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Excite@Home to shut down; AT&T drops bid

The beleagured high-speed Internet service provider announces that it will cease operations in February, after suitor AT&T withdrew its $307 million bid for its cable assets.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
6 min read
Beleagured high-speed Internet service provider Excite@Home announced Tuesday that it will cease operations in February, after suitor AT&T withdrew its $307 million bid for its cable assets.

see FAQ: Answers for Excite@Home customers Excite@Home will shut down on Feb. 28, 2002, after arranging transitional services with its major cable partners in the past few days.

AT&T's move essentially snuffs the brightest star of the late 1990s Internet stock boom and means the transfer of millions of customers of the 3-year-old broadband network to established cable companies.

"Excite@Home will be moving from an asset purchase with AT&T to transitioning services" to the cable companies with which Excite@Home partnered, a source close to the broadband company said.

AT&T, which controls a 79 percent voting interest in Excite@Home, had been the only bidder for its assets since Excite@Home declared bankruptcy Oct. 1.

But bondholders and other unsecured creditors had consistently balked at AT&T's $307 million offer. They insisted that Excite@Home's optical network and customer list of 4.1 million broadband subscribers in the United States and Canada made the company worth at least $1 billion.

The bondholders also sued AT&T and other cable partners, also known as multiple system cable operators (MSOs), alleging gouging of Excite@Home. Bondholders said contracts with cable companies siphoned a disproportionate amount of revenue from Excite@Home, costing the company as much as $6 million per week.

On Friday, a bankruptcy court judge ruled that Excite@Home could renegotiate contracts with its cable partners. In the weeks preceding the decision, cable operators threatened that such a ruling would prompt them to back out entirely from partnerships with Excite@Home. Although AT&T was the first--and so far has been the only--cable company to entirely back out of its contract with Excite@Home, almost all cable partners began making preparations months ago to migrate their customers from Excite@Home's optical backbone to their own networks.

Pulled plugs
In a prelude to Tuesday's announcement by AT&T, Excite@Home last week had pulled the plug on AT&T customers.

Gartner analysts Jay Pultz and Walter Janowski say efforts to hold Internet service customers "hostage" only hastened Excite@Home's demise.

see commentary

"When they terminated service, they incurably and materially breached the agreement," said AT&T spokeswoman Eileen Connolly. She said AT&T informed Excite@Home CEO Patti Hart late Monday afternoon.

AT&T said Tuesday that it expects approximately 80 percent of its customers to be on its new high-speed Internet network by the end of the day Tuesday and plans to complete the transition by Friday morning. As of Tuesday morning, AT&T said it had moved more than 500,000 cable Internet customers to the new network.

Several cable companies, including Comcast and Cox Communications, announced Monday afternoon that they had formed "transitional" agreements with Excite@Home. But the three-month agreements were meant to be just long enough so that the cable companies could complete the switch-over of customers to their independent networks, essentially cutting Excite@Home's list of customers in half.

Cox is expected to complete the switch for its 555,000 customers within a month, cable industry experts say, and even Comcast shouldn't take longer than three months to transfer its 800,000 customers. It's highly unlikely that any of the largest providers will strike new contracts after that.

E-mail us about the
collapse of Excite@Home The short-term nature of the contracts, as well as the widespread migration of customers from the Excite@Home network to independent networks, cast a dark shadow over the prospects of Excite@Home.

Before the judge's ruling, Excite@Home had 4.1 million customers and controlled about 45 percent of U.S. households with broadband access. Now it has about half that, and the customer ranks are thinning rapidly as cable companies transfer customers to independent networks.

"It's the end of Excite@Home," said Mark Kersey, a broadband analyst for La Jolla, Calif.-based ARS. "Excite@Home had a very small window of opportunity to get a decent sale price...It seems like that window is now closed."

The demise of Excite@Home has been almost as swift as its meteoric rise to fame during the Internet stock boom of the late 1990s. Only two years ago, @Home's $6.7 billion merger with Excite--the largest of two Internet companies--appeared to have all the makings of an industry leader: heavy traffic, popular technology, major-league financing and a head start over would-be competitors.

Blunders doomed merged company
But the marriage of the Web portal and the high-speed Internet service fell disastrously short of expectations largely because of a series of management blunders. In particular, Excite@Home board members clashed with more conservative See Special report: Excite@Home marriage doomed at the altar? executives from AT&T, and a series of management missteps and sloppy contracts with self-interested cable partners sealed the company's fate.

AT&T's bid withdrawal is the most recent--and perhaps last--chapter in the tortured history between the two companies. The companies were members of one of the most high profile and strained marriages of the Old and New Economies. Both companies share several board members, and executives at both companies have been vocal in their disdain for those at the other company.

Basking Ridge, N.J.-based AT&T, which inherited its @Home stake and board representation from its acquisition of cable TV leader Tele-Communications Inc., opposed the very creation of Excite@Home in December 1998.

AT&T had been a shareholder in the cable company for only a few months when its directors voted to acquire Excite--a second-tier Internet portal whose dot-com culture contrasted starkly with Ma Bell's conservative sensibilities.

Frustration with former Excite@Home CEO Tim Jermoluk became clear at a meeting in March 1999 in the boardroom of AT&T's headquarters in New York, when several directors suggested spinning off Excite as a separate company--essentially undoing the merger only two months after the deal had closed. Clashes between Jermoluk and then-AT&T cable chief Leo Hindery, who adamantly opposed the merger, are legendary among executives at both companies.

AT&T wasn't the only problem Excite@Home had to face. Since its inception, it has operated under an awkward ownership and governance structure that included significant input from three major cable operators: AT&T, Cox and Comcast. As a result of the complicated ownership structure, Excite@Home has appeared unfocused and divided. More bickering between AT&T Chief Executive C. Michael Armstrong and Hindery over the direction Excite@Home should take--and the role content should play--left the access provider adrift among the big cable operators' vast assets.

Ma Bell takes charge
Boardroom divisiveness escalated in March 2000, when Ma Bell assumed majority control of Excite@Home's board of directors and offered to buy the stakes of co-partners Comcast and Cox. At that point, AT&T had a 23 percent ownership stake in Excite@Home and a 74 percent voting stake.

In January, AT&T traded $2.9 billion in its stock for the ownership stakes see story: AT&T consolidates control over
Excite@Home that competing cable operators Cox and Comcast held. That deal boosted AT&T's stake to 38 percent. AT&T also took a 79 percent voting interest in the broadband Net access company.

Some insiders say AT&T's heavy stake in the company compromised the board's decision-making abilities and took the focus away from Excite@Home shareholders.

Some Excite@Home insiders blame the company's plight squarely on cultural clashes between AT&T's "cable guys" and Excite@Home's more informal, younger executives. In fact, Excite@Home's October bankruptcy filing was part of a deal with AT&T. The agreement called for Excite@Home to become wholly owned by the long-distance giant by early 2002, pending approval by the bankruptcy court.

At the time of the bankruptcy filing, AT&T said that it would use Excite@Home's assets as the core of a larger broadband network. At the time, AT&T insisted customers would not experience an interruption in service as it acquired Excite@Home's assets.

When contract negotiations broke down early Saturday morning, however, AT&T switched course and began transferring its Excite@Home customers to its own network at a rapid clip.

see CNET Internet: Find a broadband provider One industry veteran said Monday afternoon that AT&T's keen ability to switch customers to its own network made it easier to step away from the bid.

"AT&T, dating back to the days of long-distance and phone carrier switches, has had more capacity and was further along at switching other people to their own network than the other cable operators, who are not in the phone business," said one industry source. "Also, why would AT&T bid for a company that will have no customers in three months and doesn't need their network themselves?"

Staff writer Margaret Kane contributed to this report.