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Being a calm, collected, long-term, non-reactionary Fool, you may not have heard this yet: AT&T (NYSE: T) has entered an agreement with Internet service provider MindSpring (Nasdaq: MSPG) that grants the company access to AT&T's country-blanketing, high-speed cable network. There are a few caveats, however, and the first one is large: time. MindSpring must keep its paws to itself until June 2002. Until that time, Ma Bell's TCI division has an exclusive contract with Excite@Home (Nasdaq: ATHM).
Under the agreement, Excite@Home has sole access to TCI's cable lines until June of 2002, making for a powerful situation at Excite@Home. The company announced today, about one month earlier than anticipated, that it has eclipsed more than one million subscribers. Assuming that Excite@Home and RoadRunner remain the country's leading cable 'net providers the next three years, by the time MindSpring -- and presumably other companies -- gain access to AT&T's cable, Excite@Home could have an insurmountable lead.
It is estimated (by an idiot named Jeff Fischer) that Excite@Home will have approximately 5.4 million subscribers in 2002 and over $2 billion in revenue, at about 30% operating margins. Of this revenue, 40% to 45% should be derived from subscription-related charges. Another 40% to 45% will, estimably, be derived from advertising related sources, mainly via Excite.com and now maybe BlueMountain. This math indicates that Excite@Home should top $800 million in annual subscription fees by the time that MindSpring is allowed to tap AT&T's cable. Not only will this cash flow be a great weapon against new competition, but some 5 million Excite@Home users will have serious switching costs by the time newbies arrive to the cable scene.
Excite@Home is doing everything possible to make its service sticky, meaning entwined with and integral to a subscriber's daily life. From e-mail, to personal online datebooks, to family-shared online calendars, to having Internet-wide preferences in place, leaving the service will be a painful loss. Switching to a new Internet provider would mean that you'd need to reset all of your Web-surfing preferences, get a new e-mail address, recreate an online datebook, maybe cut your hair, and so forth. And this is before the launch of AtHome TV is considered. AtHome TV will launch next year in selected markets. Once this cable TV service is piped into your home alongside high-speed Excite@Home Internet service, you're not likely to dump it in 2002 for something less.
Therefore, AT&T's agreement with MindSpring provides small reason for competing Internet service providers to celebrate. June of 2002 is two-and-a-half years away in off-line time, but that equals 10 years in Internet time. (That is, if you assume that every three months online equals one year off-line, as many people in the industry do assume given how fast companies and customers move online.) By the time AT&T's cable lines open to competitors, Excite@Home should have a monstrous market share lead and every newcomer will need to combat this deeply entrenched leader. Therefore, digital subscriber line (DSL) is still the best alternative for Internet service providers competing for broadband users, and perhaps it will remain as such.
Given all this, Excite@Home's stock basically shrugged today. The news of open cable intuitively should have slapped the stock harder than today's 6% decline. A 6% movement is a typical day's volatility. Arguably, Excite@Home's stock already factored in the idea of open access (AT&T said it would do as much early this year) when it declined from $99 in April. Either way, this news isn't very destructive to the company, especially in the near term, and likely not in the long-term, either. What other online-based company has a guaranteed lock on market share for the next 30 months? None. And when that period expires, Excite@Home could have a lock on Internet cable mind-share. (For today's Fool News coverage on the cable issue, click here.)
Also in the holiday spirit of sharing, today 3dfx announced that it'll "Open Source" its Glide technology and release hardware specifications on all its currently shipping 3D hardware accelerators. This is seen by management as the best way to develop an industry standard, because releasing hardware details allows programmers to optimize new software to the leading hardware. (Read the 3dfx press release.)
Open access and "open source" is certainly where many industries are going thanks largely to the Internet. Open source Linux software provider Red Hat (Nasdaq: RHAT) helped pave the way for other Linux-based Initial Public Offerings. This week, VA Linux (Nasdaq: LNUX) and Andover.net (Nasdaq: ANDN), both Linux companies, come public. The Fool has new message boards for these companies, as well as for other interesting potential Rule Breakers: FreeMarkets, Inc. (Nasdaq: FMKT) and Agency.com (Nasdaq: ACOM) -- both coming public this week, too.
Simply go to the Fool boards here -- Fool Boards -- and search for the new boards by company name at the bottom of the page, or look alphabetically. We can also talk about these companies on the Rule Breaker Companies message board, linked below.
These are, as they say, interesting days... to say the least. And great days to make your own investment decisions, from now to retirement -- so check out the Fool's new Retiree Portfolios!.
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