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<THE RULE BREAKER PORTFOLIO>
AOL@Home?
To Deal Or Not To Deal (Part 1)
by Nico Detourn (TMF Nico)
SILICON VALLEY, CA (July 19, 1999) -- Earnings
season is in full bloom, and some of the Rule Breaker
port's most well-followed companies report quarterly
results this week. Tomorrow is Excite@Home's
(Nasdaq: ATHM) turn. Wednesday is a
double-header, with both America Online (NYSE:
AOL) and Amazon.com (Nasdaq: AMZN) turning in
report cards for the hopefully proud and delighted
perusal of their investors. Their announcements will give
us a concise snapshot of these companies, so do
peruse, all. In case you missed any of last week's RB
reports, Jeff Fischer did separate previews for both
AOL and Excite@Home.
As Jeff noted, Tuesday will be the first time @Home
reports its quarterly results since acquiring Excite, which
brings several new factors to our attention. For
example, in addition to the all-important cable
homes-passed (meaning ready for service) and
@Home subscriber counts, Excite's registered users
are now a leverageable company asset, and page views
are of greater competitive significance now that the
"new @Home" is in the big-time portal biz.
One question that comes up regularly on the
Excite@Home and AOL message boards is whether a
deal can be done between the two companies and what
that might look like. This intriguing possibility has been
hovering out there almost since @Home's inception but
really came forward late last year with reports that talks
between the companies had stalled.
Things have changed since last year, though.
Excite@Home in particular is a stronger company, with
greater revenue and audience "reach" potential than
either @Home or Excite were able to claim separately.
AOL has also made several acquisitions since then.
These developments would naturally add some complexity to deals between
what nevertheless remain two rather complementary companies.
Another factor is AT&T's (NYSE: T) controlling interest in Excite@Home,
which it places near the center of its high-stakes broadband strategy. Although
this wouldn't necessarily preclude a variety of deals, it could be an issue for
AOL, which has achieved and so far maintained its industry-leading position due
in good part to its independence.
Many good arguments can be made for a deal -- some even speculate a merger
-- between AOL and Excite@Home. But would the companies really want or
need deals similar to some of the ones that have captured the imagination of
investors and Internet watchers? As much as the pieces would fit, when I look at
the situation, I don't believe either party currently sees a compelling reason to
accommodate the other.
The "Dumb Pipe" Impasse
If AOL and @Home had both wanted a deal, they probably could have had one
last year.
Talks between the two hit an impasse last November over what @Home's
Chairman and CEO Tom Jermoluk said was AOL "insisting that @Home be a
dumb pipe," a mere conduit for delivering AOL's service over @Home's
high-speed infrastructure. I've always found that quote rather telling. It's more
than just a colorful phrase and a bit of industry gossip, especially since it is one of
the few pieces of information we have about the AOL-@Home talks.
Of course, from a purely technical point of view, all pipe is "dumb," getting its
"smarts" only from the data or content it carries. It would only be called "dumb"
when making that very point, or when assigning relative value and importance to
access and content. And although we don't know whether the words "dumb
pipe" were first said by AOL to describe @Home, or by Jermoluk to
characterize AOL's attitude, the understandable frustration expressed in
Jermoluk's public comments leaves little doubt that whatever words were used
by whom, AOL hit a nerve by "insisting" @Home accept a status beneath its
ambitions.
So what happened? Is it possible AOL set out to deliberately insult @Home?
Round and Round
What seems certain is that AOL would have approached @Home from its own
unique perspective on how a relationship might be structured between an
aggregator of content and commerce services with a massive user base and
high-value brand, and an access provider with a relative lack of all three of those
essential assets. America Online had the installed customers and presumably
would need only let them know of a "new and improved AOL Plus" for them to
turn their eyes toward AOL's broadband partner.
For its part, @Home entered negotiations from the perspective of the premier
provider of high-speed services, on the leading edge of the interactive future.
Yes, it wanted to fill its state-of-the-art pipes with content for paying subscribers
-- it was negotiating with America Online, after all. But it also wanted more
visibility than "just" being AOL's broadband provider would allow for, especially
if AOL saw the relationship as similar to its other network services deals, in
which Internet access was resold and rebranded as AOLnet. That wouldn't leave
much room for @Home to achieve its undoubtedly intensifying ambitions.
The more AOL negotiated from its advantage, the more it insisted that @Home
be limited to pipe status. Round and round they went, according to Jermoluk, for
a year and a half.
"What would be acceptable to you?"
"What if we tried this?"
"Why should we give you this when you're only providing us with that?"
"How can you accomplish what you want without our unique resources?"
Either party could have made any of those statements, and both probably did at
different times. Eventually, negotiations broke down.
Are You Reading Me?
Tom Jermoluk's frustration speaks to @Home's interest in doing a fair and less
lopsided deal. That apparently depended on AOL's real interest and motivation
in the negotiations. Based on the evidence, we might conclude AOL could have
had a cable broadband deal last year had it really wanted one. It apparently did
not.
One interesting aspect to all this, as the talks went back and forth, is that it's more
likely that @Home's ambitions, its overall position, and the outline of its vision,
became known to AOL. And although these ambitions were surely no surprise,
their subtleties and the course of their evolution could have been inferred by an
outsider, such as AOL, only through a careful and intentional reading over time of
@Home's reaction to the insistence that their ambitions be limited and
subordinated.
At the same time, @Home knew that what it brought to the table was no small
thing. High-speed connectivity was unquestionably the future. AOL knew that,
too -- it was negotiating for that very thing. Or so it seemed.
And just as AOL was reading @Home and psyching-out @Home's strategies
and intentions, @Home's post-game analysis of AOL's stubborn arrogance on
the dumb pipe point must surely have influenced its view of how it might navigate
the high-speed changes of this brave new medium. Indeed, some serious changes
loomed just over the horizon.
Tune in tomorrow. Same Fool time. Same Fool channel. There are Exciting times
ahead. We'll consider them next.
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