Content vs. Conduit: Excite@Home and AT&T Clash Over Goals

Just what is AT&T (T) up to? After putting up $140 billion to build a cable empire and gain a foothold in the broadband market, AT&T executives are sending signals that not everyone at Ma Bell is happy with owning Internet content.

One of the most intriguing trial balloons of the summer came with reports that

Yahoo!

(YHOO)

was in talks to merge with

Excite@Home

(ATHM)

. The story surfaced in

Business Week Online

late afternoon Monday.

However, by the next day, investment bankers close to both Yahoo! and Excite@Home said they had little knowledge of any merger discussions. Later that Tuesday, Excite@Home president George Bell denied a merger was in the works, but he did confirm that the company was in talks about content distribution deals. "We've had talks with Yahoo! and

AOL

(AOL)

about getting on the start page of a very powerful broadband opportunity."

But speculation continued. And at a breakfast meeting in San Francisco Thursday, Excite@Home chairman and CEO Tom Jermoluk admitted that the Internet service company's board is experiencing a bout of tension.

"The overall corporate alignment is good," says Jermoluk. "But on a tactical basis, in getting from point A to point B, there are clearly some differences."

Jermoluk's admission seems to substantiate reports that the company's board members are involved in an intense battle over the direction and strategy of the newly merged company.

To Jermoluk, the primary tug of war is between the company's cable partners and owners and telephone giant AT&T, which recently gained majority voting control over the company through its acquisition of cable operator

TCI

. The gist: Whereas the cable companies have a history of owning content, AT&T has repeatedly said that it does not want to be in the content business. "The cable guys are all coming out of a world where they used media properties to expand their business," says Jermoluk.

AT&T controls 58% voting power and has a big say on any deals involving Excite@Home. But since the story surfaced, company executives have been press-shy.

An AT&T spokesman limited himself to saying that the company was standing by what John Petrillo, AT&T's head of corporate strategy, told

Business Week Online

. Petrillo comments that the company is not interested in being a content company only reiterated AT&T's mantra that Ma Bell delivers content but does not make it.

When asked to clarify the company's position, the spokesman said "Petrillo's comments in the

Business Week Online

story is our stance on the content issue."

There may be no merger in the cards now, but telecom industry observers speculate that AT&T helped create the story to drive a wedge between the content interests and the conduit interests on Excite@Home's board.

"Excite@Home is a bid against AOL, with the advantage of mixing valued content to the cable conduit," says Kate von Goeler, an Internet analyst with

Cahners In-Stat Group

in Newton, Mass.

Jermoluk, John Doerr (the high-powered venture capitalist and Excite@Home board member) and other cable company bigwigs sitting on the Excite@Home board envision Excite@Home as the AOL of the high-speed Internet world.

Who has won the current round? Perhaps a draw. Still, some cable analysts think the tension won't be going away any time soon.

"There's definitely a cultural mismatch there," says Gary Arlen, an analyst with interactive media research firm

Arlen Communications

, referring to the cable companies and the telcos. "AT&T has floundered every time they've tried to do content in anything other than directories."

Although combining content with access in the cable industry made sense, Arlen is not entirely convinced this strategy of vertical integration will play on the Internet. "It seems to make sense," he says. "But the issue is if folks want content from their Internet provider."

Bruce Leichtman, director of media and entertainment strategies for the

Yankee Group

, thinks Excite@Home's strategy makes sense over the long term. "Speed only gets you so far," he says. "At a certain point, you need content."