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But not everyone is ready to give up on a company that already offers cable and DSL broadband access to 87 million households, nearly half the universe of households that subscribe to cable services. With such tremendous growth potential for the company and the stock at bargain-basement prices, Excite@Home can now be termed a tempting value play. So is that daylight up there peeking through the clouds? Perhaps. For one thing, the numbers weren't nearly as bad as they seemed. The quarter's losses were mostly due to a tripling of expenses in sales and marketing. Despite those losses, the company was still hitting its revenue and subscriber goals. And expecting an annual profit at this point was probably unrealistic, analysts say. When you look at Excite@Home's income statement, while taking into account all extraordinary charges, the company could not be anywhere near profitable until at least 2002, when it will have finally amortized its $7.2 billion purchase of Internet portal Excite. "DE-EMPHASIZE EXCITE." Moreover, last quarter's losses were in part caused by the company's strategic decision not to try to make Excite the beefier portal on the narrowband Net. The move was received favorably by analysts. "They're not going to out-Yahoo Yahoo," says Doug Shapiro, an analyst with Banc of America Securities. "They need to de-emphasize Excite and concentrate on broadband." Which is exactly what the company is doing, says Executive Vice-President Mark Stevens. "We're going to be a full-service online broadband company," Stevens says. "We'll provide access, content, and customer support." In other words, @Home is preparing for the day when it will compete with other content companies to be the cable Internet provider of choice for consumers. @Home started as an idea in tune with the times. Imagine, thought former NASA scientist Milo Medin, if people could use their cable-TV lines to get fast Internet access. His notion, along with the technology to make it feasible, quickly drew venture capital in the early '90s, and the new company, called @Home (ATHM), went public in 1997. The company's first two years were a blaze of success and optimism. It was the best capitalized broadband company at a time when lack of bandwidth was the greatest impediment to growth for the Internet. Even AT&T (T) got in on the action and became @Home's majority shareholder. In 1999, the phone giant purchased Web portal Excite and announced that it would provide content in addition to being a Net pipeline. SQUABBLING FACTIONS. That's when things started to get complicated. @Home's biggest problem quickly became its wealthy benefactor, AT&T, not the lack of a clear business strategy. AT&T invested in @Home prior to its dive into the cable business. When the long-distance giant started buying cable companies, it appeared that @Home would be a big winner. AT&T's cable plan rested on the concept of "Internetizing" its cable wires, and who better than its homegrown broadband ISP,@Home, to be the Net provider of choice over those captive wires. It would be like America Online, except that consumers would have no option but to sign up. To expand @Home's reach even further, AT&T allowed two other cable companies, Cox Communications (COX) and Comcast Corp. (CMCSK) to buy into it. Unfortunately, to lure those two companies, AT&T gave them veto power on @Home's board. Bad move. Indecision crept in as competing parties debated what @Home's role would be in the new cable universe. There were two factions: One side pushed @Home as an infrastructure company that would rent out its technology to other ISPs, while the other wanted it to become a broadband portal that used Excite's content to lasso advertising dollars. "There were too many cooks in the kitchen, and the brew started to have a stink to it," says Shapiro. As the internal fight raged, @Home's stock price began its descent. Then, last summer, the worst news hit. AT&T let it be known that eventually it would open up access to its cable lines to ISPs other than @Home. Although it would continue to honor its exclusivity agreements with @Home through 2002, AT&T wasn't promising anything beyond that. For consumers, who want a choice of providers, it was good news. For @Home shareholders, it was a disaster. Since then, analysts have been delving into the details of AT&T's plans for Excite@Home. Although most observers are fixated on the end of exclusivity in 2002, the AT&T agreement is much more complex than that. Many AT&T-owned cable properties, such as TCI and Media One, will continue to provide @Home with exclusive rights as late as 2006. In addition, competing cable companies such as Cox and Comcast, with which @Home has deals, are not bound by the terms of any AT&T agreements. "Over half of the homes passed with our wires are under exclusivity agreements that go beyond 2002," says Stevens. "There's a misperception that we are concentrating on 2002 as some magic date. We're concentrating on executing today." ACHIEVABLE. Another bright spot: On Mar. 29, the company announced that AT&T, Cox, and Comcast had restructured their Excite@Home ownership agreement. Gone is the veto of the two smaller cable companies. In exchange, they have the right to purchase more of the company in two years. Or they can sell their stakes to AT&T at $48 a share at that time. "It gives them leverage to use to get what they want out of @Home, but it takes away the paralyzing effect of the veto power that they had before," says Shapiro, who rates the stock a buy. The downside: The company expects to lose as much as 30 cents per share this year in a market that is severely punishing companies that can't make money. Analysts worry that it could take too long for Excite@Home to return to profitability. With a more rational ownership structure, Excite@Home now has the chance to rebuild its stock price the old-fashioned way: by selling its product. The company already has 1 1/2 million subscribers for its cable-modem service and plans to reach 3 million by yearend, 6 million by the end of 2001, and 10 million at the close of 2002. The number of homes with access to its broadband service -- it counts 87 million of them -- has jumped 25% in just a year, and the company hopes to reach all cable subscribers within two years. The company expects to be fully profitable by 2002, a target which analysts say is achievable. "Subscriber growth is strong, and they have the potential to beat their targets over the course of the year," says analyst Drake Johnston of Davenport & Co., who rates the stock a hold. "It won't be long before we start to see those improvements filter down to the income part of their income statement." There may be little to celebrate at the company right now, but the future could be exciting for investors who hold on to Excite@Home. Jaffe covers finance for Business Week Online EDITED BY BETH BELTON |
