proposed marriage is a big $6.7 billion bet that content is still king.
The two companies are betting Excite's content will speed up both the attractiveness and the adoption of @Home, which is developing high-speed access to the Internet via cable television networks. Together, the two companies are hoping to build a loyal base of Excite users who will tap into the service using both conventional dial-up connections and high-speed links to the Internet.
On Tuesday, investors loved the deal. What is more, onlookers are agreeing with them. "It's a great merger," says Marc Weiss, senior technology analyst with
Amerindo Investment Advisors
, which has holdings in both companies.
How great? At a press conference announcing the merger, @Home CEO Thomas Jermoluk showed a chart of how the two companies, which had combined revenue of roughly $129 million for the first three quarters of 1998, will show $2 billion by 2002. The new company is projected to boast operating margins of 30% to 35%. Jermoluk says that the deal will, over the next four years, increase @Home's subscriber growth 20% over the company's own earlier projections. @Home is now in 330,000 homes.
"It's a good deal," says Kevin Landis, portfolio manager of the
Technology Leaders fund, which does not have holdings in either company. "If you're @Home, the best thing you've got going up until this deal
is the inside track on what's arguably the best pipeline into people's homes," he says. "A great pipe is not worth very much unless you give people a reason to use it ... It makes sense to bring in a group of people whose business it is to get content, and that's Excite."
It's not simply content that the companies hope will do the trick for @Home but personalized information that each user can tailor for himself. Excite CEO George Bell makes much of the fact that 20 million people had signed up to personalize their Excite home page and that people who had were 25 times more likely to return to the site.
Personalization also works for advertisers too. The two companies say they'll use Excite's Internet advertising subsidiary MatchLogic to target ads based not only on demographic profiles of users but also on the type of connection they are using at any given moment. MatchLogic can potentially be used, Weiss says, to reach cable viewers as well as Web surfers.
Of course, not everyone agrees that the deal has tremendous strategic value. Peter Krasilovsky, program director at the Princeton-based Kelsey Group research firm, says the deal won't help Excite much in its battle to become one of the top five portal sites with staying power beyond 1999. Excite is competing with
for the last available spot, after
GO Network. "I think that the deal won't generate enough brand building to move Excite to the front of the class," Krasilovsky says. "I don't know that this makes Excite a shoo-in to be No. 5."
But the Excite-@Home deal may give the new entity a temporary competitive edge against AOL, which has been working hard to develop high-speed access to people's homes. AOL appears to have lost its chance for favorable distribution through the @Home network. "This puts AOL in a very difficult position, because AOL has been fighting to get access to broadband carriers," says Mark Mooradian, senior analyst at
. In the wake of the deal, it will be costly for AOL to get placement on @Home's service, Mooradian says. "Even if they can achieve that now, they would be playing second fiddle to Excite programming."
Is @Home overpaying for content by shelling out a healthy premium for a stock that -- like other Internet companies -- has growth but no earnings? Maybe. "I don't think they spent a lot of time wringing their hands over the valuation analysis," Landis says. "I think they said, 'It costs what it costs, but we need to do it.' And they did it."
Amerindo's Weiss argues that the company didn't overpay. "I think it was a fair price," he says. "That MatchLogic asset on its own ... they could have IPO'd as a company half as valuable as Excite itself."
The deal "strengthens @Home's ability to get traffic, somewhat at the expense of AOL," Landis says. "@Home is the place people could get comfortable without needing AOL."
But Landis and other market watchers are far from saying the deal will cripple AOL. "You know, the guys at AOL are awfully good deal makers," he says. Pointing out that @Home could be in 1.5 to 2 million homes by the end of 1999 -- AOL has 15 million members -- Weiss says, "AOL
have time to figure out a broadband strategy."