A shareholder lawsuit filed last week suggests AT&T, which holds a 58 percent voting stake in Excite@Home, shouldn't control the company's business decisions and that new independent directors should be installed. The lawsuit alleges that Excite@Home's best interests take a back seat to those of its larger cable operator partners--stifling the firm's growth and its ability to sign deals with other companies.
The suit serves to highlight the uncertain future of the Net-over-cable firm. AT&T recently indicated it was willing to consider various business deals for Excite@Home, while some said AT&T might sell Excite, the company's content arm.
In addition, the chief cable strategist at AT&T, Leo Hindery, recently resigned. Differences between Hindery and Excite@Home's CEO Tom Jermoluk may have hampered the high-speed Net firm's growth, analysts have said.
And a languishing stock price hasn't given investors much confidence in the company's strategic direction. Although AT&T's involvement gives Excite@Home some serious marketing power and ample cash, the communications giant's control over strategic decisions may be a mixed blessing.
Excite@Home wouldn't comment on the pending litigation. Yet AT&T executives defended their position within the complex net of cable firms that make up Excite@Home's business model.
"The reality here is that the Excite@Home charter does set up some checks and balances, realizing that the cable partners could have somewhat different interests," AT&T spokeswoman Eileen Connolly said. "We have conducted ourselves in an entirely appropriate manner and have fully adhered to those provisions."
Yet analysts agree that the company may face some serious changes soon, as AT&T hones its own cable strategy and the market for high-speed Internet services heats up.
"I would almost expect in the next 12 months that something will happen in terms of spinning off the company, or changing the way Excite@Home is structured," said Mike Paxton, a cable industry analyst at Cahners In-Stat Group. "There's a lot going on with that company."
Who's in charge?
Excite@Home holds exclusive contracts with more than 20 cable operators domestically and abroad. In many cases, the exclusive arrangements expire in 2002--giving Excite@Home a limited window of opportunity to build its customer base without the threat of competition from other high-speed Internet service providers.
Excite@Home's governance system is a complex one. The company's largest customers also are its largest stockholders--which includes not only AT&T, but Cox Communications and Comcast, among others. Executives from those cable firms also sit on Excite@Home's board of directors, and are thus in control of many major strategic decisions.
The shareholder lawsuit alleges that Excite@Home's ownership and management structure has stifled the company's growth. Yet analysts aren't so sure.
"The cable companies are the source of @Home's value," said Michael Harris, president of Kinetic Strategies, a broadband market research firm. "So much of its value is tied to its exclusive deals with the cable operators. The day that one of the cable companies signs a deal with another provider is the day that @Home's stock tanks."
Analysts say the cable partners' stakes in Excite@Home creates an incentive for them to deploy service and be innovative in their marketing and sales efforts.
"It's that incestuous relationship that's made the whole thing work," Harris said. "It's kind of been this golden cage [the cable operators are] trapped in. They certainly don't want to harm the shareholders, [as] they're the largest ones."
Yet those relationships won't last forever. AT&T, soon to be the nation's largest cable company once its pending cable acquisitions close, would like to have more than just Excite@Home delivering Internet service to consumers over its network.
"We will honor the exclusivity until 2002 and following that we will seek to establish commercial agreements with others," AT&T's Connolly said. "Our goal is that the pipe have the greatest amount of capabilities on it."
AT&T has spent more than $100 billion putting together a network of cable television systems that will allow it to sell consumers local phone service, cable TV, and high-speed Internet access, in addition to its traditional long distance services. Through all these deals, the company has focused on the so-called pipes, not necessarily the data that travels through them.
Excite@Home needs access to the cable companies' networks to deliver its content and Web applications, but some say the same could be accomplished with strategic partnerships, not equity investments.
"There could be some benefits to being a completely autonomous company," said Dave Levy, an equity analyst at Hambrecht & Quist. "Nevertheless, those benefits are counterbalanced by the tremendous benefits that control and an involvement by the cable companies bring."
Pittleman's attorney, Carmella Keener of the Rosenthal, Monhait, Gross & Goddess law firm, couldn't be reached for comment.