Excite@Home one year later: Any benefit?

Analysts still question the benefits of a landmark marriage between Web portal Excite and high-speed Internet provider @Home Network, one year after the duo announced their multibillion-dollar deal.

@Home announced its intention to acquire Excite a year ago in what was at the time the largest Internet merger ever. The $7.2 billion deal aimed to blend Excite's Web content with @Home's high-speed cable Net service to create an Internet media and distribution powerhouse.

As evidenced by the recent AOL-Time Warner merger--the largest in U.S. corporate history--heavy bets are being made that content in all its forms will play a prominent role in the evolution of the Net.

Yet the near-term results of @Home's merger with the No. 2 Web portal--which by some measures has slipped in status since the deal was closed--have raised some questions about the company's strategic choices.

The combination of Excite and @Home will long be viewed as one of the early bellwether transactions of the Net era, as the two companies took advantage of their high-flying stock prices to make the deal. But for many, the jury is still out on just what the benefits of the merger are, especially in light of recent plans to spin off Excite?s media assets into a tracking stock later this year.

"When you look at the outcome so far it's hard to point to any one thing that you can say was a success," Jupiter Communications broadband industry analyst Joe Laszlo said. "Excite has, if anything, been a bit distracted from its narrowband (dial-up Net access) roots and has maybe even lost some market share. @Home has grown steadily, but it's hard to attribute any of that to Excite.?

"On the whole it's not a win or lose situation, but it's hard to see where the synergies that were expected have materialized," Laszlo said.

The Excite merger, completed in May, did win initial praise from industry pundits and Wall Street, as stock in both companies jumped last spring in the months shortly after the merger.

But as the year progressed, a maelstrom of issues seemed to overwhelm the duo. Excite@Home's largest shareholder, AT&T, launched into a controversial debate over whether it should be required to open its cable networks to third-party Internet service providers (ISPs).

In addition, there was internal feuding over the future of the venture among Excite@Home's cable investors, according to analysts and media reports.

In parallel, analysts and company insiders say that the two vastly different companies at times distracted one another from daily operations. This has left some industry observers to wonder whether the merger of Excite and @Home will go down as a match made in Net heaven, or hell.

"I still think it was a sound move. (@Home) needed content. But it may have been a case, looking back, of mixing apples and oranges," Cahners In-Stat Group cable industry analyst Mike Paxton said.

Analysts also question how much weight a second-tier portal like Excite carries in the current competitive market. Since the leading portals--Yahoo, America Online and Microsoft?s MSN--garner the majority of advertising and e-commerce dollars, there is increasingly little left for smaller players, analysts say.

"Traffic declines and less-qualified traffic at other broad-based portals like Excite and Lycos will cause advertising share at these sites to shrink…by 2004," Forrester Research analyst Charlene Li wrote in a report published last month. "Instead, retailers will spend their marketing dollars with vertical winners."

Yet Excite@Home executives stand by the deal, claiming that the plans for a separate stock to independently track the firm?s media assets provide ample evidence that the merger has and will create value.

"We completely integrated (the companies), integrated the management teams, and at the same time as we did that we went from 1,600 to 2,500 employees, hit every subscriber goal and revenue goal," Excite@Home chief executive Tom Jermoluk told CNET News.com in a recent interview. "So by any measure I would say that's wildly successful."

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Yet the chief executive did admit the combined firm has faced a number of challenges over the past year.

"From an external standpoint it was obviously a very difficult year," Jermoluk said. "Various open access debates, AT&T taking TCI's (Tele-Communications, Inc.) place, lots of speculation…it was a very difficult year.?

"We're looking forward in 2000 to having a year where we get a lot more of the reward for the shareholders and the employees based on the performance of the team," he said, noting the upcoming Excite tracking stock.

Stock in the combined company has risen and fallen with the Internet tide in the past year. Although Excite@Home shares slumped throughout the summer and are trading close to a 52-week low, Wall Street continues to look favorably on the company and its stock.

Many equity analysts hold "buy" ratings on the stock and industry analysts say Excite@Home is poised to capitalize on the growing market for high-speed Net access and related "broadband" services. According to Jupiter Communications, the U.S. market for high-speed services will increase to 15.3 million customers in 2003, up from about 2.2 million subscribers at the end of 1999.

Although @Home bought Excite as much for its huge registered user base as its Web content, analysts say the merger with Excite should not be expected to add significantly to the company's high-speed subscriber growth.

"There are so many other issues related to getting (service installations) up and going that the marriage with content wouldn't have affected that," International Data Corp. broadband industry analyst Jeanette Noyes said. Excite@Home?s cable partners are involved in ongoing network upgrades to accommodate high-speed data traffic, Noyes added.

Still, Excite@Home topped 1 million subscribers in early December, meeting or beating most analysts' 1999 estimates.

With the merger behind them, executives now plan to turn their attention to making the most of the combined company's considerable assets. One of the first outwardly visible results of the merger--a revised broadband portal interface specifically for users of the high-speed @Home cable modem service--is set to launch commercially by the end of the first quarter. The new portal interface has been in trials since December.

"It's the first clear, tangible coming together of the interface technology of Excite, which is all about breadth of content and personalization, with the deep broadband integration of video and audio," Jermoluk said.

Some analysts have criticized Excite@Home for its time to market with the new interface, suggesting the company should have been marketing the new portal interface to third-party digital subscriber line (DSL) and satellite Net services by now.

Others, such as Jupiter's Laszlo, say one of the clearest positives brought about by the addition of Excite is the combination of the companies' MatchLogic and Enliven Net-based advertising technologies. Excite@Home's interactive advertising unit is able to offer precise statistics and garner higher ad revenues than many industry competitors.

Still, some analysts say the company will become a stronger, more well-rounded company as it matures. "The real payoff will come further down the line when they have a larger customer base and they can leverage the content into that," IDC's Noyes said.