Just a long-winded synopsis of my due diligence. I see more risk in this stock than most on this thread.
From ATHM's S-3 filed 4/9/99 (with my unsolicited commentary):
Depending on their subscriber penetration rates, as of June 4, 1999 and as
of each anniversary of that date, Cox or Comcast has the right to terminate the
exclusivity provisions of our principal cable partners if AT&T and its
affiliates do not meet certain @Home subscriber penetration levels. On June 4,
1999, we expect that Cox will have this right, but Cox has agreed to waive it in
1999 so long as certain governance changes are approved by our board and
stockholders and are approved prior to July 22, 1999. We plan to submit the
proposed changes to the board for approval at our next board meeting later this
month and to our stockholders at our 1999 stockholder's meeting. Upon board
approval, including approval by the board designees of AT&T, Comcast and Cox,
our stockholders agreement will require AT&T, Comcast and Cox to vote their
shares in favor of the changes. These governance changes will generally require
board action to be approved by a majority of our board, which majority includes
the board representatives of AT&T and either Cox or Comcast. In addition, as
further consideration for Cox's waiver of its right to terminate exclusivity as
of June 4, 1999, AT&T has agreed to increase its subscriber acquisition goal for
the next twelve months above its current goal for that period....
We believe subscriber growth has been constrained, and will continue to be
constrained, by the cost and the amount of time required to install the @Home
service for each residential consumer. In addition, our growth has been
constrained by the rate at which our cable partners have upgraded their systems,
and most of our cable partners are not obligated to upgrade their cable
infrastructures or market the @Home service. Moreover, the @Home service is
currently priced at a premium to many other online services, and large numbers
of subscribers may not be willing to pay a premium for the @Home service....
If Comcast or Cox terminates the exclusivity obligations, this could
significantly harm our business and cause an immediate drop in our stock price.
Finally, Comcast may terminate its own exclusivity obligations upon its election
after June 4, 1999 if it permits a portion of its equity in us to be repurchased
by us at Comcast's original cost. Comcast has informed us that it has entered
into an agreement with Microsoft Corporation under which Microsoft can require
Comcast to terminate its exclusivity obligations after June 4, 1999. Although
Microsoft has stated in the agreement that it has no present intention to do so,
Microsoft may be more likely than Comcast to terminate Comcast's exclusivity
obligations. (Remember MSFT has investment in Road Runner, and MSFT co-founder Paul Allen has a stake in High Speed Access Corp with ties to Go2Net portal. This gives Comcast two viable options to ATHM)
Until the later of June 4, 2002 or such time as a principal cable partner
is no longer in compliance with its exclusivity obligations, we may not offer
the excluded services described above using a principal cable partner's cable
plant, or to residences in the geographic areas served by its cable systems,
without its consent. These restrictions apply even if we have integrated an
excluded service with the @Home service in another geographic area. In the case
of streaming video transmissions that include video segments longer than 10
minutes in duration, we face increased obligations to our principal cable
partners that remain in compliance with their exclusivity obligations.
Specifically, we have agreed not to allow these video transmissions using their
cable infrastructure, or in the geographic areas served by their cable systems,
without their consent. Therefore, we may never have access to the cable
infrastructures of our principal cable partners for excluded services, and we
must negotiate a separate agreement, including a new revenue split, if
applicable, with each of the principal cable partners for each excluded service
that we seek to provide over their cable infrastructures. (So ATHM's content is in part regulated by the Cable Companies).
Time Warner and MediaOne plan to market
the Road Runner service through their own cable systems as well as to other
cable system operators nationwide. (Of course there is the looming risk that Comcast will switch to Road Runner in which both Comcast and Time Warner have one-third interests.)
OUR CABLE PARTNERS ARE NOT GENERALLY OBLIGATED TO CARRY OUR SERVICES, AND THE
EXCLUSIVITY OBLIGATIONS THAT PREVENT THEM FROM CARRYING COMPETING SERVICES ARE
LIMITED AND MAY BE TERMINATED
Our cable partners are subject to certain exclusivity obligations that
prohibit them from obtaining high-speed, greater than 128 kilobits per second,
residential consumer Internet services from any source other than us. However,
most of our cable partners are under no affirmative obligation to carry any of
our services, and the exclusivity obligations of our principal cable partners,
TCI, Comcast, Cox and Cablevision, expire on June 4, 2002, and may be terminated
sooner under certain circumstances. For example, our principal cable partners
may terminate all their exclusivity obligations upon a change in law that
materially impairs certain of their rights. Also, Comcast or Cox may terminate
all exclusivity obligations of our principal cable partners at any time if there
is a change of control of TCI that results, within one year, in the incumbent
directors of TCI no longer constituting a majority of the TCI board of
directors. In a letter agreement between AT&T and TCI, AT&T confirmed that it
was in AT&T's best interest to keep the exclusivity obligations that apply to
@Home's principal cable partners in place. Therefore, AT&T agreed not to
intentionally take or fail to take any actions with respect to the membership of
the TCI board of directors which would allow these exclusivity obligations to be
terminated.
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So, where does ATHM stand?
Current subscribers:....about.........450,000
Potential subscribers...TCI........14,500,000
........................Cox.........3,800,000
........................Comcast....11,000,000 (could easily lose)
........................Cablevision..?????
........................Adelphia....Has its own system
........................Charter.....Has High Speed Access Corp
........................Time Warner.Has Road Runner
........................Media One...Has Road Runner
........................Small Cable cos.
ATHM Market Cap with Excite...about 31 billion
ATHM value per subscriber.....about 68,000
AOL market cap with Netscape...about 150 billion
AOL value per subscriber about 10,000
ATHM valuation obviously assumes extreme growth ahead. Each ATHM subscriber should probably be assigned more value than an AOL subscriber because of the higher quality services that can come over broadband, but this disparity is assuming a steep growth rate ahead.
ATHM has stated directly in their S-3 that there are limitations to their growth that may be beyond ATHM's control. If they lose Comcast it could be game over for current extreme valuations. That would leave too few potential customers to expect such unprecedented growth that is now built into the stock price.
So, what will happen? Road Runner and ATHM may merge which would provide a real powerhouse. What seems certain, though, is that the stock price will double again in the next three months, no matter how ridiculous that may seem from realistic growth prospects.
I wish you all good tidings on this one, but I feel the risk/reward is just too big for me.
Erik (IMHO) |
