A Hitch to Marital Web Bliss
June 9, 1999 NY Times
Excite@Home Is Often at Odds With Its Cable
Parents
By SAUL HANSELL
EDWOOD CITY, Calif. -- It is early in the honeymoon for
the At Home Corporation, a provider of fast Internet
access through cable lines, and Excite Inc., the country's
second-largest Internet portal, which it just bought for $6.7
billion. But Excite may already feel like the bride who finds that
her in-laws are bent on undermining the marriage.
Executives at several of
the big cable companies
that control the newly
combined company are
now dropping loud hints
that they think the deal,
which they approved,
was a mistake -- most
notably, Leo J. Hindery
Jr., who runs the cable
operations for AT&T,
owner of 58 percent of
the voting shares of what
is now called
Excite@Home. Hindery
has publicly questioned
whether At Home should be so closely tied to a single source of
news, e-mail and other services.
That has been the strategy long articulated by Thomas A.
Jermoluk, formerly head of At Home and now chief executive of
Excite@Home. His plan is to use fast Internet access to steer
users directly to pages run by Excite, replicating the all-in-one
power of America Online Inc.
It is a big challenge to take on America Online, which adds
some 600,000 paying customers a month and is planning its
own high-speed service, through telephone wires.
But the Internet world is changing, with far faster networks soon
to be hooked up to computers, televisions and all manner of
devices. And with a potential of 65 million homes served by its
cable systems, 26 million current users of Excite and a market
value of $18 billion, Excite@Home has as good a chance as
any company to be a contender in this new market.
It does, that is, so long as everybody in the family gets along.
"The biggest threat to At Home now is themselves," said Abhi
Chaki, head of broadband consulting at Jupiter
Communications, a market research firm in New York. "There
may well be an implosion."
Indeed, since At Home was born in 1995, its cable parents --
primarily AT&T, the Comcast Corporation and Cox
Communications -- have done as much to stunt its growth as to
nurture it. They have, for one thing, been slow to add the
capability to handle two-way data traffic. So At Home, which
once promised to have a million subscribers in its first year, will
not reach that milestone until the end of this year, giving phone
companies and satellite providers the chance to develop rival
high-speed technology.
The cable companies gave At Home the right to block any other
provider from using their systems to offer high-speed Internet
access, but that block ends in 2002.
In addition, Excite@Home may be a pawn in its own parents'
bickering. Looking at its board, it is no wonder one cable
executive called it "the Falcon Crest of Silicon Valley."
The core is L. John Doerr, the venture capital impresario at
Kleiner Perkins Caufield & Byers, and John C. Malone, who as
chairman of Tele-Communications Inc. agreed to back Doerr's
plan for high-speed service. Also on the board is C. Michael
Armstrong, chairman of AT&T, which recently bought TCI, and
Brian L. Roberts, president of Comcast, which AT&T just outbid
in the takeover battle for another cable company, Mediaone.
So far, despite the public
griping, Jermoluk, known as T.
J., has been able to get the
board to back his plan,
negotiating deals with 21 cable
companies to offer its
high-speed service.
"I've been really impressed with
the force of will that T. J. has to
pull this strange collection of
bedfellows into a common
team," said Geoffrey Y. Yang, a
venture capitalist with Institutional
Venture Partners in Menlo Park,
Calif., who served on Excite's
board. "When you talk to the
guys who work at At Home, there
is almost a cult of T. J. To them,
he's larger than life."
Now Jermoluk has to bridge an entirely different culture gap. For
as much as the cable companies see At Home as their prodigal
son hot rodding around Silicon Valley dreaming of being in
show business, to Excite it is a timid Mama's boy. "The cable
companies, while entrepreneurial, are not necessarily moving at
Web pace," Yang said.
Of more concern to At Home's owners is the World Wide Web
credo that a company must dominate a market or die. At Home,
typically, wants every advantage and is trying to lock cable
systems into exclusive deals and funnel users into services on
which it controls the advertising.
The cable companies are used to cozier competition, with
system operators owning pieces of many programming
channels. And they are more used to operating under the
watchful eyes of regulators.
"Left to its own devices, At Home would go and play things up
that have a negative effect on cable," said one At Home board
member.
Since the cable companies are spending $5 billion to $10
billion to upgrade their systems to handle two-way data, they
insist that At Home not appear so monopolistic as to invite new
Government regulation.
That is what America Online has been asking for as it
complains bitterly to Washington that the cable systems will not
let it buy broadband access wholesale, bypassing At Home's
service.
Hindery has told cable executives that on AT&T's systems, the
country's No. 1 portal, Yahoo, will get equal placement to Excite.
And last week a Federal court upheld a rule by Portland, Ore.,
requiring AT&T's cable system to offer access to other Internet
services.
Jermoluk is quick to point out that At Home users can go
anywhere on the Web. But he says it is essential that the first
screen customers see, with links to news, e-mail, shopping and
so on, be Excite's.
At Home figures it will only break even from its 35 percent of the
monthly fees for its Internet service. (The cable operators keep
the rest of the fee, now about $40.) So advertising must provide
the profit.
"We think that over time, the revenue from transporting data will
continue to fall," Jermoluk said. "That's why in our long-term
business model, half our revenue comes from the media side."
Some analysts disagree, saying the transporting of data --
which happens to be what AT&T and At Home's other parents
do for a living -- can be profitable.
"Internet access is going to be a commodity," said Chaki of
Jupiter. "But there are still going to be people who make a lot of
money on access. And their whole subscription model is
muddled because they have this media play through Excite."
If the board did not agree, though, why did it approve the Excite
deal?
Excite had decided to sell itself because its stock market value
was too low to make big acquisitions, and it feared that it would
fall further behind Yahoo. Ultimately, At Home's board decided
it, too, could best protect its investment by growing. "Frankly,
Excite isn't Yahoo and At Home isn't AOL," one board member
said. "So it was a logical pooling of resources."
Excite may not quite be Yahoo, but it has come a long way since
it was founded by a group of Stanford University graduate
students in 1995. Running a marathon at the pace of a sprint,
Excite transformed a tiny search engine into a vast portal, a
collection of services from stock quotes to shopping.
"There was never enough time," said George Bell, Excite's chief
executive, who is now president of the combined company. "You
worked. It got dark. You woke up. Someone handed you a piece
of pizza and it started all over again."
Excite's breakneck style is far different from the more measured
pace of At Home, which has taken years to prepare for a battle
that could play out over a decade.
It's no surprise, then, that the two chief executives could hardly
be more different. Jermoluk, a windswept blond from Hawaii, is
an ambitious Silicon Valley engineering executive, known for his
laid-back style and wild office parties. Bell, a sober, dark-haired
New York publishing executive, is just as ambitious, but is
known for hands-on control and long hours.
And while Jermoluk is always the engineer, Bell has far more of
a media perspective. "T. J. will come in, and if he's feeling
particularly perky, he'll ask about whether we should use an
interrupt model or a polling model to get data from the cable
modems," said Adam Grosser, the head of engineering.
"George wants to know about page views and advertising
revenue."
Both executives say that for it to work, the
merger must not hinder Excite's ability to
keep up with the other portals. So far, the
combination seems smooth, aided by the
coincidence that the two companies
occupy adjacent office buildings here on
the northern edge of Silicon Valley. And
since there is little overlap in their
operations, there have been no layoffs.
While it was Jermoluk who offered the No.
2 spot to Bell, several board members were pleased, hoping
Bell's reputation for detail would help compensate for some
gaps in service quality they attribute to Jermoluk. They also
seemed reassured to have a talented backup to Jermoluk, who,
with stock options worth more than $400 million, may not have a
strong incentive to stay on indefinitely.
Jermoluk says he will stay, though, and there is certainly no
shortage of things that he and Bell say they plan to do. Excite,
for example, will be reformatted to serve users equally well at
slow and fast speeds, offering those on the faster broadband
connections more video and graphics.
Excite's vast marketing data base will also be expanded to
incorporate data from cable set-top boxes, which are really
minicomputers. That way people who watch the Food Channel,
for example, will see ads for frying pans when they later surf the
Web. And any Excite user in an At Home service area will get a
barrage of offers for high-speed access.
The company also has to complete development of its
interactive television service, another project Jermoluk
persuaded a skeptical board to back. He wants to offer news,
shopping and Internet surfing on TV screens, somewhat the way
the Microsoft Corporation's WebTV does. (AT&T is the only
cable company interested so far.)
There is some deal making to do over Road Runner, the rival
cable Internet service started by Time Warner and Mediaone.
Jermoluk has long wanted to buy Road Runner, and some deal
is more likely now that AT&T is buying Mediaone, and Microsoft,
which owns 10 percent of Road Runner, has invested in AT&T.
But some executives at Time Warner and some of At Home's
owners wonder whether the industry would not be better off with
two competing services.
Even without those deals, Excite@Home will have to complete
its $500 million nationwide backbone network to link the cable
system so it can handle all the customers Jermoluk is expecting.
By 2002, he wants 10 million to 15 million subscribers to the
Internet service and 40 million to 50 million people using its
interactive television service.
It is no accident that Jermoluk is tuning his plans to 2002 -- the
year the exclusive contracts end and cable operators can sell
access to America Online, Road Runner or anyone else. By that
point, Jermoluk says, Excite's service will be so popular that the
cable systems will want to offer it.
"Our job is to be a strong enough and powerful enough brand,
like MTV and ESPN, that the cable systems will want to keep
working with us," he said.
And ultimately, Jermoluk said, Excite@Home has a measure of
protection from too much interference from its meddlesome
parents because they own so much of its stock.
"If we are a valuable property for them," he said, "why would they
go a different way and throw away their equity value?"
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