ISP Channel Affiliates Hear Of Restructuring

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Letters that SoftNet Systems Inc. subsidiary ISP Channel recently sent to its affiliates provide a fairly revealing glimpse of how the company plans to proceed with its restructuring.

In the letter, ISP Channel disclosed that unless affiliates agree to a new, revamped contract, the company could pull out of a number of markets before the end of the year. One of those letters, sent to an ISP Channel affiliate on Oct. 19, was obtained last week by
Multichannel News

.

That letter, signed by ISP Channel president Jonathan Marx, stated that "in the absence of a fundamental restructuring of our relationship, ISP Channel will cease operations no later than Dec. 31, 2000." It added that the move follows a re-evaluation of the data-over-cable service's economic viability. Last month, SoftNet said it had cut the ISP Channel work force by 33 percent and would spend $30 million to restructure the company in the wake of cable-system consolidation that had made turning a profit and achieving scale extremely difficult.

ISP Channel's original business plan was to provide turnkey cable-modem services to small- and medium-sized operators. At present, ISP Channel has about 33,000 cable modem customers and deals that represent 2.4 million contracted homes passed.

In a statement issued in October, SoftNet would not project a fiscal-year 2001 revenue figure for the data provider.

Fielding questions about the letter, an ISP Channel spokeswoman said only that the company "is talking to all of its affiliates about the path of restructuring. We do hope to have the restructuring

finalized by the first quarter of 2001." When asked if similar letters were sent to all of ISP Channel's affiliates-or just a select few-she declined comment.

The letter also details a number of interim steps that ISP Channel is taking as cable operators mull over new contracts. For example, the company said it would "reduce its revenue share to a flat 35 percent of revenue collected from customers" effective Nov. 1.

ISP Channel's revenue model varies by affiliate, the company said. Industry sources said revenue sharing in such turnkey deals are typically split 50-50, and the move to reduce ISP Channel's share could merely be a starting point for negotiation.

The extra cash will likely come in handy for the company's cable partners. In the letter, ISP Channel also said it expected

affiliates to pay for outstanding installations, modems and headend equipment by Nov. 1, and would offer high-speed gear at "book value."

The company also said it would stop providing billing services and cease payment on telecommunications connectivity charges as of Dec. 1, 2000. ISP Channel said electronic-mail and local-content services "will be continued into December to allow for the transition of your customers."

ISP Channel finished the letter by stating that it "will need to finalize the process by entering an Amendment or Termination Agreement by Nov. 21, 2000."

Last week, ISP Channel's largest affiliate, Mediacom Communications Corp., disclosed in its third-quarter earnings statement that chairman Rocco Commisso had resigned his seat on SoftNet's board effective Oct. 27.

Mediacom-which has an exclusive 10-year deal with ISP Channel that includes performance-related stock warrants-said in a statement it "has not yet determined the full effects" of SoftNet's decision to restructure and is taking "steps to ensure that the impact of the restructuring" on the MSO's cable-modem business will be "minimal." The MSO had 350,000 "data-ready" homes at the end of the third quarter.

Mediacom added it was in "ongoing discussions" with other high-speed-service pro-viders, and has developed plans that could bring ISP Channel's responsibilities to the MSO under Mediacom's control.

An ISP Channel spokeswoman declined to comment when asked if the deal with the MSO was still intact.

Road Runner is one provider Mediacom has contacted, according to sources. A Road Runner spokeswoman said earlier that a number of existing ISP Channel affiliates have approached the company about striking new deals, but declined to be more specific.

Mediacom officials did not return calls seeking further comment.

The MSO's original deal with ISP Channel, which closed on Nov. 10, 1999, has lost much of its financial luster.

That agreement involved access to more than 750,000 potential cable-modem subscribers in Mediacom's domain. As an ISP Channel "anchor tenant," SoftNet issued a total of 3.5 million common stock shares to Mediacom: 350,000 unrestricted common stock shares and 3,150,000 restricted common stock shares, according to a SoftNet filing with the Securities Exchange Commission.

In order for the restricted shares to become unrestricted, Mediacom agreed to upgrade a set number of homes for two-way services. According to SoftNet's filing, Mediacom is required to deliver 900,000 two-way capable homes passed, in groups of at least 150,000, every six months starting May 4, 2000.

Upon that delivery, a block of 525,000 restricted common-stock shares become unrestricted. In turn, if Mediacom fails to make that quota, the MSO is required to return those shares of common stock to SoftNet.

SoftNet shares, which reached a new 52-week low ($3.50) in intra-day trading on October 19, 2000, were at $29 when the deal with Mediacom was finalized. SoftNet shares have recently closed in the $4 range, which means they have lost more than 80 percent of their value during that span.

Sagging SoftNet stock prices have also affected other recent deals between ISP Channel and cable operators. US Cable Corp. said its cable-modem service-affiliation letter of intent with ISP Channel has expired and is no longer valid.

That letter, announced Aug. 10 of this year, involved the delivery of high-speed services and local content to about 150,000 homes passed by US Cable. MSO vice president of operations Joseph Appio said negotiations with ISP Channel underwent a "material change" as SoftNet's stock price drifted downward.

Part of the agreement was based on a stock price of $30 per share, Appio said. SoftNet shares closed at $4.50 on Nov. 8.

"We're hopeful [that ISP Channel] will come back with a counterproposal, but we're still waiting," he added.

Appio said US Cable is currently looking at other cable-modem service providers, or may opt to go on its own as it prepares to launch high-speed data early in of 2001.

In the meantime, other companies, such as High Speed Access Corp. and Excite@Home Corp., will have to pick up the slack for small- and mid-sized cable operators in search of a cable-modem service partner.

Excite@Home's @Home Solutions division, which targets such cable properties, recently signed deals with Susquehanna Communications in York and Williamsport, Pa., and Horry Telephone Cooperative of Conway, S.C., expanding its footprint by 228,000 homes.

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