AT&T Bares its Teeth

AT&T achieves majority control of Excite@Home, but still will not guarantee open access to third party ISPs until the exclusivity agreements expire. And then? There may be "technological barriers."

by Patricia Fusco
of internetnews.com

Excite@Home Wednesday announced significant changes to distribution agreements with principal cable partners AT&T Corp., Comcast Corp., and Cox Communications, Inc.

Based on the new agreements, AT&T (T) and Excite@Home (ATHM) extended their relationship through 2008, while Comcast (CMCSK) and Cox (COX) have extended their relationships through 2006.

The agreements will help facilitate the kind of relationship established by the December 6, 1999 agreement between AT&T and MindSpring and bring third party cable providers to market.

What AT&T and E@H executives are calling a "renewed commitment to its broadband cable business" is much more than an average operating agreement.

An Interest in Control, and a Controlling Interest
AT&T gained controlling governance of the E@H board through a change to the E@H charter that enables board action on simple majority vote. Furthermore Comcast and Cox will give up certain veto rights they have at the Excite@Home board level and their representatives will resign from the board.

AT&T's E@H majority stake was already on its balance sheet, so no new financial arrangements were required.

Arguments between C. Michael Armstrong (AT&T) and George Bell (E@H) over content can now be bypassed — E@H is free to pursue additional content alliances to attract broadband eyeballs and enhance advertising revenues in ways that AOL-Time Warner cannot match at this time.

Your Choice of Beverage: Pepsi or Coke
Comcast and Cox reserve the right to opt out of the deal. But the stock penalties and financing required to produce competitive broadband Web destinations make the option unappealing. In essence, Comcast and Cox are relegated to client status for E@H with a flexible stock option as a golden parachute for forfeiting its seats on E@H's board of directors.

ISPs are free to negotiate last-mile delivery solutions with cable access providers and local or regional content providers in order to launch cable access. But independent service providers seeking to jump on the cable access bandwagon will have to wait two years for the exclusive aspects of the cable companies deals to expire. Even then, making the Excite! broadband portal their customer's first Web destination remains a factor for ISPs negotiation deals with MSOs.

Even though @Home's Chief Technical Officer Milo Medin is on the record stating that "shared access" with competitive ISPs is technologically impossible, @Home executives contend that they have two years to resolve technological barriers to "open access." Rather an interesting gamble, putting the technological cart before the cable access horse.

In essence, the deal is designed to beat AOL-TW to the cable access market. In the Internet world, it is not a matter of survival of the fittest, but more a case of first-to-market, wins.

AT&T's Mini-Me
At the end of 1999 third party research reported that there were 1.8 million broadband cable subscribers in the U.S. Of those, 1.5 million subscribed to cable services. Of those, E@H served up cable access to 1.1 million, while RoadRunner provided access to about 500,000 cable users. The remaining 200,000 broadband users in the U.S. were most likely served by Digital Subscriber Line providers.

E@H is free to pursue offering narrowband and wireless services. Considering that fact that AT&T is calling the shots for E@H, AT&T's WorldCom is a likely candidate to provide narrowband services.

Who Wins?
The real winner just may be consumers looking to take advantage of broadband access to the Internet over cable. They are eventually going to have their choice of providers, and choice tends to drive prices down.

Another sure winner is FCC Chairman William Kennard, who rebuffed attempts from every level of local, state and federal regulation to maintain his "hands-off" stance toward regulating cable access in the U.S. Kennard's mantra, "let the force of the market work," may next be quoted by AT&T as it now hopes to reduce regulation of the telecom side of Internet access.

Finally, another group of winners are those companies that invested in set-top box manufacturing. Microsoft Corp. is well positioned to provide the hardware and browser for the forthcoming cable access explosion.

The only loser in the deal is the AOL-TW merger (and that merger is currently undergoing regulatory scrutiny). Both stocks are responding to the E@H news accordingly, down 2.5 and 4.25 respectively.

And third party ISPs? We do not know yet. According to Mark Stevens, Excite@Home Spokesperson, "It's not a trivial challenge to overcome the technological barriers to shared access. However, we have two years to work on it. . ." Ah, but will they work on it?

—End