CAN SMALL OPS GO HOME

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Marking a significant change in its business strategy,
@Home Network will start an aggressive courtship of small and midsized cable operators by
the end of the year.

Dean Gilbert, senior vice president and general manager of
@Home, confirmed the plan last week, saying that the high-speed online service will
release details over the next few months about how it plans to snare the remaining 27
million cabled homes that are not under contract with any data provider.

@Home owns contracts representing 60 million homes, and
locking up a significant portion of the small and midsized MSO segment could add
significantly to that total.

"We're going after this in a big way," Gilbert
said. "In the very near future, you'll see that our approach will be very
comprehensive."

For small and midsized operators, "comprehensive"
will likely mean financing options, volume equipment purchases and a suite of
technological options to bypass the lack of two-way plant in those systems.

To shape its plan, @Home is working to create logical
clusters of small MSOs that will almost certainly map to Tele-Communications Inc.'s
wide-reaching "friends-and-family" set-top order earlier this year.

In that arrangement, TCI agreed to buy 15 million set-tops
from General Instrument Corp. so that smaller, cash-poor operators -- especially
affiliates of its Headend in the Sky service -- can take advantage of economies of scale.

Those set-tops will include integrated cable modems -- a
key point in @Home's small-market strategy. Because the economics of serving small,
geographically disparate operators are tricky, @Home will likely develop a version of its
package that runs solely from the set-top.

Tom Jermoluk, CEO of @Home, said the new emphasis on small
operators could bump up the company's staff count from its current level of 600 to around
1,000 by the end of next year.

"That denotes how serious we are about accelerating
this -- it's actually happening about two to three years sooner than we had originally
planned," he added.

Gilbert described the clustering concept "as a kind of
keiretsu to combine [small MSOs'] capabilities in such a way that they can have
greater buying power, and to find ways to build commercial businesses."

Executives said the project has been in the works for
several months, and they are already paying quiet visits to small MSOs, pitching them on a
turnkey, branded high-speed service offering.

While neither Jermoluk nor Gilbert wanted to talk about
potential affiliates yet, Jermoluk described an existing operator cluster in North and
South Dakota, which already has hundreds of miles of fiber connecting it together. Plus,
he said, @Home will target small operators located near the edges of bigger @Home
affiliate or partner networks.

"Maybe there's a little guy right next door, or close
enough to a big guy -- that'd be a prime candidate," Jermoluk said.

Gilbert said @Home approached its plan with no
predilections associated with its large-MSO affiliations. Because of that, its pitch to
second- and third-tier MSOs will likely look different -- particularly in terms of revenue
splits -- than @Home's agreements with big MSOs.

Gilbert declined to discuss how @Home plans to carve up
revenues with small and midsized operators, only saying, "Clearly, there are
challenges in serving smaller markets that have economic consequences."

@Home's plans will almost certainly come as disconcerting
news to the growing list of smaller turnkey data providers like Convergence.com, HSA
Corp., Internet Ventures Inc., ISP Channel, and Online System Services Inc., although
Gilbert did not rule out acquisitions of companies like those.

"But the reality is that none of those companies can
do what we're doing," Gilbert said. "This takes enormous capitalization, and it
takes experience in integration, in bringing markets up to scale and in working through
the logistics of adding set-tops into the mix."

Terry Wright, founder and chief technical officer of
Convergence.com, said one challenge that @Home will undoubtedly face is the voluminous
amount of support needed by small and midsized MSOs.

"Small operators need even more help than the bigger
ones do," in areas like return-path setup and operation, data-network mapping and
simply bridging the cultural gap between video and data communications, Wright said.
"@Home may find that it needs to be a bit more flexible."

That's in the plan, according to Gilbert, although he
wouldn't discuss specifics until they're finalized. He said @Home is already developing
"rack 'em and roll 'em" headends with special routing and proxy configurations,
so that pricey regional data centers aren't needed in every location. For very rural
locations, @Home is even considering the use of VSAT (very small aperture terminal) or
other satellite products to handle signal backhaul.

Ron Pitcock, president of HSA, said another key element is
the positioning of staff people in each turnkey market -- something that HSA does for its
small-MSO customers -- because, as he put it, penetration rates will be the real
differentiator between @Home and other turnkey firms.

"You walk up to a customer-service rep with marketing
materials, and they say, 'You're just one more premium service that we have to sell. Take
a number,'" Pitcock said.

Of @Home's plans to enter the turnkey market, Pitcock said
he figured that they were on the horizon. "That's fine," he added.

"As an industry, if we're going to get the footprint,
something's got to be done differently," Pitcock said, adding, "300,000 total
cable-modem customers is fine, but it doesn't get anybody bgcolor="#FFFFFF"
really excited."

Road Runner, the high-speed-data provider anchored by Time
Warner Cable and MediaOne, has also indicated interest in serving all potential
affiliates, regardless of size.

But most industry observers pointed out that Road Runner
still appears to be focused on merger concerns, rather than on affiliate relationships,
while it relocates to Fairfax, Va., and continues its search for a CEO.

Michael Harris, an analyst with Phoenix-based Kinetic
Strategies Inc., noted that @Home will potentially be taking on more work at a time when
its large MSO partners, like TCI, are short weeks away from massive data launches.

"@Home has been a big market player," Harris
said, noting that @Home partner Cox Communications Inc. opted for IVI in its Humboldt
County, Calif., system because of that system's small size. Marcus Cable Co. L.P.
partnered with HSA in some of its Wisconsin systems for the same reason, as did InterMedia
Partners with OSS in one of its rural Tennessee systems.

Gilbert said @Home's technical plan will likely extend to
small markets served by its larger MSO partners.

Cable operators that fall into @Home's new focal area said
they want to hear more.

"I'd want to know what the split is, who does the
marketing, what about capital costs, are there goals that are set, and what happens if
they're not met?" said Pete Smith, senior vice president of engineering for Rifkin
& Associates Inc., which is working with Convergence.com. "The best way to go
about this is not an easy thing to figure out."

Al Carollo Jr., one of the family owners of
9,000-subscriber Sweetwater Cable in Rock Springs, Wyo., said he's simply not interested
in giving up any of his 45 channels to a turnkey provider -- @Home or anyone else.

"That's all we have is channels," he said.
"Why would you let somebody bgcolor="#FFFFFF" else have access to your
plant when we can do it ourselves?"

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