April 21, 2000 5:00 AM PDT

Excite@Home marketing plans may weaken portal

Excite@Home may be willing to put its biggest and best-known Web assets on ice in an effort to maintain its lead in the high-speed Internet access race.

When the company posted subpar quarterly results this week, missing profitability and analysts' estimates by a penny, executives pointed to lower advertising revenue at portal Excite, online greeting-card site Blue Mountain Arts and online photo gallery Webshots--all low-speed, or "narrowband," Web properties acquired by the company. Excite@Home believes focusing resources on the fast-growing high-speed, or "broadband," market to entice access subscribers and Web surfers is a better use of its expertise than battling in the narrowband portal trenches.

@Home acquires Excite,
Blue Mountain

The @Home Network acquired Web portal Excite and online greeting card site Blue Mountain Arts primarily to lure more subscribers to its high-speed Internet access services.
@Home Network buys Excite
announced: January 19, 1999
completed: May 28, 1999
$7.2 billion
Excite@Home acquires Blue Mountain Arts
announced: October 25, 1999
completed: December 14, 1999
$780 million
Executives say a revised strategy focused on Web content for high-speed connections will allow the company to build a huge lead in the high-speed race and offset its declines as the broadband market accelerates. But some analysts believe the move serves as an admission that the company's highly touted $8 billion acquisitions of Excite and Blue Mountain have been less successful than Excite@Home would have hoped.

"Based on this quarter's media performance," Merrill Lynch Internet analyst Henry Blodget said in a report yesterday, "it would seem at least a portion of the value proposition behind the Excite merger and the BlueMountain.com acquisition has been called into question.

"Something is obviously not working here, and from the outside, we can't argue with the company's decision to re-deploy efforts. Even so, the company has obviously not realized the value it expected from the Excite and Blue Mountain acquisitions."

Excite@Home has said it will market its domestic and international broadband properties at the expense of development resources for Excite.com--a painful but perhaps necessary move.

Blue Mountain and Webshots were fingered as the primary culprits in the company's shortfall, with the majority of growth at Excite.com coming from pages that generate lower ad rates, executives said.

Although the earnings miss was only slight by most financial standards, the results highlight the company's difficulties in generating revenue from some of its Web sites aimed at lower-speed dial-up, or narrowband, users.

Most Internet users today access the Web via dial-up modems and frequently see related story: Web portals buy to survive visit Web sites such as Excite.com, Yahoo and MSN that are tailored for slower connections. But the newer broadband technologies allow for much faster Net connections. Excite@Home owns a series of properties, some that predominantly target narrowband users and others that are aimed at high-speed Net users.

"We're not going to spend another three or four years slogging it out with Yahoo and AOL," Excite@Home chief executive George Bell said. "We're not walking away from the narrowband business. But we're focusing more on broadband."

Excite@Home executives said Excite and other narrowband properties will continue to be a major part of the company's plans but that internally the company will hone its focus on the broadband assets.

Wall Street reacted negatively to the news, sending shares 10 percent lower yesterday.

"I understand there will be some mixed reactions to this. But I'm absolutely confident it's the right thing for the strength of the company long term," Bell said. "My view is this is a go-for-it strategy...We just think putting the pedal to the metal for two or three quarters could pay substantial dividends."

Executives believe now is the time to spend aggressively on marketing the broadband service to consumers, and they are willing to pull resources from Excite.com to do so. The local phone giants and America Online are quickly deploying digital subscriber line (DSL) technology and are expected to represent strong broadband forces in just a few years.

"There are huge things coming that will create competition," Bell said. "I just want to make sure my lead is so big at the time that it doesn't really matter who is fighting for No. 2."

Some analysts say the strategy, while it makes sense, comes just as the company appeared to have gotten its house in order and could be a tough pill for some weary Excite@Home investors to swallow. The decision to pull back on its Web portal focus is the culmination of a confusing and indecisive year for Excite@Home.

In addition to management and ownership changes, the company has been weighed down by strategic challenges to Excite.com's role in the company's grand scheme. Now that its focus will shift toward growing the broadband subscriber base, the company is facing more scrutiny from analysts over whether the Excite merger, and major investments it has made to beef up the portal, have made sense at all.

"The market's telling us that (the merger) doesn't look particularly good," said David Levy, a research analyst at Chase H&Q. "Excite@Home has many interesting and valuable assets, but the company hasn't quite unlocked the value of these assets yet."

The top-tier Web portals--America Online, Yahoo and Microsoft's MSN--are distancing their lead over smaller rivals in many respects. These leaders are increasingly taking the lion's share of advertising revenues and traffic, while the outsiders continually scramble to find ways to remain competitive. And, as Excite@Home has demonstrated, it often times takes a high stakes acquisition to do so.

Last summer's acquisition of Blue Mountain was touted by the company as a way to accelerate the growth of its broadband Net access subscriber base. Executives said Excite@Home's broadband service would appeal to Blue Mountain's demographic. The company also anticipated Blue Mountain would provide a platform for e-commerce revenues.

It was a typical Internet growth move: Buy a company using highly valued stock as currency, subsume their traffic, and try to increase advertising revenue.

While Excite@Home experienced a surge in traffic after the acquisition's completion, unique visitors each month to the Excite portal remain lower than year-ago levels, according to Media Metrix, an Internet traffic-monitoring firm. Media Metrix does not include page views on Excite@Home's broadband service.

Excite.com has, however, increased its base of registered users to 64 million as of the end of March, up from 51 million last quarter and 28 million a year ago.

But analysts also have concerns about advertising on the site. According to Excite@Home, its number of advertisers fell to 1,569 during the first quarter from 1,906 during the fourth quarter, marking the lowest levels since late 1998. Although advertising can be seasonal, the company had 1,707 advertisers for the same period a year ago, an 8 percent decline.

In addition, paying close to $1 billion for a company with negligible revenues drew skepticism from many analysts.

"Strategically, I think they definitely have some soul-searching to do, particularly given the Blue Mountain (acquisition)," said Jilani Zeribi, an analyst at market research firm Current Analysis. "Driving revenue from just eyeballs is obviously not working, and they're admitting it's not working."

 

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