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Death of a Portal: Monopoly Money Asks Excite@Home to Go Quietly
By Andrew Goodman, September 20, 2001
ExciteAtHome was literally created by Monopoly money. Now it
can't even win second prize in a beauty contest. Its stock will soon be delisted,
and it will run out of cash shortly after that. Like Willy Loman, it
was liked, but not well-liked. Death of a portal. Do not pass "Go." Do not collect
revenues. Go directly to the dot com boneyard.
This in spite of recently managing to sell off its Blue
Mountain Arts greeting card division and its Australian media operations in a
bid to raise much-needed cash. A recent "death spiral" convertible bond financing
by Promethean Capital didn't help much, and may have made matters worse. As if
it matters, the company's CFO just resigned.
Should the company go under, up to five million cable Internet subscribers could
be affected. But few observers outside of ExciteAtHome and their cable partners
seem to have a handle on the likely impact on cable Internet service in the event
that AtHome shuts down.
It's not easy figuring out exactly what AtHome offers to its cable
partners or whether it's feasible that these cable partners can continue
offering Internet service without AtHome.
ExciteAtHome was the product of an unlikely merger: one one hand,
an Internet search-engine-cum-portal similar to Yahoo (at one time, Excite was
arguably the #2 portal property overall, but for some time it's been in fifth
or sixth place, not good enough to survive the shakeout); on the other, a set
of technologies and services for delivering the Internet to cable consumers.
Insiders argue that these two companies were never integrated in any meaningful
way. They remain for all intents and purposes two separate companies, though of
course under common ownership and publicly traded on NASDAQ under the symbol ATHM.
Given recent economic conditions, there is no longer much left of the Excite side,
in any case.
The following Q&A is intended to answer both factual and
speculative questions about Excite@Home and its future. It's based on my own understanding
of the history of ExciteAtHome, an assessment of the business models of both parts
of the company, and discussions with a couple of technical experts, notably Chris
Weisorf, president of the Toronto-based Residential Broadband Users Association .
Q. What does Excite@Home actually offer to the cable companies
who provide cable Internet service to their subscribers? I hear they just offer
the Excite.com portal and maybe a few servers and basic infrastructure and so
forth. These hardly sound like essential services - it's no wonder the cable companies
can negotiate from a position of strength.
A. Yes and no, and it depends who you talk to. First of all let's
address the rationale behind the formation of @Home. A group of cable companies
thought it would be a good idea to get into the Internet business, and together
they formed a group which sought venture capital for a company which would operate
cable Internet service for the whole group. At the time, content was definitely
seen as a key moneymaker in this scheme, which explains the logic of the later
acquisition of Excite.
To hear some people tell it (for example, Steve Harmon, author of
Zero
Gravity , a book about Silicon Valley venture capital), the funding of
AtHome was a longshot "bet" on a heroic technology mission. Finding
out how to provide reliable Internet access to home users via cable was a major
accomplishment, and venture capital played a key role in spurring that innovation.
But it's likely that the cable companies involved did not see it
that way. Rather, the creation of a new company, AtHome, and their holding
significant stakes in that company, were more a matter of financial opportunism.
Yes, they wanted to get into the Internet business, but the technological hurdles
weren't as great as all that. What made them salivate at the time was the portal
concept - the potential to not only make a lot of money delivering content (and
advertising) to end users, but also to ride the wave of lofty Internet stock values
and get in on the ground floor of a "portal gold mine." It's plainly evident now
that they got burned chasing after this rainbow.
Thus AtHome was as much a fiscal creation as it was a technological
innovation, and the forces driving the company have been largely external. The
cable companies made AtHome, and they can unmake it. One of the founding cable companies,
TCI, was acquired by AT&T, which over time developed more interest in making
its AtHome investment pay off, eventually upping its stake to become the
controlling shareholder in ExciteAtHome. In hindsight, it looks like it was throwing
good money after bad. It's safe to say that AT&T has lost interest along with
the rest of the cable companies. Comcast and Cox have taken the "precautionary" step
of terminating their agreements with @Home as of June 2002. Canada's Rogers Communications,
whose chairman, Ted Rogers, is owner of a sizeable and deeply underwater
stake in ExciteAtHome, has been quietly making contingency plans to deliver the
cable Internet service via alternative means in the event of an AtHome
shutdown. Relations between Rogers and AtHome have been strained since late
last year when Rogers got bad press for the serious technical problems and
outages that affected the RogersAtHome service (eventually, these were corrected).
Most of these problems were a matter of AtHome failing to keep up with rapid subscriber
growth.
In short, then, the cable companies are making confident noises that
they'll be able to continue providing the service with or without AtHome. Rogers
could, for example, make a deal with its main cable competitor, Shaw (another
current AtHome partner), which owns its own network called Big Pipe.
Q. Recently, Comcast and Cox cable announced they would
terminate their agreement with @Home on June 4, 2002. Comcast's president made
a point of saying that they "had to ensure that their 950,000 customers would
be well served," without indicating exactly how this would occur in
the absence of @Home technology. Some analysts say that cable companies
have other options than @Home to provide this service to customers, or could
even do it themselves. Is this so?
A. As far as we know, the cable companies have said nothing
definitive about how they intend to replace the @Home technology and service. But
if you look under the hood, it becomes clear that they won't have too much trouble
replicating what @Home has offered them thus far. In some cases, end users would
see an improvement in service after cable companies made alternative arrangements,
although there is bound to be a painful transition period.
So here's a rundown of what ExciteAtHome provides to its cable partners
and their end users. This won't likely be a very satisfactory summary if you're
an engineer, but it's the best your friendly portal analyst can do.
-
A US-wide high-speed network backbone
. This is called the "ExciteAtHome Network," but it isn't really owned by
ExciteAtHome. Prior to the completion of this network, AtHome actually leased
network access from Sprint. When AT&T came on the scene it invested in
building out a separate ExciteAtHome network. AT&T has more "ownership"
of the network than ExciteAtHome; at the very least, ExciteAtHome is not even
close to being in a position to service the debts incurred in the buildout
of this network. Unless lightning strikes and ExciteAtHome stock shoots up
to $50, ExciteAtHome won't have a prayer of keeping any of its assets. -
Servers at various stages of the network which facilitate the
storage and delivery of Internet content at high speeds to cable customers.
-
Email servers and email service to all subscribers, whether
they need it or not.
-
Cable modem provisioning, the technology at the user's end
which identifies them as authorized to connect to the network via local
cable. According to Weisdorf, it doesn't make sense for ExciteAtHome to have
control over so many aspects of the delivery service. It makes more sense
for the cable companies to handle this themselves.
-
Proprietary Excite content. The problem with this is
that many ExciteAtHome subscribers don't look at this content, and even if
they did, it costs more money to maintain than it generates in ad revenues.
Any Internet user can use the Excite portal. But increasingly, people don't,
since Yahoo!, AOL, and MSN are all better.
On the surface, from this short list it looks like ExciteAtHome
brings a lot to the table. But the picture changes significantly when one examines
exactly what they offer that is indispensable or at least a valuable service to
cable partners and end users. When it comes to the network, ExciteAtHome doesn't
really own it, or at least is too severely undercapitalized to keep control of
it by fulfilling its debt obligations.
Leaving aside the entirely plausible option of cable companies simply
finding an alternative network provider, this network itself may continue to operate
after ExciteAtHome goes bankrupt. The only question is, who will own it. The likely
answer is the same cable companies who invested in and partnered with AtHome
who are now plumping for its rapid demise. They'll probably get control of
the network for pennies on the dollar in bankruptcy proceedings.
Servers and caching are basically a commodity, and alternative providers
could be found to deliver the same service. It is actually to the advantage of
the cable companies to gain more control over this aspect of the service. Particularly
in the case of Canada's Rogers, the lack of a local ExciteAtHome presence coupled
with ExciteAtHome's total control over access to the server farms led to delays
in troubleshooting technical problems. The same goes for email servers.
ExciteAtHome has control over the service but has sometimes failed to do
a good job of providing the service.
Cable modem provisioning and other local-level connectivity issues
should, in Weisdorf's view, be handled by the cable companies themselves. Dealing
with a remote service provider operating in Redwood City makes little sense.
Considering their relative lack of proprietary technology and lack
of ownership of cable lines or subscribers, ExciteAtHome has negotiated a
pretty decent revenue share of the monthly cable Internet access fees paid by
consumers. Weisdorf estimates that ExciteAtHome gets 20-25% of the access fees
in Canada, and upwards of 40% of US cable partners' monthly bill. Obviously the
cable companies would rather see themselves getting closer to 90% of that money,
and being monopolists, are in a position to play hardball with service providers
who, while they may provide a valuable service, don't have nearly as much leverage
as those who control the pipes and the subscribers.
Q. Why do the experts and journalists keep blaming the
Excite portal ("the money-losing media division") for the massive losses
being incurred by Excite@Home? Doesn't the cable Internet side of the business also
lose money? And hasn't the cable Internet service been capital-intensive, requiring
the company to take on unhealthy levels of debt that are the source of its current
woes?
A. What it boils down to is this: everyone figured out some time
ago that the Excite business had no chance of surviving (even in a good advertising
market, the #6 general-interest portal is a poor candidate for profitability),
whereas ExciteAtHome management has indicated on several occasions that the
cable Internet service is a healthy, growing business with a good future ahead
of it, in spite of its capital-intensive nature and present losses. Outgoing CEO
George Bell more or less spelled out that Excite@Home would have to become "just
@Home" if the company was to be viable. It was assumed that incoming CEO Patti
Hart would move quickly to sell off part or all of Excite to stem the red ink,
but a combination of Hart's lack of urgency and a lack of market interest
in Excite assets at any price created the current perilous financial situation.
Some analysts seem to believe that the cable Internet business
is sound. It is from consumers' standpoint - @Home service has attracted many
millions of subscribers and the growth rate is robust. But can it turn a profit
at current price levels? It's doubtful. According to Weisdorf, on paper the business
model of the AtHome side doesn't make any sense, as "revenues per subscriber keep
going down" while the "costs per subscriber" keep rising.
Ironically, the economics change only after ATHM's current shareholders lose
control of their asset for pennies on the dollar. With control of a debt-free
network, or at least the ability to incur debt on more favorable terms and the
scale to be able to service that debt, the new owners would be probably be able
to make AtHome into a profitable operation. There is no guarantee even of
this, of course. The high-speed consumer ISP business has been a terrible one
thus far; most smaller providers are bankrupt or struggling. The only clearly
profitable Internet service providers seem to be those like AOL who charge
a relatively steep fee for slow 56kBps dialup service. Large-scale digital satellite
provision may turn out to be most economic in the long run for the home user.
One thing is clear: the financials of ATHM today, even without Excite,
are not viable.
Q. Who will wind up with the @Home assets following bankruptcy
proceedings?
A. It's anyone's guess, but I think a consortium of cable companies
will likely buy the AtHome network asset for pennies on the dollar. Current
controlling shareholder AT&T is trying to move its broadband division,
so it might not have nearly as much interest in ATHM as once thought.
Here's a wild possibility, though. A new fiscal
creation could be spun off to replace ExciteAtHome. Cable companies might want
to take another kick at the can and once again fund a service provider that
would be like ExciteAtHome minus Excite, minus the network asset, minus some unnecessary
services, and on much more favorable terms for the cable companies so they
can "make back" some of the money they lost investing in the ill-conceived first
attempt at getting involved with the Internet. With the right moves by investment
bankers, such a company might even make it to an IPO, thus once again
reducing the initial investors' risk and giving them free stock in a company
which might increase in value. It still might make sense to have a full time
dedicated service provider external to the cable companies that takes charge
of the provision of various aspects of the Internet service, rather than
each cable company trying to cobble together agreements with various service providers
and hiring its extra engineers of its own. But it seems as if they'll have to
kill ExciteAtHome before they can create such an entity. At present, the only
thing investment bankers are doing for ExciteAtHome is advising them of how to
sell assets and go quietly.
It's a ruthless game. Where do consumers factor in? We're little
more than pawns in the game, it seems. It's not clear at all that cable companies
can make good on their promises to provide uninterrupted service. Recent announcements
to that effect are likely just an attempt to stem the flow of cancelled subscriptions.
But home users' collective market power may ultimately have
some impact on future trends in the broadband arena. Fed up with unreliable DSL
and cable Internet providers, some may turn to digital cable or wireless broadband
access via satellite. The problem, of course, is that large utility and media companies
are working hard to exert control over these means of content delivery, as well.
Monopoly money rules the airwaves.
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