Publish date:

Excite@Home's Valuation Under Scrutiny as AT&T Opens Up Its Cable Systems

AT&T is in talks with ISP MindSpring, and investors wonder what that means for Excite@Home's exclusive deals with AT&T and other cable partners.

It's official:


(ATHM) - Get Report

now must learn how to live in a world of open access.

After hinting at such a move,


(T) - Get Report

said Monday it would open its cable systems to Internet service providers other than Excite@Home. The two have an exclusive agreement that expires in 2002.

Tech Savvy: Join the discussion on


message boards.

AT&T already was talking to

MindSpring Enterprises


about a possible deal. It even sent a letter about the potential deal, which would start after the Excite@Home exclusive agreement expires, to the

Federal Communications Commission

, which has been watching to see whether AT&T would open its cable systems to competitors.

For Excite@Home investors, the worry is that its fat $18.6 billion market cap is based in part on its exclusive contracts with its 23 cable partners. Now that AT&T has backed off, others may follow.

"With each new piece of news regarding progress towards open access, we become less comfortable with ATHM's valuation,"

Merrill Lynch

analyst Henry Blodget wrote in a research note Monday. "The implied valuation of the @Home segment of the company

which provides high-speed access -- $11 billion -- suggests that the exclusivity agreements will be renewed, which seems less and less likely."

Without exclusive agreements, Blodget added, "it will be difficult for @Home to maintain and grow a substantial subscriber base." (Merrill, which rates Excite@Home a short-term accumulate, long-term buy, has done underwriting for the company.)

Most investors agreed Monday, pushing Excite@Home down almost 6%, or 3 1/16, to 49 on a day the


set yet another record.

But Alan Harris, portfolio manager with Excite@Home investor

TheStreet Recommends

Munder Capital

, says he's not too concerned about AT&T's agreement. "The devil is in the details," says Harris. "The bigger issue is what will happen between now and the effective date of this letter." Among the key issues still to be decided: pricing, co-branding and who controls the customer.

In addition, Harris says Excite@Home is working on other fronts. He points to another agreement that was largely overlooked Monday: AT&T announced that it will feature a customized edition of Excite@Home's online service on an exclusive basis in its wireless and handheld devices.

Still, there are plenty of forces lining up against Excite@Home.

AT&T isn't likely to stop with MindSpring, in part because it wants to continue to show regulators that it has an open cable system. At a New York meeting for analysts and investors Monday, AT&T Chairman Michael Armstrong said his company had "begun discussions with a number of ISPs and portals about offering their services on our fixed wireless and cable systems, and we're open to discussions with others as well."

And where does Excite@Home stand? "Though we will not extend the current exclusive contract with Excite@Home, we are very pleased with that partnership and look forward to a long-term relationship," said Armstrong.

What that means is unclear. For now, Excite@Home seems as if it's depending on technological hurdles to fight off the competition.

Milo Medin, Excite@Home's chief technology officer, says even if AT&T somehow opened up its cable systems before 2002, technical difficulties would prevent the service from being offered for a "couple years."

"If you didn't want to deal with us, you'd still need a new set of provisioning services, a new network and new software," adds Medin. Also, Excite@Home said in a statement Monday, "We also expect to provide a substantial piece of the 'Internet transport services' that AT&T will eventually offer to other ISPs."

Meanwhile, Excite@Home's other cable partners -- such as




Cox Communications





-- appear to support AT&T's decision.

"The fact that the talks were apparently successful and that the cable industry officials appear to have been involved suggests that AT&T had the consent, if not the approval, of its Excite@Home cable partners," wrote Merrill's Blodget.

A Cablevision spokesperson declined to comment. Comcast didn't return several phone calls. Cox spokeswoman Amy Cohn says Cox wasn't asked nor did it want to be involved in AT&T's negotiations with MindSpring.

"This is

AT&T's kind of thing," says Cohn. "We're very happy with our relationship with Excite@Home."

However, Cox has held "limited" discussions with other ISPs about potential post-exclusive contracts, Cohn says. Some of Excite@Home's contracts run through 2005, but most of the important ones, those with AT&T and Cox, expire in June 2002.

And if the cable systems don't open their systems, the government might, though many analysts say that is unlikely. On Monday, the FCC, which has repeatedly declined to regulate Internet access over cable lines, called AT&T's agreement with MindSpring a good first step.

Even MindSpring wants more. Dave Baker, MindSpring's vice president of legal affairs, says his company would like the FCC to force AT&T to open its cable lines earlier than 2002.

"We're gonna do everything we can to make this happen as soon as possible." says Baker. He also wants the FCC to establish "rules of road" so cable companies besides AT&T have guidelines with which to open their networks to other ISPs.

So investors better hope Excite@Home is a fast learner.