AT&T drops Excite bid; service to end in 90 days

Bankrupt Excite@Home Inc. will cease operations in 90 days, with the expiration of stopgap funding agreements made Monday to keep the Internet service going, the company confirmed Tuesday evening.

AT&T Corp., meanwhile, announced Tuesday that it is dropping its US$307 million acquisition bid for Excite@Home. The move comes after Excite@Home shut down service to AT&T in the wake of a bankruptcy court hearing last week.

On Friday, a U.S. federal bankruptcy judge ruled that Excite@Home could stop service. Excite@Home creditors wanted to shut down the network to put pressure on Excite@Home's cable partners and potential buyers in an effort to get better terms on contracts and a buyout. But now, with AT&T Corp. dropping its US$307 million bid for the Internet service provider, the gambit has proven to be a mixed bag.

By threatening disconnection, Excite@Home managed to squeeze $355 million out of its partners, which came up with the money to help keep the Excite service going. Two of the largest partners -- Cox Communications Inc. and Comcast Cable Communications Inc. -- provided the largest share of the payment to ensure three more months of continued service. Now, Excite@Home has decided that once that three month period is over, it will stop services, according to the source close to talks between the company and its partners.

"The company has hard assets that can be liquidated, individual pieces of the technology," said Lydia Leong, an analyst from Gartner Inc. "They have technologies that might be valuable to someone. ... But I don't think it will be a lot of money."

After Friday's bankruptcy court hearing, when AT&T neither raised its acquisition bid nor came up with additional cash to help the failing service provider, Excite@Home made good on its threat to cut off 850,000 of AT&T Broadband's cable Internet subscribers. Now, AT&T has decided to withdraw its bid to buy the company.

About 750,000 of the disconnected subscribers had been reconnected to the Internet on AT&T Broadband's own network by Wednesday morning, the company said. Virtually all of the remaining 100,000 subscribers will be connected by Friday morning, with customers in Pennsylvania, California, Michigan, Connecticut and portions of the Rocky Mountain region next on the service list.

Guaranteeing uninterrupted service to its customers formed a major part of the reasoning behind AT&T's acquisition bid in the first place, said Eileen Connolly, an AT&T spokeswoman.

"The $307 million wasn't (just) for routers and switches," she said, noting that AT&T is building out its network infrastructure, to which subscribers who formerly used the Excite@Home network are rapidly being switched.

A source close to the negotiations said that AT&T had been asked to pay $125 million for continued service -- and had agreed in principle -- but creditors would not provide suitable service guarantees to ensure that Excite@Home continues operating.

What remains unclear, according to the source, is whether the other cable companies that provided the $355 million face the risk that Excite@Home creditors will go back to bankruptcy court soon anyway, get the service halted again and pocket that money.

Excite@Home's moves have already begun to burn bridges with subscribers. AT&T has fielded about 327,000 e-mail messages and almost a million phone calls from irritated customers, the company said.

"I'm going to start looking into DSL (Digital Subscriber Line)," said Brian Horsfall, a systems analyst in Des Moines, Iowa. "It's not as fast, and I'm not sure if it's as reliable, but e-mail has been a real problem" with Excite@Home, even before losing service temporarily on Saturday.

About 30,000 of Mediacom Communications Corp's customers in Iowa, like Horsfall, lost Internet service for a few hours and e-mail for a bit longer over last weekend -- collateral damage from Excite@Home cutting off AT&T. Mediacom acquired some of AT&T's customers around Des Moines earlier this year, and Excite@Home still had them registered as AT&T subscribers.

Creditors claimed in bankruptcy court that the value of the deals that Excite@Home had in place with cable partners were not covering costs, and forced them to take losses of $6 million a week in operating costs.

Now, according to industry insiders, with no buyer for Excite@Home's assets, deteriorating relationships with subscribing consumers, and cable companies moving customers off the service, the creditors simply wish to salvage what capital they can, and shut the service permanently.

One cable company spokesman said that Monday's interim deal for more cash was structured in a way to pay out the Excite@Home fees over time, rather than letting the company take the money and run.

"It's possible that they could do anything … but it's structured in a way so that they can't get all the money up front," said John Pascarelli, senior vice president for marketing and consumer affairs for Mediacom.

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