Once caught between cable fat cats and ISP upstarts, broadband leader Excite@Home is finally breaking free. Now the real struggle begins.

By Jason Krause

In 1996, @Home’s then-CEO Will Hearst made a bold prediction: His company would provide service to a million homes by the first quarter of 1997. He’s still trying to live that one down.

Like many broadband predictions, Hearst’s did eventually come true. Excite@Home finally reached a million subscribers last December — almost three years later than Hearst had forecast. Since then things have taken off: In the last 10 months the company has more than doubled its customer base, reaching 2.3 million subscribers. After five-plus years in business, Excite@Home has become the largest provider of high-speed Internet access in the world. But the struggle to get there has been brutal, and it’s about to get worse.

Excite@Home’s growth, and that of its competitors, face looming threats that could eventually make cable broadband an also-ran technology. Despite the well-publicized problems with installing digital subscriber lines [see story, page 137], DSL is finally gaining momentum and could overwhelm cable in the long run. Other obstacles are just as daunting: Cable broadband could get lost in the thickets of government regulation. And it could fall victim to contract disputes between Internet service providers such as Excite and Road Runner, cable TV companies like Cox Communications and Comcast, and telecom giants such as AT&T.

The story of cable broadband’s troubled rollout in many ways mirrors that of DSL: technical snafus complicated by political fumbling and industry infighting. George Bell, who became Excite@Home’s CEO in January, defends the company’s progress, saying it has been buffeted by outside forces: “We couldn’t control another, much larger set of circumstances, and the much larger companies that would come into play. And we were victims of our own expectations’

The idea behind cable broadband is so elegant, and so promising, that many people were swept up in its potential early on. Conventional cable-TV networks use a small percentage of the available bandwidth to transmit television signals; the rest of that capacity is open to anyone who can figure out a way to capitalize on it.

Funded and controlled by Comcast, Cox and TCI, three of the biggest names in the cable industry, @Home was out in front to seize that excess capacity. It was the first company to successfully offer Internet access over cable modems. In 1999, @Home bought portal Excite for $6.3 billion, then the largest Internet deal ever, and it was on its way to becoming the most powerful broadband player in the world.

A few factors slowed that progress. In 1996, @Home executives figured that it would probably cost $8 billion to $10 billion to upgrade the cable networks of Comcast, Cox and TCI for Internet access — or $500 to $1,000 per home. At the time, that equaled roughly the entire market capitalization of the three cable operators. But that estimate has proven to be woefully low. Now industry analysts believe the company could spend twice that much.

The cable broadband business has long been beset by infighting, technical difficulties and massive cost overruns. When AT&T bought TCI in 1998, thus inheriting a controlling stake in was thrust into the middle of a legal fight in which it had little voice. AT&T submitted more than 1,000 transfer requests asking municipal governments to shift their local cable franchise to its control, and that provoked lawsuits challenging AT&T’s exclusive access to TCI’s cable networks. America Online and others waged a campaign to force AT&T to accept third-party ISPs on TCI’s broadband networks, arguing for “open access?’ The upshot was that AT&T backed away from upgrading cable networks in areas that demanded open access, further delaying the rollout. [See sidebar, page 130.1

Meanwhile, Excite@Home executives found it increasingly difficult to manage their board of directors, which was dominated by a handful of willful and stubborn cable industry leaders like John Malone, formerly of TCI, and Brian Roberts of Comcast. The endless conflicts with the board reflected the fact that cable broadband companies such as Excite@Home and Road Runner tend to be controlled by their cable company investors. “That’s why I’m not there. That’s why a lot of guys aren’t there anymore’ says Sean Doherty, CEO of Urban Media and former COO of Excite@Home. “It’s called the shareholders’ shareholders’ problem. The cable guys are our shareholders, but when it comes time to decide who gets the money, their shareholders win?’ Under Bell, the Excite @Home board has been

simplified. Cox and Comcast are out, giving AT&T more control. Although he announced in September that he would step down if and when a suitable replacement is found, Bell’s brief tenure has been largely free of the leaked news stories about boardroom brawls and disaffected partners that plagued the company in its formative years.

Despite billions spent on cable upgrades completed and thousands of new customers signing up daily, Excite@Home has not escaped this year’s technology downturn on Wall Street. Losses continue to dog the company, hitting $41.6 million last quarter. Its stock, which once traded around $90, now languishes at $10. Bell likes to compare his company to another once-dismissed Internet company.

“I look back at where AOL was four to five years ago, when they went to a flat-rate subscription model and the stock was in turmoil and the Street just didn’t get their strategy,” says Bell. “The strategy was the same then, but the Street doesn’t like it when the numbers are bad. Now that the numbers are good, the Street loves them:’

The fundamental problem for all cable broadband providers is that cable TV is a cash-flow business: Wall Street values cable companies by how much revenue they generate. Internet broadband access, by contrast, is now a capital-intensive business, meaning that the companies must devote billions of dollars for network buildouts at rates that would quickly bankrupt a cable operator.

That’s why cable broadband providers like Excite @Home and Road Runner became hybrid beasts — not quite independent companies and not quite part of the cable world. The cable companies own a majority stake in them and weigh down their board of directors. But they’re set up as publicly traded companies so they can raise the capital needed to build the Internet cable business.

Controlled by their dysfunctional cable parents, the cable broadband companies were tossed around like croutons in the negotiations between telecom and cable-TV companies over how they should be run. When AT&T was negotiating with Cox over cable phone services last year, recalls Milo Medin, who helped launch the cable broadband industry in 1995, Excite@Home was used as a bargaining chip. “We wound up the football in some of these deals," says Medin. “While I value Cox and Comcast as partners, having them all on the same board of directors meant you were part of the give and take.”

Time Warner’s broadband company, Road Runner, has had an even worse time of it. It hasn’t had a CEO for two years, and Time Warner and America Online are wrangling over what to do with the cable broadband company as they prepare to merge. AOL wants to be a broadband power itself, and no one can say what will happen to Road Runner once AOL takes over the service’s parent, Time Warner.

“The cable industry is just filled with interesting fights’ says Kip McClanahan, CEO of BroadJump, which sells software to broadband companies. As the cable companies exert more power over their broadband cousins, Excite@Home risks losing the tug of war with its cable partners, thus it risks ending up as just a dumb network provider, rather than a merchant of rich broadband con tent and services. And as companies selling wholesale Internet access in the dialup world have found, life can be pretty painful if that’s all you do. The real money is found in other places, like advertising, media, e-commerce and business services.

Meanwhile, Excite@Home has been plagued with technical headaches, including e-mail problems and bandwidth shortfalls, that have slowed service to a crawl in some residential markets. Though the company says most of those problems have been fixed, some customers still complain of e-mail delays. According to Dan Calic, who runs the @Home discussion group, there’s been vague talk of a class-action lawsuit on behalf of disgruntled users.

Even with cable broadband’s commanding lead over competing technologies — almost three times as many users, according to Telecommunication Reports’ most recent census many observers predict it will lose out to DSL in the long run. For one thing, phone companies are used to providing telecom services — something the cable operators have had to learn. In the early days, cable operators would stick pins on a map wherever there was a customer complaint. Enough pins and they deduced there must be an outage. Sophisticated network-monitoring sys tems have been expensive to install.

Another problem is that cable will never be ubiquitous, like telephone lines. Broadband cable can only reach homes that already have cable-TV services. That’s why, like other cable providers, Excite@Home calls itself a “broadband” company — meaning it will also offer DSL and other services in order to reach those noncable households.

“The cable companies are finally going strong, but we still think DSL will overtake them in cable broadband in a matter of years:’ says Ian Olgeirson, an analyst at Paul Kagan and Associates.

These days new competition — from digital subscriber line, fixed wireless and satellite broadband service providers — is moving in faster than ever. Deep-pocket rivals like SBC Communications, which is spending $6 billion on DSL, are entering the game just as Excite@Home seems to be turning a corner.

And it won’t be long before competition comes from Excite@Home’s cable partners’ own systems. AT&T is now conducting open-access trials in Boulder, Cob., with 10 providers other than Excite@Home. Open access is inevitable; the only question is how much it will hurt the company.

Cable broadband companies must mutate to survive. In the early days, Excite@Home tried to cram as much video and interactive content as it could on the service, thinking that move would make people hungry for more. Now, Bell and company have realized that broadband is not about sucking up bandwidth; it’s about making the Internet part of everyday life. The new service is designed to help people get things done — mundane activities like getting driving directions and looking up movie times.

Legal challenges, financial pressure and competition are only going to increase for Excite@Home. And, as the last three years have amply demonstrated, anyone who makes definitive predictions about broadband access is either lying or ignorant. But Bell remains optimistic.

“We were wrong only in the timing, in details,” he says. “In the macroeconomics, we were absolutely right. Once we hit a million subscribers, we got another million in about 12 months. There was a threshold to cross, and once we crossed it good things happened.”

E-mail: [email protected]

The Industry Standard December 11, 2000  http://www.thestandard.com/

By AARON BACA
Journal Staff Writer

The world’s biggest computer chip maker now plans to become one of the biggest — if not the biggest — supplier of things that make the Internet tick, says Bill Sheppard, an Intel vice president and former site manager of the company’s Rio Rancho plant.

“Our old role was as the supplier of the building blocks for the personal computer,” Sheppard said Wednesday, speaking at the Albuquerque Economic Development 40th anniversary celebratory luncheon at the Hyatt Regency Downtown.

“But we’ve changed our mission,” he said. “Now we’re trying to become the pre-eminent supplier of the building blocks for the Internet.”

Sheppard was asked to deliver the keynote address because Intel’s plant at Rio Rancho is considered without argument to be AED’s single greatest achievement in the arena of economic development.

The nonprofit corporation was founded in 1960 to do one thing: recruit business to Albuquerque.

Today, AED’s recruitment efforts focus on technology. The organization in trying to bring business to the city that would foster clusters of related technology companies, AED President Gary Tonjes said.

The company first came to New Mexico in the early 1980s, and Sheppard became the site manager at Rio Rancho in 1983.

Today, he is an Intel executive in Chandler, Ariz., in charge of corporate services. And today Rio Rancho’s Intel plant is the company’s largest in the world, employing more than 5,000 workers and churning out nearly everything in the company’s deep arsenal from microprocessors to memory chips.

The Internet, Sheppard said, gives new life to old and new companies alike. The worldwide computer network, he said, has changed the way companies do business with each other and has connected the remotest corners of the world to the desktop of anyone with a personal computer.

Communication, worker productivity and business efficiencies have all been enhancements that have made significant leaps and bounds in the past five years because of the Internet, Sheppard said. And businesses that wish to be viable in the future will “have to be connected.”

“How many times have you introduced yourself with your e-mail address?” he joked.

Oddly enough, Intel in 1997 and 1998 nearly missed a key steppingstone in the buildup of the Internet: the rollout of high-performance, low-cost microprocessors that are used for sub-$1,000 computers that are now the choice Internet crawlers of consumers.

The company at that time focused its efforts on building high-end, expensive microprocessors and saw its profits pinched for several quarters as it retooled its thinking.

Today, the company is focusing on low-cost microprocessors, high-end processors for Internet server computers, networking equipment and even services.

Sheppard said Intel’s wish to supply “Internet building blocks” is part of a natural evolution for the most recognizable computer name in the business. Computers, he pointed out, no longer have the value they once did before the Internet’s explosive growth in the mid- 1990s.

Instead, today’s computer users mine a computer’s value by using content taken from the Internet.

“We see the Internet as a basic utility that’s not unlike the electricity that’s in your house or the telephone,” he said.

The company’s co-founder, Andy Grove, has predicted that within 10 years, the Internet will be made up of more than 1 billion users. At last count, there were already more than 225 million users — with thousands being added daily.

Businesses are taking advantage of the Internet by turning its users into the biggest customer base ever conceived, he said.

And, those same companies are hooking themselves up to the Internet to execute at blazing speeds the once routine, but slow, functions of business such as supplies orders and product tracking.

Sheppard said the Internet’s touch on the economy has been golden.

Consumers, he said, executed some $5 billion worth of transactions on the Internet in 1998. This year the experts think it will be closer to $13 billion. And that’s just a sliver of actual business going electronic, Sheppard said. Business-to-business transactions, he said, total something in the neighborhood of $2 trillion.

“Intel itself does $1 billion a month with its suppliers over the Internet,” he said.

“It is the revolution,” Sheppard said. “We’ve said that before. But look at what’s taken shape in the past few years. It is the next revolution.”

Business Outlook, Albuquerque Journal Thursday April 13, 2000

In the upcoming fight to deliver high-bandwidth connections, digital subscriber lines (DSL) are emerging as the preferred solution to cable, as indicated by the latest studies. DSL subscribers should outnumber their cable counterparts next year, notes Cahners In-Stat, a market-research firm based in Scottsdale, AZ. Cable will maintain its lead in the North American home market until 2002, the firm notes.

Growth is expected to be rapid, with upwards of 9 million DSL subscribers by the end of this year and as many as 49 million projected subscribers by 2003, Cahners says. The 91 percent growth rate will be fueled by the reliance on the Internet for business and personal use.

Voice over DSL is expected to be the next big use for DSL connections, Cahners adds. Regional phone companies are busy testing the limits of DSL’s capabilities. As many as 16 phone extensions can be run from a single DSL line, enabling users to mix voice and data connections.

MOBILE COMPUTING AND COMMUNICATIONS MAY 2000 http://www.mobilecomputing.com/