decision to explore selling high-speed Internet access over phone lines is seen as a smart move by analysts, but it also carries plenty of baggage.
The move is designed to address the company's most important long-term strategic issue: figuring out a way to prosper in a much more competitive market when Excite@Home's exclusive contracts with cable operators begin to expire in mid-2002. The new strategy was unveiled by Excite@Home President and CEO George Bell last week on a conference call following the company's earnings announcement. Beyond giving the company some leverage in negotiations with its 23 cable partners, selling phone-based fast Internet service would enable Excite@Home to reach the remaining 50% of U.S. homes that it doesn't have access to through those partnerships.
"For a company to limit itself to one platform would be shortsighted," says David Levy, an analyst with
who rates shares of Excite@Home a buy. (His firm has performed underwriting for the company.)
The move also reinforces Excite@Home's desire to become a broadband media company, rather than just an Internet-access provider. Company Chairman Tom Jermoluk has long justified the merger of
, which provides Internet access via cable, with the
portal as a hedge against a future in which Internet access becomes a commodity.
"They're becoming more content-focused and technology agnostic," says Jeanette Noyes, a broadband analyst with
. IDC has not done consulting for Excite@Home.
That's the good news. Now comes the hard part of closing a deal. Excite@Home must also be careful not to alienate its cable partners and confuse consumers with the new service. So far, investors have not cheered. Excite@Home's stock has dropped 4 6/16, or 10%, since the Jan. 20 announcement.
Some analysts question whether the move is a bluff. Excite@Home's Bell declined to specify what phone companies it was in talks with, but several contacted by
said they are not in discussions with the cable-modem provider. Regional telephone companies
U S West
, as well as digital subscriber line, or DSL, providers
, said they had no dealings with Excite@Home to offer DSL service to consumers.
Still, DSL is not new to Excite@Home; it does sell a co-branded version of Northpoint's DSL service to business customers of its
While Bell said he hopes to start offering DSL service to consumers by year-end, it's unclear what shape such a deal would take. The options could include a high-level partnership, a strategic investment or an outright acquisition. At least one analyst says an outright purchase of a phone company is not a good idea because it would weaken the company's focus on cable-modem deployment. Excite@Home is under a lot of pressure this year to sharply increase its cable-modem subscriber base, the company's most important gauge to investors.
"They've got a big bone to chew on there, let alone going into the DSL space," says Michael Harris, an analyst with broadband research firm
. Harris has not done any consulting for Excite@Home.
Excite@Home will also be challenged to maintain good relations with its cable partners, many of which also happen to be minority owners of the company. Backing DSL, the main competitive technology of cable modems, could alienate its cable partners. In public, some cable companies appear to be understanding. David Woodrow, executive vice president of
, one of Excite@Home's biggest cable partners, says the news did not come as a surprise. "It was understood from the beginning that @Home would sell DSL service," says Woodrow, who sits on Excite@Home's board.
For now, Bell says that Excite@Home would honor its contracts with cable operators that prevent the company from offering anything but high-speed Net access over cable lines. But in markets where Excite@Home does not have contracts, it is free to pursue relationships with firms that sell competitive technologies such as phone and satellite access. Another option for Excite@Home is using DSL as an interim solution to deliver high-speed access in areas where its cable partners have not upgraded their cable plant to handle rich, two-way data transfers.
Cox's Woodrow said this would not violate its contract. But one analyst criticized the idea. "
DSL is not a migration technology," says Harris. "If the customer is happy with DSL service, why would they want to switch?"
Although some analysts say Excite@Home embraced DSL as a way to enhance its leverage with cable operators, it's not clear this move will prove effective. For starters, many analysts and cable executives say that Excite@Home is likely to win renewal of its cable-operator contracts, though not on an exclusive basis. The bigger question is whether Excite@Home will continue to receive preferential treatment by cable operators for both its broadband access and content services. Kinetic's Harris predicts cable operators are likely to push Excite@Home as the house brand, but some cable executives say that's premature.
"If someone wants to pay for a premium position on our network, we would entertain that," says Woodrow. "We may be promoting another service because we think it's better."
If Excite@Home does start offering DSL service, some analysts say the shift may confuse consumers. Until now, Excite@Home has branded cable modem as a superior delivery technology. "Excite@Home utilizes the high-speed, always-on attributes of cable to provide residential subscribers with multimedia content that goes far beyond current Web experiences," reads copy from its Web site. Promoting another technology may undermine those claims.
"The bigger issue is branding and positioning," says Harris. "Do they dilute the @Home brand or confuse the consumer by entering into partnerships with DSL providers?"