@Home's Think-Small Strategy Takes a Big Step Forward

The company announces financing details for @Home Solutions, a unit targeting small and midsized cable companies.
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SAN FRANCISCO --

@Home's

(ATHM) - Get Report

footprint just got a little bit bigger.

The high-speed Internet service provider is set to announce Thursday morning that it has signed up midsize cable operator

Falcon Communications

to deliver high-speed Internet service for 1.2 million homes in 23 states. @Home also will announce that it has secured its first round of financing from a group of high-profile technology companies for its

@Home Solutions

venture, a new business unit that is designed to aggregate small and medium-size cable companies.

"There really weren't many large cable companies available to affiliate, so @Home Solutions provides them with new ways to aggregate homes," says Michael Harris, president of

Kinetic Strategies

, a Phoenix-based research firm focusing on the emerging broadband market.

The total market for this second tier of cable operators, say analysts, is around 15 million homes. Right now, @Home has signed up 21 cable operators that give it the exclusive right to deliver high-speed Internet access through 2002 to around 60 million homes in North America. On Wednesday @Home announced a new joint venture in Japan, to be called @Home Japan, that will give the company additional access to a combined 5.1 million households, representing more than 10% of Japanese homes.

The companies joining @Home Solutions in the venture include networking and communications heavyweights

3Com

(COMS)

,

Cisco

(CSCO) - Get Report

and

Motorola

(MOT)

. The three companies promised to invest $20 million in the venture.

@Home will collect a percentage of the subscription fees that cable companies receive for providing high-speed access via cable modems. In its contracts with larger cable operators like

Comcast

(CMCSA) - Get Report

,

TCI

and

Cox Communications

(COX)

, @Home receives 35% of the monthly $40 cable modem bill. In these new contracts, Harris says @Home will likely receive a higher percentage that should be closer to 50%.

Although @Home Solutions was formed late last year, these are the first details to emerge that provide a sense of the venture's financing and ownership structure. @Home Solutions will operate as a separate business unit with its own board and balance sheet. Its board will be chaired by Dean Gilbert, senior vice president and general manager of the @Home Network division. All of the other board seats will belong to the cable operators. Falcon Communications, for instance, has already been promised a seat.

@Home decided to spin off a separate company instead of keeping it in house for two main reasons. The first is operational: Smaller cable companies have a different set of needs that require more handholding. The second reason is financial. "When @Home tries to hit their earnings estimates, this won't drag down the boat," says Harris.

Despite this deal, @Home Solutions is the second largest cable modem provider in the second-tier cable modem market.

SoftNet Systems

(SOF)

currently claims a reach of around 1.9 million homes. And

HSA

, the Paul Allen-backed venture that's short for high-speed access, is nipping at its heels with a footprint of around 800,000 homes. "Having Falcon out of the gate is significant as they try to build momentum in the tier 2 market," says Harris.

However, Harris says that @Home Solutions will probably announce agreements with several new affiliates over the next two weeks. Mark Mangiola, vice president and general manager of @Home Solutions, predicts that the first cable modems from the Falcon deal will roll out in late July or early August.