcy inevitable? Clearly, Excite@Home could hardly expect to be immune from the forces that wrought havoc across the dot.com sector. One has only to note that AOL Time Warner announced in January 2002 that it would be writing off up to $60 billion on its acquisitions and that it did not expect the advertising market to pick up for some months. Without the requisite scale, strong parental support or a business model capable of delivering profits in adverse circumstances, Excite@Home's prospects were modest at best. But in the midst of dot.com mania, few worried overmuch about the future.