Excite Steps Up Offerings With DSL Shift

In a significant strategic shift, Excite@Home (ATHM Quote) President George Bell said the high-speed Internet-access company is in talks with several phone companies to resell digital subscriber line, or DSL, service. The now aptly named Bell made the announcement on a Thursday conference call with investors.

"We're committed to deploying our service on several platforms," said Bell. "We think we're an attractive partner to DSL companies."

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Until today, Excite@Home has placed its bets on the cable industry. To be sure, it has been offering DSL service through its @Work division, which targets the business market rather than the residential one. But that unit is a small and low-profile part of the overall company. All told, the company has established more than 23 partnerships with cable operators, including AT&T (T Quote), to offer high-speed Net access to consumers over their upgraded cable lines. But the most important contracts, many of which include minority equity stakes in Excite@Home, begin to expire in mid-2002. AT&T, for example, has already stated its intention to open its cable networks to other Internet service providers. This new strategy, analysts say, is designed to help Excite@Home begin to position itself for the "post-exclusive" future.

"They're looking at losing those exclusive contracts with the cable operators within the next few years," says Jeanette Noyes, a research manager with IDC Research. "A lot of this is prep work for when those contracts expire."

It's unclear whether this new move violates Excite@Home's cable contracts. But Bell stressed repeatedly that the company will honor its cable contracts by not seeking relationships with phone companies that reside in territories in which it has contracts with cable operators.

Bell declined to specify the phone companies with which Excite@Home is negotiating. Further, when asked if Excite@Home is negotiating with satellite companies, another other broadband delivery technology, Bell declined to comment.

Beyond preparing the company for the future, Bell said the potential DSL agreements would help expand the company's market. Currently, through its cable partnerships, Excite@Home has access to around 40% of the households that have cable technology. Analysts agree that phone deals could open up new markets. "It doubles the potential customers you might have," says Noyes.

The shift to a more technology-agnostic strategy also seems to reinforce Excite@Home's larger and long-term strategy of becoming a broadband media company rather than an Internet-access company. The announcement that Tom Jermoluk, the company's chairman and CEO, will be relinquishing his CEO title to Bell, whose media expertise powered Excite, reinforces this trend as well, analysts say. Jermoluk, who will remain the company's chairman, said on the conference call that he will be focusing on three areas in 2000: winning new contracts with TV set-top box makers, developing new broadband distribution systems and nailing down extensions with the company's cable partners. "We fully do expect renewal," Bell said.

Bell believes phone companies would find value in Excite@Home's broadband infrastructure and in its content expertise. One of Excite@Home's least understood but most valuable assets is the Internet backbone that it's been building over the last four years and that has attracted 1.15 million subscribers to date. The company has spent tens of millions of dollars constructing a nationwide fiber-optic backbone with local servers that can store and distribute rich Internet content. Presumably, phone companies could piggyback on this network to distribute content across the country. "Telecommunications companies with access to the last mile would benefit by having more people sell their service," says David Levy, an analyst with Chase H&Q who rates shares of Excite@Home a buy. (His firm has performed underwriting services for the company.)

Another major weakness of the local phone companies is content. As bandwidth becomes more of a commodity, analysts say Internet service providers will need programming to attract and retain fickle users. The recently announced merger of Time Warner (TWX Quote) and America Online (AOL Quote) was interpreted by some analysts as a sign that content will be a key driver of the broadband future.

"As this market matures, the phone companies will be helped by the availability of content that leverages the high-speed capability," says Noyes.

Bell said that the company would be unveiling its new broadband portal by the end of this quarter. But Excite@Home has already missed its own self-imposed deadline on this project. Various executives promised to release this portal by the end of last year. The portal, said Bell, will be available to users on the open Internet as well as to Excite@Home subscribers, whose version will include "more bells and whistles."

On the conference call, Bell sought to portray Excite@Home as a feisty Internet company that had a successful if troubling year. The main themes of 2000, said Bell, will be growth, service and reliability. One path to growth will be through the touchy-feely electronic greeting-card company Bluemountain.com, which Excite@Home agreed to acquire last October. Excite@Home will soon begin placing advertisements on 20% of the pages of Bluemountain.com, until now an aggressively noncommercial site.

"The company got beat up a lot last year," said Bell. "We were the stepchild of cable companies, the stepchild of the government. But guess what? The company is not the stepchild of anything. We are the leaders in broadband."