Family feud: Excite@Home, AT&T: A case study in boardroom politics

By Rachel Konrad, Dawn Kawamoto and Scott Ard
February 28, 2002, 4:00 a.m. PT

REDWOOD CITY, Calif.--By all accounts, Hossein Eslambolchi is a technological genius: In 15 years as a networking engineer at AT&T, he collected more than 100 patents and was a finalist for U.S. National Inventor of the Year in 1997.

So it made perfect sense that he would be tapped by his company for the special mission of rescuing the troubled network run by partner Excite@Home. In the year since that move, however, the high-speed Internet service has filed for bankruptcy, lost 4.1 million customers, and, by the time it is expected to close Thursday, will have seen its share of the consumer broadband market plummet from 45 percent to zero.

Few people suggest that Eslambolchi was responsible for the demise of Excite@Home, a company whose problems long predated his temporary assignment on loan from Ma Bell. But his tenure has raised difficult questions about the company's relationship with AT&T, an uneasy arrangement of both cooperation and competition that has become increasingly common throughout the corporate world as industries merge and consolidate.

"It's completely legal to have executives on the board and to have a majority voting interest, even in companies that are competitors, and it's completely legal to lend an executive," said Steven C. Currall, associate professor of management, psychology and statistics at Rice University in Houston and the author of numerous studies on organizational behavior and conflict management funded by the National Science Foundation and the U.S. Department of Education. "But it's incredibly predatory, and I'm not sure how ethical it is."

What complicates the situation further is the path Eslambolchi's career took in this relatively brief period. After spending seven months as interim president of Excite@Home Broadband Network Services, a job that gave him broad authority, Eslambolchi returned to AT&T last August with a promotion to chief technology officer and soon began working on a network that would directly compete with Excite@Home's.

He began overseeing construction of an AT&T network in October that would accommodate more than 850,000 customers that AT&T once shared with Excite@Home. The new AT&T service allowed it to pull out of a $307 million bid for Excite@Home's assets, which it no longer needed--a move that was widely seen as a death sentence for the Internet company.

Critics have long been wary of AT&T's deep involvement in a potential rival. Eslambolchi recruited more than a dozen senior AT&T executives to work with him while he reported directly to Excite@Home CEO George Bell and his successor, Patti Hart.

"Whether his job was to gather intelligence or just to do a job...he learned a heck of a lot," said an attorney for Excite@Home bondholders, who are involved in the company's bankruptcy proceedings. The bondholders are also considering filing a lawsuit about AT&T's involvement with the company and the construction of the parallel network. "I don't know what his motivations were, but he clearly understood a lot about @Home."

Eslambolchi could not be reached for comment, but others who worked at both companies scoff at the suggestion that he had any hidden agenda, saying his assignment was welcomed by Excite@Home and was always intended to be temporary. They note that he had code-named his mission Project 90 to reflect his promise to overhaul the company's network in 90 days.

More important, they say, is that a professional with Eslambolchi's talent and experience would hardly need to copy Excite@Home's network for AT&T. If anything, these sources say, it was Excite@Home that benefited from the relationship, seeing its network reliability increase during Eslambolchi's tenure from 66 percent to more than 99 percent in the first six months of 2001.

"Hossein didn't learn anything new about IP and IP networking by working at Excite@Home," a source close to AT&T said. "When Hossein arrived at Excite@Home, he realized that the design of their services and network was based on what you might call trial-and-error engineering. There was no blueprint, architecture or plan for building a network that needed to grow as well as meet identified performance targets."

Excite@Home CEO Bell had already recognized Eslambolchi's merits, having offered to make him chief operating officer in late 2000, a source close to the board of directors said. But Eslambolchi turned down the offer and said he was only interested in the CEO position.

Although Eslambolchi lacked the sales and marketing experience often required of a CEO, sources described him as a supremely talented and ambitious technophile--qualities that undoubtedly served him well in his assignment to fix Excite@Home's network.

"There was no B.S. about him," said a former Excite@Home employee who worked with Eslambolchi. "When it came time to make a decision, he made it. He was authoritative."

Riddled with problems
Before Eslambolchi's arrival, serious technical problems seemed to be a regular part of business for Excite@Home. When the company launched a ballyhooed start-up screen in April 2000, many customers couldn't view it because of a glitch--the first in a string of problems that would plague Excite@Home throughout 2000 and early 2001.

In June 2000, 1.5 million Excite@Home customers experienced e-mail service delays of two days or more. The Excite.com Web site crashed a month later, followed by massive outages of the broadband service provider in the fall. In November 2000, a backup of the Excite@Home domain name server system caused corruption of some data, depriving customers of about 25 percent of the system, including Web and e-mail access.

In February 2001, a hardware failure in Excite@Home's Illinois data center shut down connections for 150,000 customers in six states. One month later, Excite@Home subscribers in the San Francisco area filed a class-action lawsuit against the company, charging that it didn't live up to promises made in its advertising campaigns. The group cited slow connection speeds, unreliable e-mail and inaccessible tech support.

Excite@Home's rise and fall Melissa Francis, correspondent, CNET

Problems were so bad that Excite@Home's cable partners, including Cox Communications and Comcast, threatened to not renew contracts when they expired in 2001. Sources say some cable company lawyers also threatened to bail out of the contracts early, arguing that poor service constituted a breach of agreement.

But the quick success of Project 90 quieted critics. While Eslambolchi was at Excite@Home, e-mail service improved from 350,000 defects per million transactions to 500 defects per million transactions when he left, according to an AT&T source. Customer satisfaction improved 50 percent.

Eslambolchi also supervised a project that would allow Excite@Home to go from about 3 million customers in the first half of 2001 to as many as 20 million subscribers--without compromising connection speeds or performance. He pushed Excite@Home to support high-profit services, such as tiered data, virtual private networks, and connectivity for application service providers and content-delivery networks.

By May 2001, Steve Brookstein, senior vice president of Excite@Home's Internet division, said complaints to the call center had declined dramatically. He imposed a new guarantee for cable companies upset with the previously flaky service: Excite@Home would pay cable partners such as Cox and Comcast whenever Excite@Home's service was poor.

As part of the deal, Excite@Home would meet 12 to 15 service standards. The company agreed that its network would operate at least 99.95 percent of the time and that it would improve its call center.

The changes, nevertheless, came at a cost. In the first three months of Eslambolchi's tenure, Excite@Home spent $53.9 million on property and equipment, up 28.6 percent from the first quarter of 2000. In the same time frame, the company's cash and short-term securities dropped by nearly half to $104.5 million.

In April, Excite@Home posted a first-quarter net loss of $61.6 million, or 15 cents per share, on revenue of $142.8 million. The company also announced that it would miss its financial targets for 2001 and that it needed at least $75 million by the end of June to keep operating.

Yet one source said Eslambolchi actually reduced the 2001 capital expenditures budget from $250 million to $190 million while slashing 400 people from the engineering department.

"Hossein redesigned the architecture of the e-mail system, changed engineering procedures, and set up processes more suitable for a network that was scaling in size at an accelerating rate," the source said. "Most of the changes he recommended did not require additional capital."

By August, AT&T Chief Executive C. Michael Armstrong decided that Eslambolchi's mission had been accomplished and promoted him to succeed David Nagel as chief technology officer and president of AT&T Laboratories. Eslambolchi also became Armstrong's senior technology adviser.

That fall, the strained relations between Excite@Home and AT&T came into their sharpest relief. Basking Ridge, N.J.-based AT&T had opposed the very creation of Excite@Home ever since Ma Bell had inherited a stake in @Home from its acquisition of cable TV leader Tele-Communications Inc. in 1998.

In September, Excite@Home filed for Chapter 11 bankruptcy protection, and AT&T agreed to buy the assets for $307 million as part of Excite@Home's bankruptcy filing. A month later, AT&T began building its contingency network, sources said, with Eslambolchi supervising the effort.

On Dec. 1, negotiations over the Excite@Home asset sale broke down minutes after the expiration deadline, and AT&T began migrating customers to the AT&T Broadband Internet network.

A few days later, AT&T withdrew its $307 million offer altogether, leaving Excite@Home's assets extremely devalued after the loss of 850,000 customers. No other bidders came forward.

Although subscribers complained bitterly of slower connection speeds and spotty service, AT&T boasted that by about Dec. 7, it had migrated 98 percent of its customers from Excite@Home to its contingency network.

Bondholders complain that Eslambolchi built the AT&T network based on his experience from Excite@Home, erasing the latter company's hopes of survival by allowing Ma Bell to abandon its $307 million bid. None of the AT&T executives on loan to Excite@Home signed nondisclosure agreements--a highly unusual arrangement in the tech industry, which is obsessive about protecting proprietary knowledge. One source close to the situation said neither Eslambolchi nor any of his temporary recruits signed NDAs because there was "no competitive overlap" between AT&T and Excite@Home.

Tortured relationship withers
Excite@Home shareholders have long insisted that AT&T's heavy stake in the company compromised the board's decision-making abilities. They have been especially wary because of AT&T's well-known opposition to @Home's acquisition of Excite, a second-tier Internet portal whose dot-com culture contrasted starkly with Ma Bell's conservative sensibilities.

Boardroom divisiveness escalated in March 2000, when AT&T 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 2001, AT&T traded $2.9 billion in its stock for the ownership stakes held by competing cable operators Cox and Comcast, a deal that boosted Ma Bell's investment in Excite@Home to 38 percent. AT&T also took a 79 percent voting interest in the broadband Internet access company.

Corporate ethics experts say no laws or regulations govern the ability of one company to take over a large stake in a smaller rival. W. Michael Hoffman, executive director of the Center for Business Ethics at Waltham, Mass.-based Bentley College, said Excite@Home could probably have done little to curtail AT&T's involvement or prevent its own demise.

"If AT&T is the big boy on the corporate board and in the shareholder room, even if @Home doesn't like their meddling or strategies, you can't really do anything about the big bully," Hoffman said. "AT&T may have said, 'We'll pick everybody's brain that needs to be picked, and then we'll grind them into the dust.'...It's not a typical takeover, but it's still a takeover. Unfortunately, this is the way of capitalism and corporate control."

That line of thinking extends to situations such as Eslambolchi's assignment as well.

"Here we have a situation where you have a person who works for another company, in this case AT&T, who is at the present or might be in the very near future competing against the very company he's working at," Hoffman said. "Excite@Home was silly to invite the wolf or the fox into the henhouse."