SILICON VALLEY, CA (Dec. 10, 1999) -- A good day capped off a good week for the Rule Breaker. Amazon.com (Nasdaq: AMZN) and eBay (Nasdaq: EBAY) in particular benefited from a reported strong increase in overall e-commerce traffic early this month, and an even larger increase over the same period last year. E-commerce also helped America Online (NYSE: AOL) through unconfirmed reports that it and Wal-Mart (NYSE: WMT) were up to... something. Excite@Home (Nasdaq: ATHM) was also up nicely after announcing a more than three-fold annual jump in visitors to the Excite Shopping Channel. However, some uncertainty still surrounds the stock a year and a week after first entering the port.

Excite@Home's status as the exclusive broadband ISP for its partner's cable systems has been one of its greatest assets, second only to the high-speed technology at the heart of its business. AT&T's (NYSE: T) Monday announcement that it would not extend Excite@Home's exclusivity beyond its mid-2002 expiration had been pre-telegraphed in recent months and was not terribly surprising. The announcement did emphasize, however, that AT&T had "begun discussions with a number of ISPs and portals about offering their services" once Excite@Home's exclusivity ended, and was "open to other discussions as well."

That announcement also came in conjunction with a letter to the FCC, co-signed by executives of AT&T and MindSpring (Nasdaq: MSPG), outlining an agreement in principle on access to AT&T's infrastructure in the post-exclusive period. While this puts some questions to rest, it raises new ones and reframes others.

Jeff and David wrote earlier this week about Excite@Home losing its exclusivity advantage. With that 30 months away, I'd like to look at some possible downsides to exclusivity. What reason could AT&T have for an apparently hostile move against its own partner and investment?

The Squeeze

Posting on the company's message board, CoolMoose asked if Excite@Home has any guarantee of continued access to AT&T's infrastructure, even on a non-exclusive basis. Might AT&T at some point squeeze Excite@Home, or simply say, "Sorry ATHM, but you can't use our pipes anymore?" CoolMoose then asks if Excite@Home, whose customers all ride the cable lines, could "actually be in an inferior position" relative to MindSpring and other ISPs with large numbers of dial-up customers and whose businesses are not dependent on the cable system.

Although there is no reason to think AT&T and Excite@Home will not continue cooperating, the issues CoolMoose is raising are important not only to Excite@Home but to the future of the medium. They also reveal some generally unrecognized similarities between Excite@Home's relationship with its cable partners, and that of the ISPs and content providers who buy services either directly from the cable companies or through Excite@Home.

As a rule, there is only one cable system in any location. And when you deal with a single-provider, you deal on that provider's terms. This exclusivity creates power relationships and customer dependencies that define the food chain, placing the cableco's business customers in a position of dependence and vulnerability. In a word: Squeezable.

Avoiding getting squeezed by the cablecos or Excite@Home for an essential service will be especially important for companies like America Online and Yahoo! (Nasdaq: YHOO.) Players at this level are in a position to choose just where in the Internet food chain they wish to reside and which links in that chain they wish to either feed off or feed on. The stronger the company, the more detailed and resolute its bargaining position will be in any negotiations that do take place. This is one reason the many phantom deals between AOL and @Home have never materialized. At the end of the day, the only thing @Home really has to offer AOL and other potential partners is speed.

What's that? Speed the "only" thing? Aren't broadband and high-speed access important?

Yes. As an isolated factor, of course speed rules. As consumers and surfers, we crave it. But speed alone cannot make a medium or build a business. As a practical matter, other factors conspire to make a deal for cable Internet access less appealing -- and more difficult -- than conventional wisdom has assumed.

Nothing New

With its roots deep in the single-provider cable system, @Home's greatest strength -- high-speed cable Internet service -- actually places it in a weak negotiating position against potential customers like AOL and Yahoo! At the same time, that same effective monopoly places it in a weak position relative to cable operators like AT&T to whom it is a privileged but nevertheless dependent customer.

It is said that AT&T's action is "nothing new" and doesn't really change anything; Excite@Home's exclusivity was expiring anyway. But if nothing else, it helps us see what has been glimpsed though the cracks, especially in recent months: Excite@Home faces comparable risks to those it expects its business customers to accept in the name of broadband. One difference is, Yahoo! and AOL have alternatives to cable, including letting their users bring their own access. That option is not currently available to Excite@Home -- at least not @Home, alone -- whose consumer emphasis is dependent on access to third-party cable networks.

It is also said that two-and-a-half Internet-years is a long time for MindSpring to wait to benefit from its treaty with AT&T. Very true. But it is also true that with @Home just hitting its stride, AT&T could have given the fast-growing Rule Breaker some time to progress before deciding whether to open its pipes. By moving sooner than later, AT&T has underscored its rejection not of Excite@Home but of an exclusivity that offers AT&T no advantage. Indeed, the announcement was packaged in with an annual conference to hype analysts and media on the renewed promise of the latest model "T."

More significant is AT&T's coupling of the announcement with a statement of principles that, in effect, outlines the basic workings and logic of the Internet food chain, from Internet to ISP; ISP to consumer. In that outline, Excite@Home is mentioned only by reference to "exclusive contractual arrangements," a complication that eventually will "no longer apply."

The document is nevertheless very much about Excite@Home. It highlights how exclusivity offers Excite@Home diminishing advantage, whether as the hypothetical high-speed gatekeeper to the AOLs and Yahoo!s of the world, who reject dependency on the closed single-provider model out of self-interest, or as a customer of an equally self-interested AT&T, where the only thing shielding Excite@Home from exposure to that same closed system are expiring and unwanted exclusivity obligations.

Coming from its unique position in the Internet food chain -- as the ultimate telco insider and the overnight cableco don -- AT&T's action acknowledges that the original mid-90's structure of @Home's cable partnerships is at odds in the context of the mass Internet and modern Web, which barely existed when those deals were done.

AT&T is expressly abandoning certain legacy aspects of the cable TV model it inherited from TCI, Excite@Home's first cable patron, and is repositioning to operate under a data transport model more in tune with an interactive and inherently open medium.

That is what's "new."

What does this mean for Excite@Home? It means it's operating in a difficult and fast-changing environment, where the premium is on independence, flexibility, and the ever-morphing business model. That's the only thing we can safely say is "nothing new."

David and Tom will be talking about Excite@Home on The Motley Fool Radio Show this weekend. Need a Fool station in your area? Click here. You can also listen online, any time, by clicking here.