Excite Deal Is Derailed, AT&T Takes Hardest Hit

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In the space of less than a week, troubled Excite@Home Corp.'s story turned from a question of how it would fare to, simply, farewell.

The pioneering Redwood City, Calif., cable-modem service — which until recently had 3.7 million subscribers and claimed top-dog status as the largest U.S. broadband Internet-service provider — said it would shut down after Feb. 28, when interim contracts forged with its remaining cable affiliates expire.

As simply At Home Corp., the cable-modem service first went online in Fremont, Calif., in September of 1996. It merged in 1999 with the Internet portal Excite Inc. (www.excite.com
).

The announcement came after AT&T Corp., which owns a 23 percent stake in the struggling cable-modem service, withdrew its $307 million bid for Excite@Home's assets, citing "a number of significant breaches and other violations of the agreement by At Home."

That action, in turn, came after Excite@Home shut off service Dec. 1 to 850,000 AT&T Broadband subscribers, after AT&T Corp.'s cable unit refused to sign a new service contract at higher rates.

The AT&T bid, widely reviled by Excite@Home bondholders as far below a fair-market price, was the only formal offer on the table. With that — and the fact all of its cable affiliates are now planning fairly speedy transitions to in-house services — there seem to be few prospects that Excite@Home will continue.

The only thing left of the @Home network will be a collection of routers and electronic-mail servers housed in cable headends and 25 data centers nationwide.

"This is going from Chapter 11 to Chapter 7 — there is no doubt," said Janco Partners Inc. cable analyst Matt Harrigan.

In fact, it is not clear whether Excite@Home will proceed with its Chapter 11 bankruptcy or convert to Chapter 7 liquidation. Company spokeswoman Estella Mendoza said the ISP could not comment on that issue.

It is possible for the company to liquidate under Chapter 11. Companies often seek that status to direct the distribution of assets, with court approval. In contrast, under Chapter 7 an impartial trustee is appointed to oversee the auction and distribution of assets.

Losing the AT&T bid in part sealed the service's fate, given that the network it had created was so integrated into that of AT&T.

"The @Home network is so entwined with AT&T's network that AT&T was the only logical bidder," Harrigan noted. "AT&T has so tarred Excite@Home that it is very difficult to see how anything really remains intact.

"It's a sad story because it really could have been, I think, a viable competitor to AOL. But everyone completely dropped the ball."

CONTRACTS WERE VOIDED

The latest series of events began Nov. 30, when U.S. Bankruptcy Judge Thomas Carlson voided Excite@Home's existing service agreements with cable affiliates and gave the high-speed ISP the power to shut down its network.

After an intense round of negotiations, all affiliates except AT&T Broadband and Adelphia Communications Corp. agreed to the new 90-day contracts, which required up-front payments in lieu of the monthly subscriber fees.

The contracts, worth a total of $355 million, were signed by Comcast Corp., Cox Communications Inc. Mediacom Communications Corp., Midcontinent Communications and Canada's Rogers Cable Inc.

Carlson must still review the contracts; a hearing had been set for last Friday in San Francisco, but that has been delayed until Tuesday (Dec. 11). Charter Communications Inc. will likely be a late addition, as it worked to finalize its deal late last week.

Comcast and Cox will each pay about $160 million to keep their cable-modem customers online during the period. Insight will kick in $10 million as it begins shifting its customers to alternative ISPs on a market-by market basis.

Mediacom will ante up $10 million; Rogers will pay $15 million; and Midcontinent has also signed the contract, but the amount it will pay was not disclosed. Charter's pending deal would add $1 million.

For Cox, the agreement means the operator's 555,000 Excite@Home customers will stay lit. With its own network about 75 percent complete, Cox can start switching people over as early as this month.

At a UBS Warburg seminar Dec. 4, Comcast cable president Steve Burke said the Philadelphia-based MSO decided to shell out to keep the service going through February because "this is a business that we believe is absolutely critical to our future growth rate."

Comcast expects to have 950,000 cable-modem customers by year's end, and these customers are "almost by definition the best customers we have," he added.

Under the original service agreement, Comcast would have paid $50 million to $60 million to Excite@Home over the period. Adding an extra $100 million was money well spent to guarantee no service interruptions, Burke said.

Comcast plans to transition to its own network well before the 90-day interim period ends, Burke said.

Once it does take over, Comcast also stands to reap greater profits from its own high-speed service. Excite@Home's 35 percent cut of subscriber fees to operate the service equaled roughly $13 to $14 monthly per subscriber. In contrast, Burke said Comcast could run the service for $7 to $8 monthly per subscriber.

"This could be a $600 million business for us next year," Burke said. "If you take the 35 percent that we would have paid @Home, that would be $200 million dollars."

Insight is farther behind on the transition curve. It is talking to multiple ISPs as it mulls options for cable modem service after Feb. 28, according to Kim Kelly, the MSO's chief operating officer and chief financial officer.

"I think, generally speaking, we are not really interested in creating a full-fledged Insight ISP to compete with national brands," she said. "That's the stuff we are really looking at right now."

Kelly said subscribers have been "extraordinarily supportive."

"They didn't want to go dark, but they understand the blackmail that was going on, and so there has been incredible goodwill that has been created," she said.

Midcontinent Cable also has plans afoot to create a network for its 20,000 high-speed Internet subscribers in the Dakotas. It already has a commercial high-speed ISP and will bank on that to develop the consumer version, according to MSO vice president Tom Simmons.

"Of course, like everyone else, it is our intent to develop our own network, and we've had those plans in place for some time," he said. "If in fact the date allows us 90 days to get after this, that would be just fine – we could make the migration at that point."

The interim contract will force Midcontinent to pay substantially more than it charges customers for the service, he added.

"So we will go upside down in the time period, but that's OK," Simmons said. "It is still in our best interests to keep our customers satisfied, who up to this point have been remarkably patient."

Earlier this year Charter had revised its contract to offer its Charter Pipeline service in all Excite@Home markets, and as of last week the MSO has managed to switch over all but about 10,700 customers in Medford and Port Orchard, Ore. It originally had 145,000 @Home customers.

As most other MSOs making the conversion have found, Charter's hardest task was getting local exchange carriers to link its network to the Internet. That's what is holding up the conversion for the customers in Port Orchard.

"So from our perspective the cost of deploying the network is not an incremental cost," said Majid Mir, Charter's senior vice president of telephony and advanced services. "It just happened a little faster than we were planning."

Ramping up customer care was also a big task. Although Charter has not disclosed how many calls it has taken in during the past month or so, Mir said the company did tap billing and customer-support provider Convergys Corp. to bolster its call center.

"We're very happy. In fact, we're seeing call volume start to decline now," Mir said. "Some of our call centers now are down in the sub-10-minute hold-time range."

Like other operators, Charter believes the high-speed business will be better without Excite@Home.

"We actually feel a lot better about our ability to grow our business now having done this than we did a couple a months ago with the uncertainty," Mir said. "We feel that we have control of our destiny – we have the resources in the network and our people have the confidence that they can do it."

AT&T BACK ONLINE

AT&T Broadband, which was closest to developing its own parallel Internet-protocol cable-modem network, managed to restore service to nearly all of its customers in six days. As of Friday, it had moved nearly all of its 850,000 customers to its own network.

Five hundred thousand users had successfully reconfigured their computers and 475,000 had their new e-mail accounts, according to the company. The MSO did acknowledge some users had problems with the transition. Call volume to the MSO's help centers remained predictably high, with long hold times not uncommon.

AT&T Broadband customers have been reassigned a new e-mail addresses combining their original user name with the @attbi domain name. Content is being supplied by AT&T WorldNet, AT&T Corp.'s dial-up ISP. AT&T Broadband is promising its customers two days credit for each day service was shut down.

Excite@Home serviced the roughly 40,000 Adelphia customers that hadn't been moved to the MSO's in-house PowerLink service, which was cut Dec. 3. By the end of last week, the Coudersport, Pa.-based company expected to have all of those subscribers switched over.

As the MSOs plan their exits and Excite@Home employees start to clean out their offices, bondholders and creditors face uncertain prospects for recovering their money. They will be able to claim whatever is left over from the $356 million in new contract fees, minus operating expenses incurred during the 90-day period.

They're not likely to go quietly. There's real fury against AT&T Corp., said Harrigan, who's gleaned the rising anger from his talks with those involved. Excite@Home's bondholder committee has already talked of suing the telecommunications giant over its actions during the bankruptcy.

In the end, Excite@Home won't stand as one of the cable industry's better moments.

"This exposes the darkest side off the cable industry, and this has really been cable's most inglorious episode in the last five years," Harrigan said.

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