New York -- At Home Corp. rocked the Internet worldwith news of its pending $6.7 billion merger with Internet portal Excite Inc.
The deal will give the cable-modem company access to a hugecustomer base and substantial leverage in its efforts to convince cable operators toupgrade their systems.
Although At Home, the parent of @Home Network, will pay apremium for access to Excite's customer base -- the all-stock deal values Exciteat almost double its market capitalization -- investors apparently believe that thecost is more than worth it.
Several analysts also gave credence to a report in The WallStreet Journal last Friday that At Home was close to purchasing AT&T Corp.'sWorldNet ISP division for about $1 billion in stock.
At Home will issue 1.042 new series-A common shares foreach share of Excite stock. The combined company, which will be called At Home, will beheaded by Thomas Jermoluk, its current CEO. George Bell, Excite's president, willhead up that division within At Home, reporting directly to Jermoluk. Bell will alsoreceive a seat on At Home's board of directors.
The combined company will have about 1,200 employees, andit presents a revenue opportunity of about $2 billion by 2002, Jermoluk predicted. Headded that operating-profit margins in that time frame could be about 30 percent to 35percent.
But the real value of the deal lies in the vast number ofsubscribers that Excite controls. At a press conference here announcing the deal, Bellsaid Excite has about 20 million users of its personalized service, called MyExcite.
Although these customers don't actually pay for theExcite service, they come back to the site 25 times more frequently than the averageInternet user, he said. And Bell believes that they will be prime candidates for AtHome's high-speed service.
People don't like the clutter of the Web,Bell added.
With its transmission speeds of between 10 and 30 timesthose of traditional modems, At Home can potentially greatly reduce that clutter.
Jermoluk said the Excite merger will allow At Home totransmit across multiple platforms -- both dial-up and broadband -- and it willprovide an incentive for cable operators to upgrade their systems in order to provide theAt Home service.
The idea is to make At Home available, through Excite, as adial-up service in areas where cable-modem service is not yet available. Those customerswould then be migrated to At Home's cable-modem service when the local cable operatormakes the necessary upgrade.
1999 is the breakout year for cable andbroadband, Jermoluk said.
At Home has 330,000 subscribers and partnerships with about19 different cable operators in North America, covering about 60 million homes. Butbecause not all of those systems have upgraded to two-way transmission capacity --essential for the Internet service -- At Home is only available to about 13 millionhomes.
Many analysts said cable operators that may not havethought that upgrading to two-way capabilities was cost-effective now might think again asa result of the Excite merger.
Thomas Eagan, an analyst with PaineWebber Inc., said theExcite deal represents an incremental revenue stream for cable-modem service thatwasn't there before.
More revenue means a higher return on theirinvestment, he added.
Eagan also believes that the deal could provide criticalmass for high-speed service in an industry that's rapidly consolidating.
It's important to get critical mass on your sidebefore someone else does, he said.
The deal might also help At Home in Washington, D.C., asregulators are closely watching to see if it and other companies are making their networksaccessible to competitors.
This [deal] makes At Home look more like it isopening up the Internet infrastructure, Eagan said.
Part of At Home's strategy is to offer serviceanywhere it can, even if that means transmitting via alternative technologies.
Outside of our cable partners' footprint, wewill go after customers with narrowband, even today, Jermoluk said. As ADSL[asymmetrical digital subscriber line] becomes more cost-effective, we will go with that,with wireless, LMDS [local multipoint distribution system] -- I don't care. Wewant ubiquitous capability.
That strategy is also expected to increase At Home'salready-aggressive subscriber-growth projections -- currently 40 percent to 50 percentper quarter -- by 20 percent or more, Jermoluk said.
Goldman Sachs & Co. analyst Lou Kerner liked the dealjust for that reason.
At Home has been largely driven by scale,Kerner said. In one swoop, they've dramatically increased their scale.
Another beneficiary of the merger could be AT&T, which,through its pending merger with Tele-Communications Inc., becomes At Home's largestshareholder. AT&T also benefits because the preferred provider for Excite'snarrowband offering will be AT&T WorldNet, the long-distance giant'sInternet-service provider.
But days after the deal was announced, talk turned to thereports of AT&T shopping WorldNet to At Home in exchange for about $1 billion in AtHome stock. Although spokesmen from both companies declined to comment on the story,analysts who follow both companies believe that it makes a lot of sense.
While any deal would depend on the completion ofAT&T's merger with TCI, unloading WorldNet would allow AT&T to receive anInternet-style valuation for WorldNet, while removing the ISP's expenses from itsbooks. And At Home would get WorldNet's 2.3 million customers -- 1.3 millionresidential -- to eventually migrate to its broadband service.
Despite an upbeat third quarter, the ISP service has turnedout to be a disappointment for AT&T.
Zia Daniell Wigder, an analyst in the bandwidth andaccess-strategies group of Jupiter Communications, said that by combining WorldNet with AtHome, the idea is to eventually migrate those subscribers to the broadband service, whichhas higher margins.
This is a plus for both sides, Wigder said.It gets [WorldNet] off the books, and it puts the Internet-access business focus onAt Home. It gets [AT&T] out of this business that was originally thought to behigh-revenue.
AT&T's stock rose significantly after the At Homeannouncement, and some industry analysts said the deal could make AT&T the undisputedruler of the Internet, with control of high-speed access through cable and of narrowbandaccess with Excite and WorldNet.
But Jeffrey Kagan, president of Kagan Telecom Associates,an Atlanta-based telecommunications consultancy, said the chances of AT&T or anyoneelse becoming the dominant force in the Internet are slim.
That's just a lot of alarmist talk, Kagansaid. The Internet is too big, too sprawling and too dynamic to be controlled by anyone company. But this is good news for AT&T -- it helps to position them for themarketplace in the future.
Kagan said the real impact of the deal could be on all ofthe other companies that have some connection to the Internet, be it broadband ornarrowband.
This is a great illustration of convergence throughthe traditional silos in the telecommunications industry, Kagan said. Onecompany can't stand alone anymore with a single product line. Companies providingintegrated solutions are just becoming the cost of doing business.
Kagan added that the deal also could push Road Runner-- the high-speed cable-modem service owned by Time Warner Inc. and MediaOne GroupInc. -- into a much closer relationship with At Home.
Sandy Colony, a spokeswoman for Road Runner, saidspeculation concerning a merger between At Home and Road Runner has been rampant for thepast two years.
There are no current talks to that effect,Colony said. That doesn't rule it out, but it's not happening rightnow.
Colony added that the At Home/Excite deal benefits hercompany because it brings broadband technology to the forefront. She said that althoughshe has been asked whether Road Runner is planning similar deals, We're puttingmore energy and resources into deployment. We have an extremely aggressive deploymentschedule for this year.
She declined to elaborate, except to say that Road Runnerdeployment so far has mainly been in MediaOne markets, and there are several very largeTime Warner markets that have yet to see the service.
We are going to deploy some really big marketsnext, Colony said.
