Motley Fool article (part 2)
AOL@Home? (Part 2)
Creating Competition. Plus, @Home's
Earnings
by Nico Detourn (TMF Nico)
SILICON VALLEY, CA (July 20, 1999) --
Yesterday's Rule Breaker Portfolio looked at a
possible partnership or merger between America
Online (NYSE: AOL) and Excite@Home
(Nasdaq: ATHM). We focused in particular on
talks between the two that broke off late last year,
prior to @Home's merger with Excite and the
creation of Excite@Home. The new company
reported its quarterly results today after the market
closed, and Jeff Fischer's first take on that can be
found below.
According to @Home Chairman and CEO Tom
Jermoluk, the sticking point in negotiations with
AOL was AOL's insistence that @Home's role be
limited to being a provider of high-speed network
services, thus reducing its visibility and status to that
of a "dumb pipe."
AOL's insistence on this point created a less than
amicable negotiating environment, suggesting
AOL's interest in crafting a deal was less than
@Home's, and less than it was generally thought to
be. Although we can never be certain, this further
suggests that a deal could likely have been done
had AOL been motivated. Yesterday's RB Port
also noted that the negotiations over a
year-and-a-half provided each company with
valuable insight into the other's strategy and vision
for how the Internet might evolve.
In order to get a better view of how the two
companies might have partnered, or might yet do
so, we need to look at other events that took place
at the same time and subsequent to their aborted
negotiations.
In particular, America Online's acquisition of
Netscape Communications and @Home's acquisition of Excite need to be
examined. To fully place these events in context, though, we also need to
look at AOL's relationship with Excite, as well as Excite's relationship with
Netscape -- a tangled web by any measure.
AOL and Excite and Netscape
Just as we might conclude that AOL could have done a 1998 deal with
@Home had it wanted to, the same can be said of a deal between AOL
and Excite.
America Online at one time owned approximately 20% of Excite. One of
the original Web search engines, Excite had for about two years been the
exclusive co-branded Internet search and directory service on AOL and at
AOL.com. Excite's first Instant Message program was licensed from AOL.
AOL's President and Chief Operating Officer Bob Pittman had been an
Excite board member prior to joining AOL, and AOL's Steve Case had
also been on Excite's board.
At the time the AOL-@Home negotiations hit the wall in November 1998,
AOL was also negotiating to acquire Netscape. In that acquisition,
announced in late November, AOL inherited an extensive May 1998
partnership between Netscape and Excite. The arrangement, laid bare for
AOL in its due diligence of Netscape, essentially called for Excite to
manage and operate large portions of Netscape's Netcenter, integrating
Excite search technology, content, and interactive marketing know-how in a
late attempt to rejuvenate the neglected portal.
Suffice to say that America Online, which by all appearances operates in
continuous-acquisition mode, knew Excite well, and was in a position to
determine what Excite could add as part of AOL's growing portfolio of
online operations.
In addition, we know that Excite was at the same time starting to shop itself,
or, as the @Home-Excite merger prospectus puts it, "pursue a business
combination and/or strategic partnership with a range of companies."
Indeed, America Online and Excite were reportedly in negotiations as late
as mid-December, two weeks after the AOL-Netscape deal had been
announced.
Of course, none of this means Excite would have sold itself to AOL on
AOL's terms. Nor does it mean AOL could have swallowed both
Netscape and Excite in such short order. All things considered, though, if
AOL had wanted to acquire Excite within that general time frame, it most
likely could have.
Creating Competition
In one of the other prime quotes from this period -- a companion to "dumb
pipe" -- Excite's George Bell acknowledged that AOL's Netscape
acquisition helped him realize that Excite could not "out-Yahoo! Yahoo!." It
would in addition leave Excite vulnerable to America Online, which would
now own one of Excite's largest strategic partners.
It was also at this time that @Home's Tom Jermoluk began pursuing
mergers with content companies in a strategic reassessment surely
influenced by his recently ended stand-off with AOL. In a rapidly
consolidating industry dominated by America Online, Jermoluk's new
course would broaden @Home's operations and allow it to more effectively
compete.
As we've seen, AOL would have had a good sense of how @Home and
Excite were positioned and what they were capable of. What's more,
knowing that its acquisition of Netscape was about to reconfigure the
industry, AOL was actually driving the logic that was about to motivate Bell,
Jermoluk, and others.
From AOL's perspective, which given what it knew was at least one step
ahead of the game, an @Home-Excite merger would be the shortest
distance between where those two companies were, and where they
needed to be.
Powered by @Home and its cable partners, Excite could more effectively
stand against Yahoo!, AOL, AOL's Netscape, and others. Likewise, with
the media savvy and content of Excite providing "smarts" to @Home's
high-speed pipes, Tom Jermoluk could recreate his company according to
his vision, rather than yielding to what AOL had insisted it be during their
aborted negotiations.
The great irony that falls out of this analysis is that America Online's actions
in November and December 1998 virtually ensured the creation of its main
competitor in January 1999. In fact, Excite@Home is the strongest and, I
believe, the first significant single competitor AOL has faced to date.
Opportunity Lost?
Was not dealing with @Home an error on AOL's part?
It could play out that way. But it is better to influence events than to simply
wait for events to happen, especially if future competitors can be identified.
Surely Excite and @Home would be around in one form or another no
matter what. The advance of cable and other broadband services could not
be stopped. Accepting the inevitability of this competition, and surveying the
possibilities, America Online made decisions and took actions that in turn
influenced the actions of its competitors, entailing the risk that competitors
end up strengthened.
Both AOL and Excite@Home are today going down their own road, no
doubt hoping the other stumbles, if not working to bring that about. On the
surface, at least, they both appear reasonably confident. A future merger
between America Online and Excite@Home remains an intriguing
possibility. But the interesting thing about the present situation is how it can
be seen as resulting from deals that were not done, but that involved the
identical cast of players.
In the end, America Online's decisions not to deal separately with either
@Home or Excite helped create the possibility of dealing with them in
combination at a later date. Whether those decisions add up to an
opportunity lost or an opportunity deferred remains to be seen. Certainly
neither America Online nor Excite@Home will be vacating the scene any
time soon.
Today's News
by Jeff Fischer (TMF Jeff)
Excite@Home (Nasdaq: ATHM) announced $100 million in pro forma
(continued operations) second-quarter revenue, an increase of 140% from
the prior year. Total @Home subscribers leapt to 620,000, up more than
300% from the second quarter, 1998. These results exceeded average
estimates of $90 million in revenue and 610,000 subscribers, while homes
made ready for cable reached the expected 17 million mark, as we
discussed last week. Excite@Home lost a pro forma $0.02 per share,
matching the estimate.
Excite's website also performed well, although page views didn't rise as
much as some expected. The 81 million June page views was a modest
climb from 77 million in March. Estimates ran as high as 87 million.
However, registered Excite users climbed 36% to 38 million -- great results
during the slower quarter two period.
With $433 million in cash and investments, including $50 million invested in
five Internet startups, Excite@Home is in a great financial position as it
builds towards year-end profitability. And build it is. Like wildfire. The
company's press release explains everything that Excite@Home is doing --
and we do mean everything -- and on the Fool, this news is followed by
comments from various readers. The beginning of the thread (the press
release) can be found here.
Elsewhere in the news, certainly you saw that the Nasdaq declined 3.4%
today. The decline follows several days of record highs, the last of which
was Friday. This week hasn't been a picnic. Living up to its volatile
reputation, in two days the Nasdaq Composite has fallen 4.95% below its
high. If you're not long-term, that hurts.
Falling with the stock market has been Amazon.com (Nasdaq: AMZN).
The company should report a widening loss on July 21. It costs money to
build, and it is easy to criticize a work in progress, especially when you can't
visualize its completion. Picture a half-painted Picasso, or any novel
half-written. The best of these are often criticized in their beginning by critics
who can't envision a completed work. I don't see Amazon being treated
much different.
Meanwhile, news that America Online (NYSE: AOL) will offer a free
Internet service in the U.K. didn't raise eyebrows. It will be called Netscape
Online -- and that's instant brand recognition. Nice. We reported on the
possibility here twice in the past few weeks before yesterday's
announcement.
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