Nothing Exciting Coming Home
By Aram Fuchs
May 11, 2000
EXCITE@HOME (ATHM) was originally supposed to be the ultimate Internet portal. Excite, with its large reach in narrowband, combined with the broadband cable access that @Home provided was to create a bandwidth juggernaut.
That's not what's happening. The growth in EXCITE@HOME's narrowband base business is slowing. The company missed its March quarter revenue estimate, blaming the shortfall specifically on the "monetization" of the Bluemountain Arts acquisition. But, we at Fertilemind.net believe this is simply an excuse to cover up the real dirt in the EXCITE home.
The business of narrowband portals is, and always will be, marginally unprofitable for all players except YAHOO! (YHOO). Close to half of America is already online, so the growth in new users is about to slow dramatically. According to MEDIA METRIX (MMXI), users are not spending dramatically more time online ? as they must in order to compensate for a decline in the number of new users.
YAHOO! is the only major portal that is comfortably profitable. It continues to enjoy the mass that allows users to have a "one-stop shop" for their Web-based content and community needs. Because advertisers can get the reach they need from YAHOO!, they spend more of their marketing dollars with YAHOO! than with the other portals. This has forced the other portals ? Excite, LYCOS (LCOS), Alta Vista and Go.com ? to spend more money on marketing in an attempt to attract more users. With the burden of large marketing expenditures, however, these portals are never going to be more than marginally profitable.
Beset by intense competition in their narrowband business, EXCITE@HOME tried to keep Wall Street's attention on the potential of their broadband business, @Home. But, while @Home has less competition than the Excite.com portal business, it has tremendous structural problems. Subscribers to @Home access the Internet via cable modems connected to their cable TV. But, in order to get people on to their network EXCITE@HOME has to cut deals with the cable companies.
Unlike the telephone companies, the cable players are not obligated to give access to their cable wires, and EXCITE@HOME's cable partners used their power to extract onerous terms for access to their networks. EXCITE@HOME signed a new deal in the first quarter of 2000, securing exclusive distribution on the AT&T network until 2002. For that privilege, EXCITE@HOME had to convert 10 million class A shares owned by AT&T to B shares, which carry 10-times the voting power, and give AT&T the right to buy 25 million Class A shares and 25 million class B shares. The conversion and purchases would increase AT&T's voting stake in EXCITE@HOME to 75% from the current 56%.
COX COMMUNICATIONS (COX) and COMCAST (CMCSK) ? which each own about 8% of EXCITE@HOME ? gained similar concessions when they extended their exclusive distribution agreements with EXCITE@HOME. COX and COMCAST each received warrants to buy two shares of EXCITE@HOME stock for each home its system passes. The warrants vest in six-month stages beginning in June 2001, and vest fully in June 2006, so long as COX and COMCAST extend their nonexclusive distribution agreements through that time. In order to have access to the combined 14.2 million subscribers of COX and COMCAST, EXCITE@HOME had to promise stock valued at around $568 million, as of May 8, 2000).
Under the best scenario EXCITE@HOME will lose its exclusivity on its cable partners' platforms in 2002. When that happens Fertilemind.net thinks that EXCITE@HOME shareholders will be left with a narrowband business that has been decimated by competition and a broadband business facing its own competitive battle. We say sell the stock.
Aram Fuchs is CEO of www.fertilemind.net, an independent Internet equity research house.
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Author missed a key point with "Close to half of America is already online". That may be true, but high speed access subscribers is something altogether. Probably less than 7%.
Something that I am seeing out in the construction business is the evolution of gas companies laying fiber optic cables so they can leasing the access line in the future. Duke Energy and El Paso Gas do this with their lines. I think the exclusivity issue will play out differently if these companies start challenging local MSOs.
Jack
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