Rough Seas For Excite@Home

In May 1999, three years into his stint as CEO of Internet search engine Excite, George Bell basked in the warm glow of interviewer Charlie Rose’s softball questions.

The No. 2 portal after Yahoo had earlier in the year announced an unprecedented $6.7 billion merger with broadband Internet access provider @Home. Shares of Excite, which in December 1999 had the fifth-largest reach of all Internet properties, were hovering near $70. Bell envisioned growth of 30% to 40% a year, predicated on the company’s triple-tiered strategy of increasing its broadband subscriber base through partnerships with cable operators, offering customers personalized, Web-based content and monetizing those eyeballs through targeted ad sales.

Now, Bell’s sky is dark with more storm clouds on the horizon.

The Redwood City, Calif.-based company disappointed analysts with a 10% revenue shortfall in the fourth quarter. The company said a 30% to 35% drop in advertising revenue this quarter will drive overall revenue down by 12% to 15% compared with the December quarter. It also cut its forecast for residential subscriber growth to between 5.2 to 5.5 million subscribers, down from the 6 million the company said it would sign up by year’s end.

It is shuttering several of its content-related businesses, laying off 8% of its staff, and took a staggering charge of $3.4 billion in the process. Its stock, at $6.50 Wednesday, is recovering from a December low of $3.87.

Moreover, its ace-in-the-hole, exclusive relationships with major MSOs, is decidedly more tenuous in the coming open-access environment. Open access will surely breed competition, leading to lower prices for services. That will be a drag on Excite’s broadband revenue.

In short, Excite is in a tough spot.

At this point, however, the concern over Excite’s financial health is emanating more from Wall Street than Main Street.

At Charter Communications in Redding, Calif., "Customers are just interested in high-speed access," says GM Michael Lytle. "We’re still very much moving ahead with @Home."

He adds that his system has yet to examine open access and is waiting for direction from corporate headquarters.

Quality of service is more important than Excite’s financial situation to system managers.

"As a local operator, there are other alternatives," says Martin Hauser, GM of Community Cable Systems in Spokane, Wash.

Hauser says his system found @Home to be "a little slow" and adds his system "found ISP Alliance can offer us the same service, and possibly a better service."

"Our system managers are not concerned about staff changes or stock fluctuations at Excite@Home, says Robert Smith, director of public relations for Comcast’s New Jersey systems. "I haven’t heard anyone at the operating level being concerned about Excite."

Operators may not be worried about Excite because it is the operator who sets the pricing for cable broadband access, with the provider getting a cut.

"If you look at [Excite’s] model, they don’t control pricing, the cable companies do," says Ahbishek Gami, an analyst with William Blair. "And there’s no doubt pricing is coming down."

AT&T Broadband in January repotedly lowered the monthly price for its Road Runner service in Richmond to $29.95 a month, a 25% drop.

Excite@Home gets about 35% of the revenue generated from monthly access fees. The potential problem of reduced access revenue in a more competitive environment is compounded by the negative outlook for media and advertising services revenue. Now that it can’t count on strong growth from that segment, which contributed half of the company’s revenue last year, "They need to find ways to make [more] money off customers," Gami says.

Excite@Home’s woes underscore the drastic reshaping of the nascent cable Internet access market.

Just a few years ago, when @Home and its main competitor, Road Runner, were formed, no one knew how quickly demand would soar for fast Internet connections.

At that point, exclusivity deals were thought to protect the company’s interests. @Home fell prey to the prevailing view two years ago that delivering content and related services, in addition to providing broadband access, was the way to go to attract advertisers. To that end, the company made several outrageously expensive acquisitions for content and e-commerce services companies.

On a recent conference call, Excite’s management conceded that it had its fingers in too many pies. Excite said it will re-focus on its core broadband unit and exit several content-related businesses, such as its iMall e-commerce business, which it bought in October 1999 for $637 million in stock.

Disney’s announcement last week that it will close its Go.com portal, absorb its Disney Internet Group tracking stock, and let go 400 staffers was an emphatic exclamation point on the demise of the portal as a business model.

Disney’s admission was nowhere near the first — it followed CNN’s revamping of its Internet operations and NBC’s slashing its Internet staff. Even popular search engine Alta Vista, which aspired to compete on the scale of Yahoo and AOL, scaled down its operations, laying off more than 200.

Still, Excite expects to reach break-even, to turn cash flow positive, by this year’s second half, and has revamped its strategy to focus on its core broadband services, including @Home and its corporate access service, @Work, as well as on becoming a wholesale provider of broadband access network services to other third-party ISPs seeking to take advantage of open access.

A big question for Excite is how much growth is there on the broadband side of its business — and can that revenue offset an expected decline from content services?

One avenue Excite will pursue will be to wholesale its network infrastructure and extensively built-out backbone to other ISPs. In an open access environment, this could be an important revenue stream.

Excite executives, on the company’s conference call, declined to project just what those revenues will look like. Excite executives could not be reached to comment by presstime.

Meanwhile, the specters of competition and open access are looming large. Overbuilders, telecom and satellite providers are all vying for their own piece of the broadband access pie.

AOL Time Warner will be nothing if not formidable as a competitor. The company ended the year with a combined total of 130 million subscriptions, including 26.7 million AOL subscribers, 3 million Compuserve customers, 12.8 million Time Warner Cable customers and Time’s stable of 60-plus magazines, reaching over 250 million readers.

Jerry Levin, AOL Time Warner’s CEO, referred to an access pact AOL had entered with Time Warner Cable, and some industry observers say AOL stands to benefit the most from open access. Will AOL become as ubiquitous in broadband cable TV Internet service as it is with the PC? It’s a good question.

Looking further out, it doesn’t get any easier on the competitive front. More operators are learning the ins and outs of providing Internet service, and some, such as Massillon Cable of Ohio, may choose to go it alone.

Massillon offers its own broadband Internet connection and in two years has signed up 10,000 of its 45,000 basic customers for the service, which starts at $25 a month. The biggest benefit of the do-it-yourself service, says Massillon president Bob Gessner, is, "We get to keep all the money."

Further, he says, Massillon found that between 75% and 80% of people who hit the system’s home page either typed in a URL or clicked through a bookmark — a negation of the need for a portal connected to broadband access provider.

"The thing we discovered, and that others must be discovering as well," he says, is that setting up broadband access is not that hard. "It’s computer science, not rocket science."

That means less marketing bang for Excite; some Excite partners are even neglecting their Excite marketing duties.

In addition to Excite’s exclusive deals with operators Cox and Comcast, the company entered into agreements with Cablevision Systems, Rogers, Shaw and others.

Cablevision, for instance, is marketing Optimum Online, its own broadband access service.

Cablevision president/CEO James Dolan has complained in published reports about the @Home service, and the two companies are embroiled in a dispute over Cablevision’s lack of marketing of the Excite services.

On Excite’s recent conference call, executives said Excite may reclaim warrants issued to Cablevision — either that, or the relationship will be repaired.