Feeling @Home

Feeling @Home
By Corey Grice
Staff Writer, CNET NEWS.COM

Called TJ by friends and co-workers, Tom Jermoluk, with his swath of platinum blond hair, could pass for a California surfer just as easily as a high-tech executive.

But Jermoluk doesn't have time for the beach. The 42-year-old chief executive of @Home Network, has been building his company up to capitalize on the data revolution by providing data services and high-speed Internet access over cable networks.

The Redwood City, California-based @Home provides an integrated set of Internet-based services for cable television operators who want to cash in on the higher profit margin data business. And, since cable allows transfer speeds up to 50 times faster than dial-up connections, the industry--with @Home as the bellwether--has gotten a lot of attention.

@Home had more than 210,000 customers as of last quarter. Those numbers pale in comparison to America Online's 14 million subscribers, but lead data-over-cable competitor Road Runner, a joint effort between Time Warner and MediaOne.

Regardless of recent success, Jermoluk and his company still face a number of challenges ahead.

Until standards-based cable modems hit the retail market in full force, services such as @Home's are unlikely to realize significant subscriber spikes. Online leader and competitor America Online is also lobbying for access to many of @Home's cable partners' broadband pipes. Additionally, @Home has had to limit broadcast-quality video downloads, for fear of overloading its networks. The proposed limits have irked some customers who signed on to the service specifically for its alleged massive bandwidth capacity and blazing download speeds.

Jermoluk recently discussed the Internet and cable landscape, competing technologies, and why he thinks 1999 will be a big year for his company with CNET News.com reporter Corey Grice.

News.com: Your company's subscriber numbers seem to fall within expectations, but have yet to show any strong growth. What is holding the company back?
Our [subscriber] numbers right now are actually pretty predictable--and that's why we're basically just on them. And it all has to do with how many homes you get handed, and how many installation crews you get put together to get out there and install the service, because everything today is scheduled. We've gotten better and better at that process?but it's still very labor-intensive and scheduling-intensive. If I could go into a market, and have [the service] available in a box? and you went home and it all just worked, and you never had to have a tech show up at your house. Then you could have quarters where you'd do the right marketing campaign and people respond and wow, suddenly you blew [subscriber numbers] out. Well, that's what we are striving for very strongly.

Cable has a great penetration rate with home users, but that penetration rate falls significantly with the business user, which is a higher profit-margin customer. How do you reach the business user as well?
Well 80 percent of small businesses in America are passed by cable. For small businesses, it's a big opportunity. But say 25 percent or 30 percent of our business will be commercial, that's significant and it's very

profitable, because the infrastructure of our company was built and paid for by the consumer service. When we resell [ the @Work service] to businesses, it's incrementally much more profitable than our core service. Our obligation is to provide the service--and we do, but how we'll make all our profit is in leveraging it into commercial and media businesses.

How important is content to you, as you create your own front-end navigation page. How heavily do you plan to invest in creating a new kind of interface?
As far as content, in actual content we fully intend to partner, we don't intend to be an original content creator. Now, content comes from Disney or [Time]Warner or Sony or CNET or New York Times or whoever. Those are real content providers. But as far as the portal goes, we intend to create that ourselves. We have a big investment in our company; it's a huge part of our budget, probably 20 percent to 30 percent of our company today goes into the development of our broadband portal interface.

How big a part of your revenue is the portal-like front page and the content arm of @Home?
It's greater than 10 percent of the revenue of the company. We have been incredibly attractive to advertisers. They want to get on and understand what broadband is all about. Our click throughs and impressions are so much higher than what anybody else is getting on the Web, that [advertisers] are willing to pay?two to three times higher than anything they're getting on Yahoo or AOL.

And maybe it's only 200,000 or 300,000 subscribers, but guess what? They're [users] spending three to four times as many hours online per month as they do on the dial-up side, and they're viewing twice as many page views because the service is so much faster. So they're operating like they are millions of users in terms of eyeball hours because of the amount of time and the amount of things that they're looking at.

The Competitive Landscape

Boosting e-confidence

America Online wants access to your service, and they were one of 17 companies that filed public comments on the AT&T-TCI merger in general. What's your stance on that at this point? You negotiated with AOL earlier in the year on a possible deal.
Yeah, not just earlier in the year--we negotiated with them for the last year and a half, trying every way possible to come up with a commercial deal offering them everything from we'd resell their service, we'd integrate content, we'd basically share the user base in some way. But they are just clinging desperately to their old business model they want to have complete control over the user. They want to have 100 percent of the control over the subscriber and they want to have 100 percent of the programming interface, which is to their portal. And that's simply not a very attractive proposition for a cable company, or AT&T, or ourselves, to become involved with. It limits choice for the consumer, it limits choices for programmers and puts all of the power in the hands of AOL. And we're simply not interested in doing that...and the best argument on our side is it's not in the interest of the consumer.

Is there nothing to the proposed deal that AOL would be interested in?
There's an opportunity to gain customers here together; there's an opportunity for me to make them more profitable by cutting out their modem minute network charges; there are opportunities for us together to make other revenue and transaction revenue. And that's what should happen, we should come together and make a commercial deal. And they're not going to go around us, either through the FCC or by doing things with the cable companies. We exist. As much as they want to be us, it is incredible that this 14 million person, $30 billion operation has such incredible envy right now--they want to be us. They decided they want to be @Home because everybody realizes that broadband is the one industry right now that's happening, but it's happening because the cable operators are putting the billions of dollars into the plant. And our company is putting the people and the hundreds of millions of dollars necessary to rollout the digital platform--and it's working.

To what extent is this partnership that you are willing to go with AOL?
Well, it just depends on what the commercial relationship is. We've offered integration of content services and will share in other revenue. We've offered. We don't need to be the providers of all these different pieces of content, but we're not going to give up that first screen in that relationship to the customer. That has to be a joint relationship. Today it's joint between us and the cable operators. It's Cox@Home or TCI@Home--it's not just @Home because the cable operators, remember, these guys are programmers. Do you think they'd like to have AOL have control of their plant, where they couldn't even get their own programming assets on the screen if they wanted to? They couldn't get iQVC or E! or MSN or any of those things to show up on the screen because AOL has the programming relationship on their own pipes. They abhor that idea. So there's got to be some cooperation; there's got to be an integration kind of capability. And it just means you've got to share--that's all--you've got to find a way to share the customer.

How might the blockbuster merger announcement between America Online and Netscape affect @Home?
I see no impact on us at all given the fact that we're a technology integrator. We recently moved away from the Netscape technology and are working with Software.com for email, and Inktomi for searching proxies. We're a technology integrator, so we make sure we have the best for our customers. We'll still have a choice of browsers for users, Netscape and IE.

On a broader perspective, I feel there is a difference in cultures between America Online and Netscape. And AOL may find it hard to retain the talent that's inherent in Netscape.

Does Microsoft's interest in PC/TV convergence concern you, since they are potentially a competitor? How do you view their investments in this area?
Well, they're not a competitor because we don't pretend to make money off of technology. All of our money comes off of service, providing the service, as either this portal or as the direct monthly bill. And we in no way have a business model of making any money off of selling hardware or software, or licensing or any of those kind of revenue streams. So that's why the cable operators are choosing to have us be their integrator, because I don't care which hardware and software platform they pick.

Do you think there's a concerted effort in the cable industry to make sure that Microsoft does not have the same dominance it has in the PC world?
Oh clearly. Everybody is very attuned to what happened in the PC world. And the cable industry is going to be very careful to make sure that they do not lose any kind of access to their own resources. And the other industry that's very aware of that is the consumer electronics industry. We are very much on the same page on that.

NEXT: Cable vs. xDSL

Cable vs. xDSL

You've signed a few deals recently with Dell and Compaq to promote cable modem access to the Internet. What does their support say about cable technology?
First of all, if you recall, these are the kind of consortium of people who a year ago were all on the ADSL bandwagon-Microsoft and Compaq and all these people. And ADSL has gone nowhere. The fact that they've turned around, Microsoft is making investments in Comcast and Roadrunner; Compaq and Dell are signing up for OEM cable-modem ready PCs. They're all recognizing that cable, cable is the one that's happening. There will be 600,000 commercial cable modems in use by the end of this year in North America, counting Canada. So 600,000--that's a lot and going to millions next year. It's happening.

How do you see the cable versus DSL argument these days?
Well you know, it's kind of like the war got fought and we won by default--they didn't show up. A year ago it was a real pain in the butt, because if you recall, everybody was writing about DSL, and cable guys are going to be too slow, and DSL is going to kick our butt. We kept having to do white papers and go around and...I don't have to give any talks about DSL anymore. All the research reports [are] expecting that by 2002 there will be 13 million cable modem customers and 2 million ADSL customers. So they're all doing our work for us.

Let's talk about the @Work business division for a minute. You rolled out some digital subscriber line (DSL) service through @Work. Why did you do that?
Because wherever we don't have cable plant, we don't want to wait. So if somebody is in the Bay Area and we have not yet got upgraded cable plants in some parts of the Bay Area, we don't want to wait around for another year or two, for a division like @Work that's in a very, very competitive field. There's nobody who is trying to take DSL to a consumer today, but there are people who are trying to take DSL to businesses in replacement of T1 circuits. Well, we sell T1 circuits. So if people are going to move to ADSL, then we want to move to ADSL. Now if cable were there, we'd use it, hands-down. It's such a huge win for us and it's just so much better technology. But if it's not, then we'll use whatever we got.

So what is the problem with DSL?
Lack of motivation. Right now ADSL, if they were to go invest any money in it, that's an open access technology and all these other providers are out there waiting to see ADSL occur. Why are the phone companies going to go put in the money to make it happen? That's why the phone companies have petitioned the FCC to close access back to the advanced services of ADSL, because they want to be able to say, if they're going to put in all the dough, they want to get the return--otherwise, they're not going to put in the dough. In fact, if it wasn't for cable modems right now, my prediction is that zero would have happened with ADSL today; I mean nothing. The only reason they even made any announcements is because we're out there today. They'd just keep selling T1s and making $1,000 from 1.5 megabit circuits and the hell with selling a megabit for $100, or in our case $30.