Dueling Fools Dueling Fools
@Home Alone
January 27, 1999

@Home Bull's Pen
by Jeff Fischer (tmfjeff@aol.com)

Computer technology and our needs have made a giant leap. In the past, people were continually seeking the newest processor and the latest computer hardware in order to speed applications. Now computers run faster than allowed by the lines that connect them. Thus, the new focus with computer technology is connectivity. This is where the most progress will be made in the next five years.

Computing is now about communication (and, surprise, commerce) and a computer can only communicate as quickly as its connection will allow. Over traditional phone lines, this isn't quick enough, especially as lines become congested and the Internet concurrently becomes more sophisticated. And this is just the beginning. Increase the number of Internet users by millions and consider new applications that will develop for the Internet in the future -- applications that will demand faster connections -- and one day we'll marvel that we ever considered the phone line as a viable means for using the Internet at all (other than for e-mail).

@Home is the next step in connectivity. And it's one giant step.

@Home's cable network offers the ability to send data services ranging from high-speed Internet access to videoconferencing to interactive television (yes, television) over a single line that runs directly into a home. Owned by a consortium of leading cable companies, @Home has contracts to reach 60 million American homes and it will offer services to 25 million other unaffiliated homes in the United States, too. The closest competitor reach-wise is Roadrunner, a company contracted for 27 million homes. (@Home might partner with Roadrunner eventually.)

Currently, 13 million of @Home's contracted 60 million homes have been readied for connection. Of those 13 million, @Home has signed 331,000 subscribers, up from 50,000 one year ago. This results in a 2.4% sign-up or conversion rate. It's estimated that @Home will have 1 million subscribers by the end of 1999, and 5 million by 2002. These estimates are based on an eventual PC penetration rate of 5% and they are very possible. @Home has the lowest churn rate (cancellations) of any Internet Service Provider (ISP), at under 4%. Typical ISPs have churn of nearly 40%. Reflecting the loyalty of users, @Home is already the second-largest ISP in each market that it has served for more than one year, and its subscriber count is more than twice its next largest competitor.

Very importantly, the subscriber estimates above don't take into account the large potential represented by TV set-top boxes that offer television watchers Internet access. @Home's TV service will launch this year. Mr. Tom Jermoluk, CEO of @Home, believes that interactive television will become its largest business. "Two-hundred and fifty million television sets out there -- that's what I want," he said. No company is in a better position to grab them, and @Home's new partnership with the country's long distance leader, AT&T (NYSE: T), only strengthens its position.

TCI, also known as Tele-Communications Inc. (Nasdaq: TCOMA), owns over 50% of @Home's voting stock. AT&T is due to acquire TCI. Therefore, it shouldn't be surprising that a partnership is developing between AT&T and @Home. This month the two companies announced a partnership to deploy an Internet backbone under a ten-year agreement. The service will launch in mid-1999 with capacity for 5 million users. It's estimated that this partnership will instantly cut in half transport costs for @Home. In light of this, @Home's long-term operating margin target has been raised to 35%, up generously from the previous estimate which ranged from 25% to 30%. Regarding margins: @Home achieved a positive gross margin for the first time in the third quarter of 1998, and it's expected to turn profitable by the end of 1999, with its first profitable year in 2000.

The deal with AT&T has other benefits. For example, it significantly increases the likelihood of @Home offering Internet-based telephone services. So, let's consider: through @Home we can expect to receive lightning fast, always-on Internet access (no need to dial up), interactive television, videoconferencing, and telephone.

Let's relate this to our lives. We'll be able to conduct all of our electronic communicating, shopping, banking, learning, reading, surfing, and receive all of our entertainment through @Home's high-speed cable (which can be 50 to 100 times faster than a telephone modem). We can receive all of this, all the time. The cost: $40 per month compared to AOL at $22 per month (which doesn't include phone charges related to AOL). If that's not enough to merit the extra cost, it's predicted that websites will become multimedia television and radio stations, in essence; to be used properly, users will need cable-type speed.

@Home is in a sweet position.

Alongside record fourth quarter revenue, last week @Home announced an intention to acquire leading Internet portal Excite (Nasdaq: XCIT) in a deal initially valued at $6.7 billion. Excite provides @Home with a very large base of users that it can work to convert to its cable services. @Home will also, of course, leverage the eyes at Excite to create more @Home-based commerce and advertising dollars. @Home is building content for its services, and Excite is a key addition. Investors agree. The stock-for-stock deal was smiled upon: @Home's stock advanced more than $10 on the news.

To summarize:

@Home is an infant in a world-size crib, providing it tremendous room for growth. It's the first mover in the next mode of connection to the Internet. Demand for cable Internet access is expected to increase rapidly as the service spreads across the United States and integrates both television and telephone. Demand will increase further as the Internet becomes an increasingly important part of our lives on a daily basis. It's reported that telephone lines in the U.S. are already jammed to capacity between the hours of 7 p.m. and 2 a.m. due to Internet use. This problem will proliferate, causing Web-users to migrate to the quicker, reliable and always-on service offered by cable. The demands and benefits of tomorrow's Internet technology will push people to faster connectivity, too.

@Home is in the catbird seat. It has the key nationwide partners, the key home contracts, it offers the key service in a rapidly expanding market, and the medium in which it operates offers more leverage (and revenue streams) than any other medium in history. Consider all of the possibilities, if you can. Finally, @Home has $330 million in cash and no significant debt.

To learn more about the company, visit the Rule Breaker Portfolio's buy report for @Home; also, read past Rule Breaker columns, including the December 7, 1998 column. Now, let's see what the bear has to say about @Home. Will he frown on the company's $12 billion price tag? We'll have an answer if he does.