Will fire follow smoke at Excite@Home?

When there is smoke, there is fire. But in this case, there is only smoke -- so far.

When there is smoke, there is fire. But in this case, there is only smoke -- so far.

Some news stories and Web message boards have suggested in recent days that Excite@Home Corp. (Nasdaq:ATHM), the Redwood City, Calif., company that provides high-speed Internet access over cable lines, may make any number of wildly different moves. These range from selling its much-trafficked Internet portal to America Online Inc. (NYSE:AOL), to splitting its content and access business into separate companies. Excite@Home's stock has fluctuated accordingly, as have the shares of perspective dance partners.

But people close to the situation say such dramatic moves are unlikely for now. Excite@Home and its cable owners -- especially AT&T Corp. (NYSE:T) -- have been in increasingly complex talks about how to settle the issues that face the company.

Political fight
Critical topics include settling a contentious political fight with online companies, especially AOL, regarding access to cable systems. Also on the table: simplifying the complex rules that govern Excite@Home, and addressing AT&T's desire to focus on its high-speed Internet access distribution business and not content. In a statement, AT&T acknowledged it has had discussions about the future of Excite@Home but described them as preliminary. Excite released a statement noting that it is continually assessing its alternatives both internally and externally, but it won't comment further until it decides its course of action.

Talks also have been reinvigorated with AOL, Yahoo! Inc. (Nasdaq:YHOO) and Microsoft Corp. (Nasdaq:MSFT) about possible alliances that would allow their services to be carried on Excite@Home's service.

But people close to the situation at all these companies say they are wary of investing in Excite@Home in exchange for broader access to its high-speed service. They cited the high price of an ownership stake, as well as the likelihood that they wouldn't be able to get lucrative preferential treatment on the system, or complete access to its customers.

Asked whether a cable-access deal was imminent, Steve Case, AOL's chairman and CEO, said in a recent interview, "There's more desire on the part of the cable companies then there once was" to strike a pact. An AOL spokeswoman declined to comment on whether the company is negotiating with Excite@Home.

One idea suggested by AT&T is to split up Excite@Home so distribution, which refers to the access network, would be separate from content, which includes Excite and the other interactive services @Home offers. But so far, there have been no formal proposals, said people familiar with the situation.

Pressure from regulators
Nonetheless, AT&T is under pressure from regulators to persuade its partners in Excite@Home to open up @Home's home page to other online providers. C. Michael Armstrong, AT&T's chairman and CEO told analysts this summer that AT&T would adopt such a position after 2002, when AT&T's exclusivity agreement with @Home expires.

This week, Armstrong said this remains his best option. "What I think, and what I am working on, is to bring some definition to post-exclusivity," said Mr. Armstrong, who is actively involved in sorting out AT&T's @Home affairs. "I have announced that AT&T would welcome and seek commercial terms from other parties."

Armstrong has been emphatic that AT&T wants no part of the content business on the Internet, and that the phone company's future rests on its role as a distribution medium that is open to all sorts of content. AT&T inherited its stake in @Home with its purchase of Tele-Communications Inc (TCI). That 57 percent stake of the company's voting stock became more complicated when @Home purchased Excite in January. The purchase caused widespread confusion about whether Excite would get priority on Excite@Home's interface with users of its cable service.

AT&T could simply proclaim that it will open up its own network after 2002, and persuade the cable players to strike an agreement before then with another provider such as Yahoo, thereby proving to regulators that the system is open. It also could push to separate Excite@Home into two companies, one for content, the other for distribution.

Fed up
AT&T's cable partners are getting fed up with the entire hullabaloo. "Something has to be done soon," laments one @Home cable partner. "All this speculation is getting in the way of business."

And business, at least for the @Home board, has been tough lately. According to people close to the situation, @Home board meetings have turned rancorous, with AT&T and its cable partners going back and forth about the best way to proceed. A big part of AT&T's problem is that it has no control over its cable partners. Though it owns a majority of voting stock in @Home, AT&T can't force through decisions because of the way the company has been structured. Any major deals or corporate governance changes must be approved by key cable partners.

That is not to say AT&T hasn't tried to throw its weight around. Aiming to get more support, AT&T recently threatened to put out a public statement saying that it didn't intend to continue having an "exclusive" arrangement with @Home once its contract runs out in 2002. The implicit threat was that the statement, issued in such a public manner, would cause @Home's stock to take a hit. Several people say they saw a draft of an AT&T statement that was never released. AT&T Thursday declined to comment on the matter.

Any kind of talk that paints Excite@Home as a pawn among cable powers has riled Tom Jermoluk, the company's chairman. He has asserted publicly many times that Excite@Home controls a critical juncture point of the broadband Internet future. This is why, he has said, companies like AOL, Yahoo! and Microsoft are interested in striking a deal.

But that has not happened yet, despite continuing talks between Excite@Home and many of the major Internet companies. In fact, after a long series of talks, the relationship between @Home and AOL has deteriorated into the bitter political fight over open access. And a deal with Yahoo! that was negotiated in January by Leo Hindery, president of AT&T's cable and Internet unit, was rejected by the board because board members believed it gave up too much control to Yahoo!.

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