@Home improvement

The Redwood City, Calif., headquarters of Excite@Home is full of toys: pinball machines and foosball in the stairwells, Tinkertoys and crayons in the cafeteria, and even plastic corkscrew slides between floors. The only thing missing is a rollercoaster. That is, unless you count the fortunes of the company itself.

The ride started in January of 1999, when Internet portal company Excite announced that it would merge with the @Home cable broadband network, a system with exclusive transport contracts on the hybrid fiber/coax (HFC) networks of AT&T, Cox Communications and Comcast. With deals for a potential footprint of 72 million homes, the approximately $7 billion alliance was hailed as a powerhouse of content and distribution. "This was going to revolutionize the Internet," says Jack Ledyard, an analyst with Tel-Data. "This was going to leave all high-speed competitors fighting over leftovers."

Then the fun started. First, AT&T - owner of a 25% share in Excite@Home, thanks to its purchase of Tele-Communications Inc. in 1998 - made a grab for MediaOne Group, which promised to make it the nation's largest cable operation.

It was another groundbreaking merger, but the ground shifted. Resistance to the deal gave rise to the open access movement, supported by grassroots activists but funded primarily by America Online. AOL saw itself being frozen out of cable networks by AT&T's contract to carry Excite@Home's service exclusively on its network until mid-2002. Legal wrangles broke out as local cable authorities were pressured to build open access guarantees into the franchise transfers that AT&T needed.

The exclusivity deals threatened to draw regulatory fire until FCC Chairman William Kennard affirmed his agency's hands-off approach. But connectivity-minded AT&T also was apparently having second thoughts about its new role as a content company, especially when the content was Excite@Home's. AT&T Broadband Chief Leo Hindery defended the relationship, denying that his company was in talks with any other ISP. When that turned out to be the case, Hindery left AT&T.

That departure seemed to symbolize a loss of faith in Excite@Home on AT&T's part. What would that mean when the Excite contract expired in two years?

To appease AT&T and to raise its stock price, Excite@Home split its content business into a tracking stock separate from its network. That promised to unlock some value, but it also further muddied exactly what the merger had accomplished.

"That was weird," says Bruce Leichtman, an analyst with The Yankee Group, of the tracking stock. "Didn't they just buy that, and now they're separating again?"

Clarity @long last

But a few funny things happened on the way to the end of the fiscal year. First, AOL quit fighting the access wars and enlisted on the cable side instead. The Internet giant announced in January that it would merge with Time Warner, which owns content and - through its cable operations and the Road Runner Internet service - the fat pipes to pump it.

Second, last February, Tom Jermoluk, who rose from @Home chairman to become chairman and CEO of Excite@Home, handed the CEO's reins to former Excite President George Bell. Jermoluk had been @Home's second CEO since its IPO in 1997, but some of the company's cable partners reportedly did not like his fiercely confrontational style.

Before the leadership change was announced, Excite@Home made two moves indicating that the company was re-thinking its cable strategy: the acquisition of online greeting card company Bluemountain.com and the launch of a free dial-up service (first named FreeWorld, now called FreeLane). But the change at the top was the clearest indication to date that Excite@Home realized it needed a new approach.

"This was a sign that the company was concerned about its relations with cable operators," says Abishek Gami, an analyst at William Blair & Co. "Their business is collaborative; they sell through their partners, and they need their partners to keep pace operationally. Bell seemed easier to work with on a day-to-day basis." Jermoluk was more of an advocate for cable broadband, Gami says, and better-suited for top-level negotiating.

Apparently so. On March 29, Excite@Home announced agreements that will extend its relationship with its three biggest cable partners - AT&T, Cox and Comcast - beyond the expiration of its exclusive contracts in mid-2002. AT&T agreed to carry Excite@Home on its system through 2008, while the other two promised access to their cable networks through 2006. And Bell gave Jermoluk credit for striking the deal.

The complex arrangement does more than guarantee Excite@Home a place on three of the country's biggest HFC systems for the next few years. To win those original exclusive contracts, @Home gave AT&T, Cox and Comcast much control over the company, including seats on the board of directors. Under the new agreement, AT&T will take over control from the other two cable companies, which agreed to step down from the board and relinquish veto power.

Cox and Comcast can sell their 8% equity stakes in Excite@Home to AT&T between January and June 2002 for $48 per share. They also can cancel their deals with Excite@Home beginning in June 2001, when the current contracts expire.

But they may decide not to, Bell says. By sticking with the cable Internet service through 2006, they will earn an option to purchase more shares in the company at favorable prices. If they sell early, they will forfeit that right. AT&T will have the same purchase rights, gradually vested through 2008.

That dumb pipe problem

One problem apparently solved by the agreement is the disparity between the comfort level of Cox and Comcast with the integration of network and content and that of the more traditional "dumb pipe" telco AT&T.

That cultural difference made strategizing unnecessarily difficult, says Milo Medin, co-founder and chief technology officer of Excite@Home. "You had folks on the board who had different alignment in terms of how they saw the future and how they wanted to conduct their interests," he says. "AT&T is a much broader communications company, less focused on some areas than Cox and Comcast are. Basically, it made it harder to actually execute on some objectives. Now there's clarity in terms of the board." Increasingly in the Internet economy, those that are nimble fare better than those with the largest scale, he says.

It also has given assurance to cable and content partners that Excite@Home has a future, Bell says. The company could have waited to grow a little bigger "because cable partners wouldn't have wanted to cut us loose when we had 5 million or 7 million subscribers," he says. "But we wanted to do things like network, capital and capacity planning, and you want to be able to plan for two or more years. Besides, Wall Street and our content partners were continuing to express uncertainty about what was going to happen to the company."

As for the proposed content tracking stock, it's history. "It was a good idea at the time," Bell says. Excite@Home's cable partners understood that the company's portal business requires acquisitions such as Bluemountain and iMall, an e-commerce company bought in 1999. But those acquisitions diluted the partners' equity stake in the company. "As we moved toward the expiration of our contracts, we wanted our cable partners to own more of us, not less, so they'd have an incentive to renew," Bell says. "And we didn't want them to object to deals just to protect their interests." Hence the new currency for Excite's content.

But the new contracts have removed the rationale behind the separate content stock. "The ownership stakes of AT&T, Cox and Comcast are now so much higher for the foreseeable future that we could buy $15 billion worth of new acquisitions at today's stock price and still not threaten AT&T's control position," Bell says (Figure 1).

The new deal shifts the cable contest from content - in which AOL has amassed hefty firepower - to infrastructure, says Tel-Data's Ledyard. And in that arena, the cable ISP has a sizeable asset. "Excite@Home has four years of expertise and network-building behind it," he says.

"Now they have a two-year window to make as much of that edge as they can and secure relations for years beyond that. If they can't use that time to become a premier high-speed power, they have serious problems." That exclusive window becomes more important because the three cable partners also have agreed not to "re-market" the customers Excite@Home may sign by mid-2002 to any other ISP while they carry the service.

The new alignment with its cable partners also has opened a new line of business for Excite@Home: selling itself as a broadband platform on which other ISPs can ride. The three cable operators will continue to use the @Home network to provide connectivity for their own high-speed services - including, perhaps, third-party ISPs that the cable partners may decide to offer end users. AT&T has already said it will offer a choice of ISPs over its cable system when the exclusive Excite@Home contract expires, and Comcast has said it will follow that lead.

"Post-exclusivity, the platform that we have built, deployed and scaled becomes a business opportunity unto itself," Bell says. "We will try to drive as much traffic and as many bits across that platform as possible."

Bell's to-do list

With the contract renewals in place and the regulatory pressure off - thank you, AOL/Time Warner merger Excite@Home now can turn to the other strategic initiatives that Bell set forth when he became CEO.

Those moves included building Excite@Home's subscriber base, deploying the service across multiple platforms and devices and reinforcing the broadband experience with a deeper, more functional Excite.com portal.

On the first count, analysts estimate that the company will have between 2.5 million and 2.8 million subscribers at the end of the year (Figures 2 and 3).

"We're comfortable with those numbers," Bell says. Excite@Home has made strides in enabling self-installation by end users and is working on an effective retail model, but those subscriber targets do not depend on successes in those areas. "If the retail self-install model proves very powerful during the 2000 holiday season, that could add topspin to those numbers," Bell says. "But retail is not modeled as a big contributor to our subscriber numbers yet."

Excite@Home also is working to attract customers over all devices and access modes. The new agreement with AT&T will permit new forms of collaboration and development, Bell says. "We're going to look at set-top box together, wireless, fixed wireless and even narrowband. We're trying to think about how we align even the non-cable parts of our businesses so that we're driving the maximum number of customers to broadband over time."

Earlier this month, the company announced that it will incorporate a DSL offering from Rhythms NetConnections - carefully deployed to avoid poaching on cable operators' territories. Excite@Home has agreements with cable companies serving 60 million homes in North America, but that capacity depends on the speed with which the operators upgrade their networks for high-speed two-way access. Adding other access modes such as DSL and eventually wireless and satellite will open new markets in areas where upgrades are slow or where cable operators won't work with Excite@Home (Figure 4).

Rhythms will become Excite@Home's exclusive provider of residential DSL in return for a $15 million investment in the company. Excite@Home already offers DSL last-mile solutions through various providers to the commercial customers of its @Work division.

The company also is working to bring out versions of its service adapted for different devices that customers will use to access the Internet. Last December, it rolled out an application that lets the Palm Pilot VII access users' personalized Excite start page. In September, Excite@Home announced that it would use AirFlash wireless technology to bring the service to wireless application protocol-enabled mobile phones.

"They have a proprietary technology, a search engine that does location-specific, content- and commerce-specific applications for the phone market," says Rob Wilen, senior director of wireless and group manager for Excite@Home. "We're starting with a location-based directory service so that instead of finding a drugstore, it finds a drugstore `near here.' And it takes account of natural boundaries so that it knows if the nearest drugstore is across a river and requires a 30-minute drive to get there."

With AOL apparently poised to debut an interactive TV product this summer, ExciteTV currently is in what Bell calls "a rich development cycle" with Cox and AT&T and should be ready for deployment this year. The service will offer the Internet over TV. Its killer apps will look and feel like TV but provide the connectivity of the Web, says Jeff Huber, Excite@Home's vice president of engineering.

"The TV will essentially become the doorbell of the next generation," Huber says. "The question is, how does an always-on device in the living room change the nature of communications in the home?"

Net advantages

The wide diffusion of Excite@Home's services is enabled by two architectural characteristics. On the infrastructure end, the network was built to integrate other delivery methods. "It was one of the design metrics from the beginning, that if we were going to spend the last four years and half a billion dollars building this phenomenal asset, we wanted to make sure it was going to be general purpose," Huber says. Originally this agnosticism targeted delivery over cable or satellite, but the rise of DSL and fixed wireless have made those modes more attractive.

Second, Excite@Home's early emphasis on high personalization involved the company in the same de-coupling of data and format that transformation to other devices entails. "In the context of presenting not a static Web experience but one that was all about the customer, we sort of got lucky," Huber says. "The ability to differentiate not only by individuals but by platforms was a benefit we got for free from that content architecture."

The company's philosophy of bringing intelligence deep into the network with servers and caching also gives it the functionality to support relatively simple access devices. It can use its servers to transcode data instead of having to recognize new types of graphic images so that a device such as a Web pad can read them as simple JPEG images.

"Now your device doesn't have to have that complexity," Excite@Home's Medin says. "It can just do a few things well, and all the changes and upgrades happen transparently inside the network. You can do all kinds of interesting things over simple devices because our servers are relatively close by. That's our big advantage over the classic `dumb pipe' architecture."

To showcase those capabilities and the rest of its broadband glitz, the company launched its @Home2000 broadband portal, a super-charged Web site intended to integrate Excite's personalized features with broadband speed and a new browser better-suited to the intermittent way subscribers use an always-on service. Scrolling over news headlines brings up the story, news photos and video clips from Bloomberg, CNN and Fox. The e-mail icon lights up when mail has arrived, other icons expand automatically to show menus and drag-and-drop capabilities make the page more customizable than the average start page.

The new portal also offers more capacity: seven e-mail accounts instead of three, 70 Mbytes of Web space instead of 15 Mbytes and five rather than three potential computer connections. Advertising on the portal also will make more use of video and visual effects.

"Broadband is about the combination of connectivity and content," says Joe Kraus, senior vice president of content for Excite@Home. "Consumers really want convenient packaging."

The new portal, now rolling out automatically to Excite@Home subscribers in North America, will be a fixture on the start page of whatever service its cable partners AT&T, Cox and Comcast set up after its exclusive contracts run out. The deals announced last month also give Excite.com "most favored nation" status on those start pages.

"The placement of the Excite button on the screen, the size of the button, the co-marketing agreement and the revenue sharing - all these things are guaranteed to be as good as any other portal provider on the page, so we know in advance that we're going to get a reasonable deal," Bell says.

A window of opportunity

Will these pieces come together to produce a strategy that will help Excite@Home compete in a broadband world where DSL is getting its deployment act together, wireless access is coming up fast and AOL is presumably massing its troops for a high-speed frontal assault on AT&T? The odds still are pretty steep. Time Warner has 75 million homes under contract, and AOL's ability to add phenomenally to its customer base each quarter - 1.8 million new subscribers in 4Q 1999 alone - promises a ripe harvest of broadband upgrades. If, that is, the companies get regulatory approval to merge, and if they find a workable technology for overlaying AOL content and systems on Time Warner's network.

Meanwhile, Excite@Home must expand its markets and execute its plans swiftly and flawlessly - something that hasn't always happened. The @Home2000 portal, for example, arrived six months late and was temporarily down a week after it was introduced, reportedly because of technical problems.

"We're only in the second inning here," says The Yankee Group's Leichtman. "The sign-up pace is going to increase. Is it a grand slam home run in 2002 or will it take until 2006? The problem is that expectations have already outrun performance."

But Dean Gilbert, general manager for the @Home network, believes it can be done. "There are no systemic problems with the @Home operating layer," he says. "You're always going to have isolated issues with a technology platform this complicated, where you have HFC, a cable infrastructure, this number of servers and responsibility for the final mile. But we're leading edge on every aspect of the network, whether it's high-availability servers, proxy servers, switches or routers. But I always come back to what customers think about the service. And people love this stuff."

And Gilbert has advice for AOL, now has to get its own cable broadband service - properly diversified with other ISPs, the company vows - up and running: "Be careful what you wish for. It may come true."