Ma Bell Reeling In Cable-Modem Subscribers

AT&T, Excite@Home's largest cable partner, is holding its own in the competitive battle with local-phone companies.
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LIVERMORE, Calif. -- When Paul Thompson ordered a high-speed Net connection from

Excite@Home

(ATHM) - Get Report

, he got more than the installation. He landed a job.

So impressed were the

TCI

installers with Thompson's ability to fix computer glitches that they encouraged him to join their ranks. Thompson now works as a cable-modem guy in the Livermore office of TCI's owner,

AT&T

(T) - Get Report

.

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"We take people that are computer people and train them on the cable portion," says Thompson's boss, Eric Carlsberg. "And those guys often turn out to be our best installers." It's an unorthodox and so far effective way for AT&T to help fix what has been Excite@Home's most nagging problem: the bottleneck of would-be customers waiting for a cable-modem guy to install @Home's service.

Ma Bell, Excite@Home's largest cable partner and shareholder, is facing increasing pressure from local-phone companies offering competing high-speed Net services. And, like many Internet companies, it continues to struggle with customer service problems. But the long-distance and cable colossus is finally reeling in cable-modem subscribers.

The company surprised Wall Street last quarter with stronger-than-expected subscriber growth, which was driven primarily by AT&T's aggressive rollout of the service. The number of AT&T's cable-modem subscribers has grown to 110,000 in the third quarter from 32,000 at the beginning of the year. By year-end, Ma Bell expects the total to be as high as 200,000 high-speed Net junkies, which would put AT&T ahead of all its cable partners, accounting for 15% to 20% of @Home's subscribers.

"@Home is becoming a bigger and bigger part of our overall business," says AT&T spokeswoman Larae Marsik.

Although Excite@Home is a key part of AT&T's business, it doesn't have a monopoly on Ma Bell's attention. Like most of the cable industry, AT&T has been emphasizing digital cable over @Home's niche of high-speed data services. Cable companies focused on rolling out digital video during 1998 and early 1999 because they felt that the digital cable-TV market, pushed by the threat of direct broadcast satellite services such as

DirectTV

, was more competitive than the market for data services.

But the cable outfits are shifting their focus to data services in the latter part of 1999 as local telephone companies like

Pacific Bell

and

U S West

(USW)

have stepped up their efforts to offer competing services such as digital subscriber lines.

A bigger problem was the laborious nature of the "truck roll," the process of rewiring a home and installing a modem and software on the computers of new @Home customers. A rival service like

America Online

(AOL)

offers about 5% of the bandwidth of an @Home connection, but setting up an AOL connection takes a fraction of the time and cost. Nor does it require a truck roll.

"We are definitely supply-constrained," admits Excite@Home Chairman and CEO Tom Jermoluk. "The problem is the installers."

At AT&T's Livermore office, however, there are clear signs that the bottleneck is easing. The staff of 28 includes 16 installers, four service technicians and four people in training. And Carlsberg can call on the talents of 10 dedicated contractors. Company-wide, AT&T says it has hired 400 installers and 700 customer-service representatives this year.

Thanks to that growing crew, Excite@Home was able to handily beat Wall Street's third-quarter subscriber growth estimates. While most sell-side analysts had forecast that Excite@Home would pull in 160,000 to 180,000 new subscribers in the quarter, 220,000 new Internet gluttons signed up -- the company's largest quarterly subscriber increase ever. For the first time, Excite@Home looked to be getting some traction on its broadband subscriber growth, which some analysts regard as the company's most important metric.

Although AT&T has improved its customer acquisition rate, Ma Bell is pressuring Excite@Home to better meet the needs of those customers. At a meeting in Denver two weeks ago, AT&T and its other cable partners urged Excite@Home to improve its customer service performance. To do so, @Home is hiring more customer service reps internally, says Adam Grosser, Excite@Home's president of subscriber networks. The company has also hired an outside firm,

Stream International

, to help it take customer calls. In addition, Excite@Home is boosting the network capacity in eight of its 40 regional networks to speed up download times.

Excite@Home needs to get on top of its service problems quickly because the company is under pressure to achieve even greater growth in 2000 as the digital subscriber lines offered by local-phone carriers gain ground, say some analysts.

"If the pace of new subscribers does not materially accelerate in the first half of 2000, the time-to-market advantage over DSL services sold by telephone companies will be lost,"

Morgan Stanley Dean Witter

cable analyst Richard Bilotti wrote in a recent report. Morgan Stanley, which maintains a neutral rating on AT&T, has done underwriting for AT&T and Excite@Home.

To increase the pace, Excite@Home is aggressively establishing a retail presence. Through partnerships with

CompUSA

(CPU)

,

Circuit City

(CC) - Get Report

,

Office Depot

(ODP) - Get Report

and

Good Guys

(GGUY)

, consumers can demo the service, talk to a cable representative and set up an installation time. Excite@Home has also struck a deal with PC manufacturer

Dell

(DELL) - Get Report

, whereby customers can order cable-modem services through Dell customer service representatives.

The company is also looking for help from a piece of hardware called a

DOCSIS

(Data Over Cable Service Interface Specification) modem, which provides a unified platform for all cable-based data services. Excite@Home expects 50 stores to be selling DOCSIS modems by the holiday shopping season. And PC makers will start shipping computers with DOCSIS modems come year-end. The hope is that a plug-and-play modem will dramatically reduce installation times and accelerate the growth of the market.

Sales of DOCSIS cable modems and related equipment will exceed $3 billion through 2003, according to a new report by research firm

Kinetic Strategies

. In 2000, Kinetic projects DOCSIS shipments will climb to 2.3 million units. Kinetics has done no consulting for Excite@Home.

But as with so many promises in the broadband-access industry, there's even a catch with this silver bullet: It still doesn't eliminate the need for a truck roll. AT&T says it's working on ways to eliminate the bottleneck, but declines to discuss them. "We're exploring a number of different possibilities," says AT&T's Marsik.

Until then, @Home will need to rely on the ability of installers like Thompson to quickly roll those trucks.