AT&T Gets Custody of ExciteAtHome

SAN FRANCISCO (03/30/2000) - AT&T Corp. has finally embraced ExciteAtHome, the stepchild it hasn't quite known what to do with for the past year, and has been granted custody rights from Cox Communications and Comcast. But while it's a good move for AT&T and ExciteAtHome, the company needs more than strong family ties to compete with the America Online-Time Warner behemoth on the horizon.

"This removes a lot of the uncertainty about the cable companies, AT&T in particular, and ExciteAtHome going forward. It gives clarity in terms of governance and direction, and I think it fully aligns all of us," said Michael Armstrong, AT&T chairman and chief executive officer, in a conference call in which the companies' representatives used the word "clarity" no fewer than seven times.

Despite the clarity the deals add, the terms aren't simple. AT&T is assuming majority control of ExciteAtHome's board and offering incentives to Cox Communications and Comcast to relinquish their control. AT&T would then have a 74 percent voting interest in ExciteAtHome, up from 56 percent. Cox and Comcast would give up their board seats and veto power. The ExciteAtHome board members would remain the same, and AT&T would select five more members. In exchange, AT&T has offered to pay each as much as US$1.5 billion, in cash or stock, for Cox and Comcast's shares. The companies each own about 8 percent of ExciteAtHome. AT&T's share would remain 25 percent.

Cox and Comcast representatives say they are confident they would benefit from "further acceleration and deployment " of AT&T's network now that AT&T has a more focused approach with ExciteAtHome. "It's a huge win-win for all parties involved," says John Alchin, executive vice president and treasurer of Comcast.

Meanwhile, AT&T is extending its relationship with ExciteAtHome from its 2002 expiration date to 2008. During that time, ExciteAtHome would be the featured portal on AT&T's wireless phone and interactive TV services. Thereafter, AT&T says, it would open up its cable system to other Internet service providers.

Comcast's and Cox' exclusivity distribution agreements with ExciteAtHome remain in effect until June 2002. The cable companies have also agreed to use ExciteAtHome as their featured portal through 2006, and get warrants to buy discounted shares of ExciteAtHome stock if they stick with the agreements until then. They have the right to end the exclusivity agreements and to terminate the distribution arrangement beginning in June 2001.

ExciteAtHome is also withdrawing its plans for a tracking stock for its media business, and AT&T is consolidating ExciteAtHome's financial results with its own, which is expected to increase revenues in 2000 by about $400 million, but reduce operational earnings per share by about 20 cents and reported earnings per share for the year by about 5 cents because of goodwill and other charges.

Since the AT&T-ExciteAtHome merger announcement, the moves cap a year fraught with internal AT&T fighting over how best to integrate the ExciteAtHome's content and access businesses, calls for open access to cable networks and doubts about the future of ExciteAtHome after its exclusive distribution pacts with cable companies expire.

And now AT&T will soon face competition from the biggest integrated media company in the industry, AOL-Time Warner. AT&T and ExciteAtHome can't expect to compete with their combined assets. However, AT&T has time on its side to expand its subscriber base. "The opportunity ExciteAtHome has is to capture as many broadband customers as possible before the exclusivity expires and make sure the renewal agreements aren't sold to other partners," says Kinetic Strategies President Michael Harris.

Meanwhile, the OpenNet Coalition and EarthLink called for AT&T, Comcast and Cox to open their cable lines to competition before their distribution agreements with ExciteAtHome expire in 2002. "With AT&T solidifying their control over ExciteAtHome, we think not only does this give AT&T more leverage to make good on the somewhat vague promises they made last December about opening their system to other ISPs (Internet service providers), but it certainly frees up Cox and Comcast to do it sooner than they otherwise were saying. It can and should happen this year," says EarthLink Vice President of Law and Public Policy Dave Baker.

That might not be as easy as it sounds. Unlike telephone networks, which provide direct lines to subscribers, cable networks are shared by subscribers and terminate in one box, says David Eiswert, director of the broadband group at The Strategis Group. "It's very complicated to break those channels out to multiple ISPs. It's not possible from a technical, practical standpoint" to expect that to happen before a year or two, says Eiswert.

When the companies finally open up their cable networks to other ISPs, ExciteAtHome will be able to serve as a wholesale carrier to them because it already has its high-bandwidth connections into the network, says Harris.

AT&T's cable modem subscriber base is growing faster than Time Warner's, at an 82 percent rate vs. Time Warner's 30 percent, according to a report by Kinetic Strategies. At the end of last year Time Warner had 320,000 subscribers; MediaOne had 220,000; AT&T had 207,000; Cox had 186,918; and Comcast had 141,900.

There were 1.8 million high-speed subscribers in the U.S. at the end of 1999, and 1.6 million were cable-based, said George Bell, ExciteAtHome president and CEO. Of those, 1.1 million subscribed with ExciteAtHome and 550,000 with Road Runner.

AT&T is still waiting for regulatory approval for the purchase of cable company MediaOne Group, whose broadband Internet access company, Road Runner, is jointly owned with Time Warner.

One day after the announcement, ExciteAtHome's stock was down $4.50 to $33.18, while AT&T's was down $2.43 to $57. ExciteAtHome's stock price has tumbled from over $90 last April.

The agreements have been approved by a unanimous vote of ExciteAtHome's board, but still require shareholder approval. The transactions are expected to be completed by the third quarter of this year.

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