The future of cable based broadband access is bright. The question is exactly when it will be translated into a large revenue stream for COM21.
See the article below; broadband is coming, soon.
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March 30, 2000
Dow Jones Newswires
SMARTMONEY.COM: For AT&T, It's The
Network, Stupid
By ALEC APPELBAUM
Smartmoney.com
(This story was originally published Wednesday.)
NEW YORK -- AT&T (T) rescued Excite At Home (ATHM) from the ether
of uncertainty today, and it bore the cost by agreeing to dilute its 2000
operating earnings by 20 cents per share. But this was no sacrifice by AT&T.
Instead, it's a tactic for survival in the future.
Two years ago, AT&T stormed into the cable business by buying TCI, and
then bought MediaOne (UMG) to become the nation's biggest cable
provider. The bet was cable systems would become the dominant high-speed
networks carrying phone calls, Internet service and TV. TCI used At Home
as its exclusive high-speed Internet service by contract; AT&T inherited that
relationship. It also inherited a huge, sprawling cable empire and applied a
huge bureaucracy to modernize it. Meanwhile, Cox (COX) and Comcast
(CMCSK), smaller and more nimble cable companies that had their own
deals with At Home, deployed phone-over-cable and interactive TV offerings
more smoothly than AT&T could. When America Online (AOL) announced
in January that it would buy Time Warner (TWX), a huge cable operator in its
own right, pressure increased on AT&T to get its systems up to snuff.
Today AT&T basically took over Excite At Home's governance and pledged
to use it as its high-speed Internet carrier until 2008. It's converting part of its
stake into Series B stock, which has 10 votes per share. Even though it's not
increasing its overall financial interest, Ma Bell is taking over 74% of Excite At
Home's voting stock. (Excite At Home, happy with AT&T's ownership, will
shelve plans to raise money through a media tracking stock.) Excite At
Home's unprofitable results will now show up on AT&T's books. But AT&T
CEO C. Michael Armstrong seems to think it's worth it. For the price of a hit
to operating earnings - which don't have much weight with Internet analysts
anyway - Armstrong gets to really lean on Excite At Home's engineers to help
him keep his cable-Internet promises.
None too soon. While AT&T's engineers have invented lots of things, they've
never managed a national high-speed Internet service. Excite At Home's
engineers have. Now, AT&T needs that expertise and work force. Systems
the company inherited from TCI are 'incredibly thin' in terms of upgrades,
says cable-modem consultant Michael Harris of Kinetic Strategies. Excite At
Home's engineering corps looks like a valuable bullpen for the bureaucratic
AT&T as it races to keep pace with Comcast, Cox and, now, Time Warner.
This deal is all about AT&T wanting to own a network that will let it beat
Time Warner with a national high-speed audience, says Dataquest analyst
Patti Reali. 'Simplified governance allows them to move more quickly in the
face of increased competition. That's the deal.'
Armstrong talked about the deal in terms of technical strength at today's press
conference. He spoke of fusing the two companies' 'network wherewithal.'
He outlined how Excite At Home would help AT&T 'set up for multiple
[ISPs]' on its systems, provide more heft in its data centers and collaborate
'on the network so we can deploy the network faster.'
AT&T has to lure not only eager-beaver Web-heads, but long-distance
customers who currently don't see much lure in high-speed access. That
means service incentives and promotions similar to the high-speed demos
AOL plans to run in conjunction with Sears (S). For example, AT&T might
give away free cable modems to make customers interested in high-speed
cable Net access. But once AT&T uses its network to offer customers local
and long-distance phone service, plus Internet access and cable TV, that
network will have to run flawlessly: The loss of such a 'bundled' customer
would be a costly loss indeed. And helping to make the network run
flawlessly is where Excite At Home comes in.
The cost is assuming Excite At Home's unprofitable operations and asking the
Street to value AT&T stock as a multiple of cash earnings, or earnings
excluding fixed charges. CFO Chuck Noski argued that Ma Bell has
positioned itself as a 'growth company' for years now and shouldn't faze
anybody with this move. David Goldsmith, a Wall Street Journal All-Star
analyst with Buckingham Research, told us through an assistant that he
wouldn't have trouble with this approach and doesn't think his colleagues will
either.
Meanwhile, it's easy to see why the other players benefit. Excite At Home will
provide the underlying access services and software to AT&T for six years
and to Cox and Comcast for four after its exclusive contracts expire in 2002.
The cable companies also agreed to make Excite.com, the company's search
engine, the start page on their Internet service. 'We've secured a long-term
future for the Excite.com portal,' said George Bell, Excite At Home's CEO.
Bell has also secured revenue for a few years - and observers had worried
revenues would dwindle if AT&T let other Internet service providers use its
networks.
Even if consumers choose other Internet service providers such as AOL or
EarthLink (ELNK), Excite at Home will get paid. 'We'll be one of the
elements,' explains Excite At Home Executive VP Mark Stevens. If a
consumer asks for another ISP, 'we would be the network backbone and
infrastructure and get paid for that.' This would seem to resolve the question
of whether Excite At Home would shrivel in any AT&T deal with AOL.
In fact, Excite At Home retains some marketing edge. As AT&T cable czar
Dan Somers explained it in today's press conference, Internet service
providers on AT&T systems would be like channels on a cable TV system. 'If
someone else wanted onto our network, we would try to negotiate a way to
include [Excite At Home and the other provider],' Somers said. Armstrong
said local portals might attract customers in specific cities. By letting
customers choose their ISP - and by enlisting Excite At Home to help build
the data centers that make everything run smoothly - AT&T improves its
chances of generating more traffic, which means higher bills, which means
more money.
Cox and Comcast, meanwhile, get the reward of flexibility. They now can sell
their Excite At Home stakes to AT&T and cut off the exclusive deal as early
as next June. This frees up these smaller cable companies to, theoretically,
align with AOL, which they might want to do if Excite At Home moves too
slowly. But if Excite At Home should work out as AT&T hopes, Cox and
Comcast can up their stake.
AT&T can't waste time cajoling Cox and Comcast to stay invested, though: It
has to worry about beating them. Comcast has already offered
phone-over-cable and is focusing this year on expanding its data presence,
said Executive VP John Alchin in today's conference. Cox has also
introduced some two-way cable services. Ma Bell plainly intends to catch up.
And if AT&T still can't deploy these new systems rapidly by controlling Excite
At Home? Well, there's always Plan B. Buried in the old Excite At Home
charter, a rule required a supermajority to approve a merger, an acquisition of
a company worth more than 20% of Excite At Home's assets or a sell-off of
more than half its assets. Now AT&T's people can steer the board into any
kind of deal.
That's more uncertainty for Excite At Home and AT&T. But in the long run,
it's the good kind.
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