Online:
Inside the Tangles of AT&T's Web Strategy
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By Wall Street Journal staff reporters Rebecca Blumenstein,
Leslie Cauley and Kara Swisher
AT&T Corp.'s race to wire America with fast Internet service over cable lines is quickly turning into
the Web's most complicated business deal.
AT&T is spending $120 billion to buy cable-TV lines, in large part to offer speedy Web hookups to
customers all over America. But it faces a predicament that has the company in high-stakes,
unresolved talks with some of the Web's biggest players: Just what is going to pop up on the
computer screen at the other end of those cable lines?
Behind the battle over that prime electronic real estate is an unusual set of legal hamstrings AT&T
acquired when it bought Tele-Communications Inc., and some high-profile disagreements between a
top AT&T executive and one of its main Web partners.
One choice that some have suggested is for AT&T to offer a link to America Online Inc., the nation's
biggest Internet service, with 18 million subscribers. But right now AT&T has other relationships that
preclude such a deal. Moreover, AT&T and AOL have long been at an impasse over how such a
deal would work.
AOL wants to control customers' accounts, programming the first screen they see and handling billing
and service. That's the approach that has built AOL into a juggernaut, with a gusher of revenue from
customers and marketers eager to pitch AOL users. AT&T at some point might consider a deal to
give AOL access to its cable lines, but the company is adamant that those customers remain AT&T
customers.
The rancor between the two companies has grown considerably as AOL wages a city-by-city fight
against AT&T. AOL's lobbying pitch: AT&T should let AOL run its business over AT&T cable lines,
in the name of "open access." People close to the situation say that the two sides haven't talked
seriously for months, in part because AT&T's executives are infuriated with AOL's continuing
campaign for what they call "forced access."
Meanwhile, AT&T finds itself in an exceedingly complex relationship with Excite At Home Corp.
When AT&T bought the cable giant Tele-Communications Inc. in March, it inherited a big minority
stake in At Home, a company building Web connections via cable lines. It also inherited a contract
making At Home the exclusive online service for AT&T's cable customers through 2002.
Then, in May, At Home merged with Excite Inc., provider of a Web portal ranked No. 8 among the
most popular Internet sites. Suddenly AT&T was in bed not only with the supplier of a Web pipeline
but also with a big supplier of Web content.
Not only that, At Home's complex board structure means that AT&T and its cable partners must
agree on major decisions. And getting all the cable rivals to agree isn't easy. "We are made up of
companies with competing and cooperative relationships, so it is going to be a much harder job to
deal with all the issues facing us," said Excite At Home President George Bell, speaking recently of
the unusual makeup of the board, on which he also serves.
So for now, AT&T finds itself in the awkward position of not having complete control over just what
customers will see on its system. At Home management obviously has an interest in seeing the Excite
screen pop up when customers connect to the Web.
Under the terms of At Home's agreements with its cable partners, AT&T can't cut side deals with
other national Internet players, such as AOL and Yahoo! Inc. Those types of talks are the domain of
Excite At Home, which is free to negotiate with anyone on behalf of all its cable owners.
As AT&T and Excite At Home thrash out these matters in current talks about strategic direction, the
issues are labyrinthine. "Do you remember that game Spock played on `Star Trek'?" says one
executive close to the situation, referring to a perplexing, multilevel board game that appeared on the
television show. "Multiply that times 100 and you'll have an idea of what we are working out."
That's not to say AT&T is unhappy with Excite At Home. To the contrary, AT&T executives point
out that the entire TCI acquisition came about because AT&T wanted to get its hands on At Home.
Though At Home decided to buy Excite before the TCI deal closed, AT&T Chairman C. Michael
Armstrong was kept informed and personally signed off on the deal.
Making matters even more complicated, Leo Hindery, the former TCI president, who now heads up
AT&T's Internet business, has publicly and privately sparred with Tom Jermoluk, Excite At Home's
chairman and CEO.
Mr. Hindery came under fire earlier this year when he tried to negotiate a separate deal with Yahoo,
the popular Internet portal, not long after At Home had announced plans to buy Excite. Mr. Hindery,
a longtime advocate of treating all Internet content providers equally, had viewed such a deal as a
way to blunt public criticism of AT&T that it was hogging cable access to customers.
But At Home officials went ballistic, saying AT&T wasn't permitted to cut a side deal with Yahoo
under its exclusive agreement with At Home. Mr. Jermoluk argued that any Yahoo deal should be
negotiated by At Home, not individual cable companies. Mr. Hindery backed down, but not before
having a spirited discussion about the matter with Mr. Jermoluk and the At Home board, people
familiar with the matter say.
Since then, Mr. Hindery has made it clear that he thinks At Home should be more democratic in its
handling of Internet Web sites, suggesting that Excite should get no better play on At Home's Web
page than, say, Yahoo. Mr. Jermoluk, for his part, has indicated that he intends to give Excite a very
high profile in the At Home domain, though he remains open to bringing in other content providers.
One thing motivating Mr. Jermoluk is the ghost of Netscape Communications Corp., which sold off
positions on its busy search page to Internet companies like Yahoo and Excite, allowing them to
grow large audiences for small amounts while Netscape missed out on building its own site.
"They took the short-term gain and sacrificed the long-term," said Mr. Jermoluk in a recent interview.
"We don't want to be a dumb pipe for others to take advantage of." AOL acquired Netscape earlier
this year.
Mr. Hindery and Mr. Jermoluk are a study in contrasts. Mr. Hindery is meticulously punctual, has a
reverence for the cable industry that borders on religious and maintains a work regimen that begins at
5 a.m. daily. Mr. Jermoluk, considered a very savvy deal maker, is also known for being far more
relaxed and openly pokes fun at the cable industry.
He doesn't help relations by going over Mr. Hindery's head to deal directly with Mr. Armstrong, who
gets along well with Mr. Jermoluk, even though Mr. Hindery is head of the AT&T unit that oversees
At Home. Citing the importance of cable to AT&T's future, Mr. Armstrong has turned unusually
hands-on in his dealings with At Home. He regularly attends board meetings and weighs in on nearly
every decision. (Mr. Armstrong wasn't available for comment.)
Mr. Hindery, in an interview, acknowledged that he sometimes differs with Mr. Jermoluk but said the
issues are purely professional. "For me, it is never personal -- it is always about trying to do the right
thing for shareholders," said Mr. Hindery. "That sometimes leads to differences of opinion, but it is
never personal."
Mr. Jermoluk declined to comment about Mr. Hindery. He said that Mr. Armstrong "has been
incredibly supportive of us and what we are doing, and he is always available," and added: "That has
been critical for us."
The stakes in how the relationship with AT&T develops over time are huge for Excite At Home,
since its success rises or falls on how it gets along with its cable partners. In order to grow, the
company depends on cable systems to upgrade their lines in order to sell Internet service. If tensions
become too great and cable companies lose interest in At Home, the service will lose ground to the
big phone companies pushing a rival technology called digital subscriber lines, or DSL.
In a statement issued Monday, AT&T said: "We respect and will honor our current contract with
Excite At Home, including its exclusivity provisions." But the company also added that it is open to
discussions with others about possible relationships when the contract expires.
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Nick Wingfield contributed to this article.
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Who Owns Excite At Home
Equity stakes
AT&T Corp. 25.9%
Cox Communications Inc. 8.0
Comcast Corp. 8.0
Cablevision Systems Corp. 5.7
Janus Corp. 4.4
Intuit Inc. 3.1
Janus 20 Fund 1.8
Thomas A. Jermoluk 1.7
Vinod Khosla for Kleiner
Perkins Caufield & Byers 1.0
The rest is divided up among publicly held stockholders
Source: Excite At Home |
