Why Excite@Home failed: A postmortem

Kleiner Perkins Caufield & Byers venture capitalist William Hearst III has been associated with numerous Silicon Valley successes and failures, but none that has fallen from grace quite like Excite@Home.

Excite@Home filed for bankruptcy Friday and said it would sell its network assets to AT&T. As a result, the company where Hearst was chief executive in 1995 and 1996 will cease to exist as an independent provider of Net access through cable networks.

Excite@Home's demise bordered on Greek tragedy at times, with a history filled with tense boardroom skirmishes, ill-conceived acquisitions and executives who governed the operations from afar. Once considered one of the pillars of the Net revolution, Excite@Home was largely a victim of its own grandiose ambitions, as well as of a convoluted ownership structure that kept too many cooks in the kitchen.

Originally conceived as a high-speed Net access operation, Excite@Home quickly expanded its own notion of itself, purchasing Net media properties such as the Excite Web portal and Blue Mountain Arts in a bid to create an online empire akin to America Online's.

But that strategy was not what several large shareholders wanted. Large cable companies Cox Communications and Comcast simply required a good return on their investments in a high-speed Net access company that could rival the dial-up colossus of AOL.

Along the way, Excite@Home lost hundreds of millions of dollars, shifted strategies several times, and shuffled executives in and out of the company at a rapid pace. As the company's demise became official Friday, Hearst spoke with CNET News.com to share his thoughts on what happened to one of the darlings of the Net's go-go days.

Q: You helped found the company. What are your emotions today?
Mixed. I think that the idea that broadband could become a residential product has been proven to be correct. The inventions and technology of the founders of the company, people like Milo Medin, figured out how to do this and sort of gave to the cable industry--but more importantly, to people in their homes as opposed to their place of business--a way to open up a world of broadband data which I think we're at the beginning of. And I feel very good about that, and nothing that has happened has subtracted from that success and that idea that's now embraced by all the cable operators and is a real segment of the broadband world along with DSL, T1s and other things.

As you look back, what was the driving idea behind @Home?
There was a notion that a company could be built that would serve the complex technology and backbone systems to a group of cable operators and participate in the economics, that that company raised a lot of money, and succeeded in the mission in terms of building the technology and getting it to work. But there's no real reward.

The stock has gone up and then back down again; it's kind of a round-trip, and that's disappointing and sad, because normally you associate that kind of outcome with some failure of the product or some competitor who took your idea and did it better than you did. And that's not the case here. In fact, the cable operators want to do this themselves rather than create an independent company, and I'm sorry to see that happen. But it seems to be a trend in the sense that not just AT&T, but Cox and Comcast and Charter and others are looking to do that on their own. So that's disappointing.

Briefly, what went wrong?
I just think this is a growing business that people want to run themselves.

Do you think the merger of @Home and Excite was a good idea?
I did at the time because I thought that when you're building a consumer marketplace, you need to have one-stop shopping. One of the promises of the @Home idea was that you'd have a national brand, not a different brand in every marketplace. And as AOL has proven, if you have an e-mail product and a content product and a telecommunications product and a software product all under one single point of responsibility, you can build a very big company.

That, I think, was the motive for the Excite merger: to build a company trying to produce a uniform national consumer experience but on broadband instead of dial-up. That's why I supported the deal.

The critics say the merger was doomed from the start. That is, it was a case of a hasty merger that was done more to satisfy Wall Street by boosting sales and traffic than for strategic reasons. What do you say?
You know, I'm not from that persuasion. That's a reasonable question for people to ask, but I don't think the facts support it.

But isn't it true that if Excite were left alone, it would have had trouble?
It would have been acquired by someone. They were looking for a merger partner. I would also contest the theory that it was hastily put together. I know for a fact that (former CEO) Tom Jermoluk spent more than a year looking ahead, talking to bankers about it, and not with Excite circled as the target but with what different strategies could be done. It was hasty in the sense that there were multiple bidders and multiple phone calls in the 24 hours before the merger was announced, but not hasty in that any party had suddenly had this thrust upon them. Both parties had been thinking not about this merger, but about some combination with somebody else for quite some time.

What role did Silicon Valley culture have in all this, seeing that the two companies were married?
I've seen that angle, but as someone who was very close to this, Excite was looking at several merger partners, including Yahoo, Microsoft and Lycos. And @Home was looking at several acquisition candidates. That deal was done very narrowly in favor of Excite and probably was more influenced by the fact the two companies were located around a water fountain than by any Kleiner Perkins influence.

The merger fit neatly into Kleiner's version of the keiretsu school, which emphasized the "interlocking operating relationships" between companies backed by the firm.
And that's unfortunate, because it made people think that must be the point of it. And I don't think you'll find any of the principals--Tom or George or anybody--I think ultimately people who will defend that theory weren't at the table.

Were there other reasons why it faltered?
I believe some of the cable owners perhaps wanted a pure telecom business rather than a consumer brand and in fact wanted to control the company themselves rather than have this joint coalition so there wasn't much follow-up of that idea. And after a while, people left. And of course, there was a dot-com collapse and a collapse also--let's be honest--in advertising for all media businesses, including traditional media. And the company began to need capital, as did its competitors.

In the case of AOL, they could get that capital via the merger, but in the case of @Home, that capital was to some degree earmarked to build the network. AOL, as you know, doesn't really own their own network; they kind of farm it out or at least certain points--as does @Home. But the demand for capital and the demand for management focus on that strategy just wasn't there.

And by the time the company decided to look at spinning off Excite, the marketplace had deteriorated. And meanwhile, the demand for broadband was growing so rapidly that the capital was needed to sustain the quality of service of the business. Maybe in the next generation of the Internet, the real product will be just access to the Internet. There won't be so much of a walled garden, in which case perhaps AOL's own content will be less important than their Internet access and their e-mail and their software products.

Whether it's content is a tricky question. Is e-mail content? Is chat content? Is software content? It depends who you talk to, but I do think the idea of a uniform consumer experience is a good one. I think AOL has done it very well and very successfully. And I think Excite@Home did not do it successfully.

It was baffling how (former CEO) George Bell could run a Silicon Valley company from Boston.
You weren't the only one who was baffled. One of my accomplishments was to convince George that that wasn't a good CEO definition and to work with the board and hopefully convince people who didn't need a lot of convincing that we needed to bring somebody in. You couldn't take that approach to a company with the complexity of an Excite@Home. If that time period when George was trying to do that will in hindsight look to be a period when things got worse, I think George was faced with some personal issues and that was just not a good format for leading the company. I would agree with you. That format had very few fans. It was not a good plan.

What could AT&T have done differently? Should it share any blame in this?
Well, they were the controlling shareholders, so to the extent that they are at the helm, it'd be unusual for the captain to blame the voyage on the crew. But there was also an independent management.

I'm sure hindsight will turn up things we might have done differently. I'm not really interested in fixing the blame, but it's not possible to say that no mistakes were made, and it's not possible to point the finger at any one person or management team because the management has changed over time.

But AT&T was involved in oversight, wasn't it?
I certainly think the AT&T people paid a lot of attention to the business--it was not something they did not pay attention to--but they weren't directly running it, and the management wasn't free to run it as they saw fit. And that could never have been because the company really depended on the good will of the (cable companies). So when Cox and Comcast began to want to build their own networks, and AT&T didn't share the content vision, you knew there were going to be challenges for management.

You talked about the crew. What part of the criticism lies with the initial vision and how that changed over time, particularly as it got into the Excite era and the Blue Mountain Arts era?
Like I said, the strategy was to build a national brand that could compete against AOL. To the extent that we spent money pursuing that strategy, which may not have been the right strategy, perhaps, but to the extent that we spent money chasing that strategy--and I don't think we ever as a whole company embraced that kind of strategy even though the board voted unanimously for the transaction--we tended to pursue it when prices were very high. And when we lost confidence in that strategy, prices were not as high. And that, inevitably, is going to damage the balance sheet of the company.

Put this into context of the larger busting of the dot-com bubble. Are there any lessons learned here that future entrepreneurs or deal makers--or venture capitalists--should keep in mind?
One of the lessons--and I hate to say it--is that you can gain a tremendous advantage by partnering with big, well-established companies, and people are going to continue to do that. But those companies are going to find it very difficult to put their new start-up venture ahead of their own corporate responsibilities. So when you have a start-up controlled by big, established companies, it's going to be a little different than a real, standalone start-up.

News.com's Charles Cooper contributed to this report.

Kleiner Perkins Caufield & Byers venture capitalist William Hearst III has been associated with numerous Silicon Valley successes and failures, but none that has fallen from grace quite like Excite@Home.

Excite@Home filed for bankruptcy Friday and said it would sell its network assets to AT&T. As a result, the company where Hearst was chief executive in 1995 and 1996 will cease to exist as an independent provider of Net access through cable networks.

Excite@Home's demise bordered on Greek tragedy at times, with a history filled with tense boardroom skirmishes, ill-conceived acquisitions and executives who governed the operations from afar. Once considered one of the pillars of the Net revolution, Excite@Home was largely a victim of its own grandiose ambitions, as well as of a convoluted ownership structure that kept too many cooks in the kitchen.

Originally conceived as a high-speed Net access operation, Excite@Home quickly expanded its own notion of itself, purchasing Net media properties such as the Excite Web portal and Blue Mountain Arts in a bid to create an online empire akin to America Online's.

But that strategy was not what several large shareholders wanted. Large cable companies Cox Communications and Comcast simply required a good return on their investments in a high-speed Net access company that could rival the dial-up colossus of AOL.

Along the way, Excite@Home lost hundreds of millions of dollars, shifted strategies several times, and shuffled executives in and out of the company at a rapid pace. As the company's demise became official Friday, Hearst spoke with CNET News.com to share his thoughts on what happened to one of the darlings of the Net's go-go days.

Q: You helped found the company. What are your emotions today?
Mixed. I think that the idea that broadband could become a residential product has been proven to be correct. The inventions and technology of the founders of the company, people like Milo Medin, figured out how to do this and sort of gave to the cable industry--but more importantly, to people in their homes as opposed to their place of business--a way to open up a world of broadband data which I think we're at the beginning of. And I feel very good about that, and nothing that has happened has subtracted from that success and that idea that's now embraced by all the cable operators and is a real segment of the broadband world along with DSL, T1s and other things.

As you look back, what was the driving idea behind @Home?
There was a notion that a company could be built that would serve the complex technology and backbone systems to a group of cable operators and participate in the economics, that that company raised a lot of money, and succeeded in the mission in terms of building the technology and getting it to work. But there's no real reward.

The stock has gone up and then back down again; it's kind of a round-trip, and that's disappointing and sad, because normally you associate that kind of outcome with some failure of the product or some competitor who took your idea and did it better than you did. And that's not the case here. In fact, the cable operators want to do this themselves rather than create an independent company, and I'm sorry to see that happen. But it seems to be a trend in the sense that not just AT&T, but Cox and Comcast and Charter and others are looking to do that on their own. So that's disappointing.

Briefly, what went wrong?
I just think this is a growing business that people want to run themselves.

Do you think the merger of @Home and Excite was a good idea?
I did at the time because I thought that when you're building a consumer marketplace, you need to have one-stop shopping. One of the promises of the @Home idea was that you'd have a national brand, not a different brand in every marketplace. And as AOL has proven, if you have an e-mail product and a content product and a telecommunications product and a software product all under one single point of responsibility, you can build a very big company.

That, I think, was the motive for the Excite merger: to build a company trying to produce a uniform national consumer experience but on broadband instead of dial-up. That's why I supported the deal.

The critics say the merger was doomed from the start. That is, it was a case of a hasty merger that was done more to satisfy Wall Street by boosting sales and traffic than for strategic reasons. What do you say?
You know, I'm not from that persuasion. That's a reasonable question for people to ask, but I don't think the facts support it.

But isn't it true that if Excite were left alone, it would have had trouble?
It would have been acquired by someone. They were looking for a merger partner. I would also contest the theory that it was hastily put together. I know for a fact that (former CEO) Tom Jermoluk spent more than a year looking ahead, talking to bankers about it, and not with Excite circled as the target but with what different strategies could be done. It was hasty in the sense that there were multiple bidders and multiple phone calls in the 24 hours before the merger was announced, but not hasty in that any party had suddenly had this thrust upon them. Both parties had been thinking not about this merger, but about some combination with somebody else for quite some time.

What role did Silicon Valley culture have in all this, seeing that the two companies were married?
I've seen that angle, but as someone who was very close to this, Excite was looking at several merger partners, including Yahoo, Microsoft and Lycos. And @Home was looking at several acquisition candidates. That deal was done very narrowly in favor of Excite and probably was more influenced by the fact the two companies were located around a water fountain than by any Kleiner Perkins influence.

The merger fit neatly into Kleiner's version of the keiretsu school, which emphasized the "interlocking operating relationships" between companies backed by the firm.
And that's unfortunate, because it made people think that must be the point of it. And I don't think you'll find any of the principals--Tom or George or anybody--I think ultimately people who will defend that theory weren't at the table.

Were there other reasons why it faltered?
I believe some of the cable owners perhaps wanted a pure telecom business rather than a consumer brand and in fact wanted to control the company themselves rather than have this joint coalition so there wasn't much follow-up of that idea. And after a while, people left. And of course, there was a dot-com collapse and a collapse also--let's be honest--in advertising for all media businesses, including traditional media. And the company began to need capital, as did its competitors.

In the case of AOL, they could get that capital via the merger, but in the case of @Home, that capital was to some degree earmarked to build the network. AOL, as you know, doesn't really own their own network; they kind of farm it out or at least certain points--as does @Home. But the demand for capital and the demand for management focus on that strategy just wasn't there.

And by the time the company decided to look at spinning off Excite, the marketplace had deteriorated. And meanwhile, the demand for broadband was growing so rapidly that the capital was needed to sustain the quality of service of the business. Maybe in the next generation of the Internet, the real product will be just access to the Internet. There won't be so much of a walled garden, in which case perhaps AOL's own content will be less important than their Internet access and their e-mail and their software products.

Whether it's content is a tricky question. Is e-mail content? Is chat content? Is software content? It depends who you talk to, but I do think the idea of a uniform consumer experience is a good one. I think AOL has done it very well and very successfully. And I think Excite@Home did not do it successfully.

It was baffling how (former CEO) George Bell could run a Silicon Valley company from Boston.
You weren't the only one who was baffled. One of my accomplishments was to convince George that that wasn't a good CEO definition and to work with the board and hopefully convince people who didn't need a lot of convincing that we needed to bring somebody in. You couldn't take that approach to a company with the complexity of an Excite@Home. If that time period when George was trying to do that will in hindsight look to be a period when things got worse, I think George was faced with some personal issues and that was just not a good format for leading the company. I would agree with you. That format had very few fans. It was not a good plan.

What could AT&T have done differently? Should it share any blame in this?
Well, they were the controlling shareholders, so to the extent that they are at the helm, it'd be unusual for the captain to blame the voyage on the crew. But there was also an independent management.

I'm sure hindsight will turn up things we might have done differently. I'm not really interested in fixing the blame, but it's not possible to say that no mistakes were made, and it's not possible to point the finger at any one person or management team because the management has changed over time.

But AT&T was involved in oversight, wasn't it?
I certainly think the AT&T people paid a lot of attention to the business--it was not something they did not pay attention to--but they weren't directly running it, and the management wasn't free to run it as they saw fit. And that could never have been because the company really depended on the good will of the (cable companies). So when Cox and Comcast began to want to build their own networks, and AT&T didn't share the content vision, you knew there were going to be challenges for management.

You talked about the crew. What part of the criticism lies with the initial vision and how that changed over time, particularly as it got into the Excite era and the Blue Mountain Arts era?
Like I said, the strategy was to build a national brand that could compete against AOL. To the extent that we spent money pursuing that strategy, which may not have been the right strategy, perhaps, but to the extent that we spent money chasing that strategy--and I don't think we ever as a whole company embraced that kind of strategy even though the board voted unanimously for the transaction--we tended to pursue it when prices were very high. And when we lost confidence in that strategy, prices were not as high. And that, inevitably, is going to damage the balance sheet of the company.

Put this into context of the larger busting of the dot-com bubble. Are there any lessons learned here that future entrepreneurs or deal makers--or venture capitalists--should keep in mind?
One of the lessons--and I hate to say it--is that you can gain a tremendous advantage by partnering with big, well-established companies, and people are going to continue to do that. But those companies are going to find it very difficult to put their new start-up venture ahead of their own corporate responsibilities. So when you have a start-up controlled by big, established companies, it's going to be a little different than a real, standalone start-up.

News.com's Charles Cooper contributed to this report.