What Will AT&T Do with Excite@Home?
Keep the pipelines, sure. But the content raises problems

If you're puzzled about what AT&T (T) plans to do with Excite@Home Corp. (ATHM), you're not alone. AT&T is wondering, too.

Excite@Home, in which AT&T holds a 58% voting stake, is the much-ballyhooed company responsible for rolling out speedy Internet access over the cable networks of companies including Tele-Communications Inc., which AT&T acquired earlier this year. But Excite, an Internet portal, and @Home, the company that will bring you cable Net access, were once separate companies. AT&T is pondering whether that should be the case again.

Inside AT&T there's a high-stakes debate going on about the future of Excite@Home. Why? Because AT&T CEO C. Michael Armstrong thinks that offering only Excite's content could hurt his ability to recoup his $110 billion investment in TCI and his other cable property, MediaOne Group. Perhaps, he reckons, AT&T could do better striking deals with mega content providers, such as Yahoo! (YHOO) and America Online (AOL). An additional benefit: Armstrong might also skirt regulatory control over broadband service by providing his own form of open access.

DISCONNECT. Already, there are reports that suggest possible outcomes: Business Week Online reported portal Yahoo! Inc. has held discussions to acquire Excite@Home. If that were to happen, some sources indicate that Yahoo! might keep Excite, and AT&T could either retain control of @Home or @Home might be spun off. Separately, AT&T confirmed it held talks with AOL, although the kind of deal discussed was not spelled out. AT&T insiders say an overhaul in Excite@Home's strategic plan is likely. And even outsiders see the need. ''There's a disconnect between what Excite@Home's management is pursuing and what AT&T wants,'' says John H. Corcoran, an analyst at Stephens Inc.

What Excite@Home CEO Thomas Jermoluk wants is to build Excite@Home into a content company that could offer customers virtually everything they need online. Jermoluk cut the deal to buy Excite because he understands that a company that combines Net access and content, like AOL, is more valuable than two separate operations. Jermoluk has a key supporter: L. John Doerr, who sits on Excite@Home's board and whose venture firm, Kleiner Perkins Caulfied & Byers, holds a major stake.

What's best for Excite@Home isn't necessarily best for AT&T. Armstrong wants to offer a broad variety of content. With what he calls an ''open-portal interface,'' an @Home subscriber would get an opening screen with six to ten content providers to choose from. That would roll out its Net service much faster than if the task were left to Excite@Home alone. There are two major hurdles. Excite@Home now has an exclusive contract to market broadband service on AT&T's cable network through 2002. And to sell Excite@Home, AT&T needs approval from now reluctant partners, Cox Communications, Comcast, and Kleiner Perkins.

Meanwhile, the stocks of both Excite@Home and AT&T are suffering. With fears that AT&T isn't giving the company its full support, Excite@Home shares are down about 30% in the last two weeks. AT&T's stock tumbled to 48.44 on Aug. 11, a 52-week low, although that's at least partly because of MCI WorldCom Inc.'s planned long-distance rate cut.

While AT&T doesn't have complete control over Excite@Home, bet on Armstrong being able to get his way with Excite@Home. That means AOL will probably be able to market the speedy Net service for AT&T. ''I think it's inevitable that the two companies will come to terms,'' says Richard G. Klugman, an analyst with Goldman, Sachs & Co. ''AT&T has the network and AOL has the customers.'' That would help Armstrong pay off his $110 billion cable bill.

By Peter Elstrom in New York, with Linda Himelstein in San Mateo

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What Will AT&T Do with Excite@Home?

TABLE: Three Scenarios for Excite@Home

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