A bounceback day for the market today, as the S&P 500 and Nasdaq rose 1.79% and 3.39%, respectively, while our Rule Breaker portfolio still rose but trailed those indices, up 0.88%.
First off today, a quick update on The Motley Fool's newest service, Soapbox.com, a marketplace for research and ideas on personal finance and investing topics. We've had some incredibly talented Fools signing up to be authors and we're thrilled about the excitement. Soapbox.com launched its free weekly e-mail newsletter, Soap, today. You can read the first version of Soap and subscribe to it here.
Now on to today's promised topic: Excite@Home (Nasdaq: ATHM).
When I sat down to write a few days ago about the weakest-performing stock in our Rule Breaker portfolio, I had not planned in those first few minutes to turn this into a series. But that's exactly what has happened, and for good reasons. Excite@Home, for all its early promise, mega-growth, and recent turmoil, is a great company to study and learn about -- whether or not you ever buy, sell, or short. Here you have an organization at the very apex of some of today's most fascinating trends:
- the inevitable broadband revolution
- AT&T's transformation
- playing #2 to Yahoo! with Excite
- open or closed access?
- possible government interference
- birth of a major media company?
The reason for the addition of the stock to our portfolio grew originally out of my delight as a customer of its @Home service. Back then, there was no "Excite" before the company name, and I was purchasing the stock as a play on what I perceived to be the inevitable move toward greater Internet throughput, greater Internet relevance, and therefore greater Internet usage. My own computer had been turned practically into a TV set (in the best sense of that ambiguous phrase) by the @Home service, and I could, for example, measure the download of a 100-meg computer game demo in minutes, rather than in 24-hour periods.
After the company completed its merger with Excite on May 28, 1999, the stock -- already down after news of the merger -- proceeded to drop over the next year from $60 to where it is today, right about $19. Was it Excite's fault? Was it AT&T's fault? Is the government to blame? Was it the fault of @Home management, or of the venture capital firm that structured so much of this -- Kleiner Perkins? (Or, as one hears the occasional rumble today, "Decliner Perkins")?
I asked you for some help in the form of questions a few days ago, and one Foolish correspondent, Charlie Oppenheimer (the CEO of an infomediary startup called Aptivia), sent in a note saying:
"One more item you ought to check out about ATHM: They recently hired a guy by the name of Byron Smith, who was recently promoted into the position of running the Consumer/ATHM part of the biz. I recently had an opportunity to meet with him and I was quite impressed. His background includes packaged goods brand management, GM for a cellular biz, and ran a large long-distance biz too. He really gets the broadband opportunity, understands the consumer applications/triggers, and has a keen sense of focus. He carries no baggage with regards to Excite or AtHome, he just sees the market growth and their unusual position. I bought the stock after meeting with him and I'll be holding it for several years. One senior exec can make a difference."
As it so happens, some hours later I received a correspondence from Melissa Walia at Excite@Home, on behalf of that very Byron Smith, Executive Vice-President, Consumer Broadband Services and Chief Marketing Officer of Excite@Home, who said he would enjoy answering some questions. So we conducted an e-mail interview last night, which we publish here at Fool.com tonight. Because of the length of the interview, and because I'd like to hear your reaction to it, I will follow up with further thoughts about the interview and about Excite@Home next week, in Monday's Rule Breaker recap.
I would like to thank Byron for his willingness to tackle some Foolish questions, and I would particularly like to thank those of you who took the time to write in and provide some questions you wanted answered, some of which were included below.
Fool on! -- David
"Take Me To Your Leader"
Fool: OK, Byron... who are you, where do you come from, and why are you here?
Plus, why did you have to come in the first place (i.e., why the recent management
changes)?
Byron Smith: Strangely enough, I come from the non-tech "real-world." I grew up at P&G, Pepsi-Cola, and GTE Wireless. In my youth, I was an Eagle Scout as a kid and still live by the "Be Prepared" motto. To prepare for Excite@Home, I spent five years at GTE Wireless as VP/GM during the highest growth period of the industry. There, I learned how to really scale a company and knew that I wanted to do it again. I saw the early phase of broadband being developed at Excite@Home and couldn't ignore the opportunity. So, I headed West.
Regarding the recent management changes, we're in a time where we are scaling for growth and putting the right team in place for the next phase of the company. Overall, we're aligning our company around our growth strategy, international investments, and leveraging a single network infrastructure to provide both consumer and commercial services.
Fool: How active or inactive is AT&T in operations, and in managing the company?
Smith: While AT&T is an active member of the board and provides full support, they are not involved in the daily operations of the company.
Fool: If you were to use just three words to characterize [former CEO, former
chairman] Tom Jermoluk, just hired on as a venture capitalist by Kleiner Perkins, what would they be?
Smith: Brilliant, fun, popular.
"Brand Me... Confused"
Fool: What was the original thinking regarding the merger between @Home and Excite, and is the company's present strategy still consistent with that original vision? If so, explain. If not, explain.
Smith: Yes, we are still on the same track that we established in January, 1999. Our goal of extending our lead in broadband remains firmly in place. Our mission is to offer consumer, commercial, and international broadband services worldwide and the best broadband consumer experience. By that, I really mean the best combination of consumer broadband connectivity, content, and applications across multiple platforms. We're packaging together everything a broadband customer needs: high-speed access, an 'always-on' connection, a complete software package designed for broadband, and a personalized Excite broadband content experience.
This year, we're focused on the international expansion of this vision, commercial expansion, and continuing our consumer broadband roll-out.
Fool: You ready for the Humorous Cheapshot Zinger question? Which presently has a stronger brand in the company's native state of California, Excite@Home or Carl's Jr.? Which is more comprehensible?
Smith: Stronger brand: Excite. More comprehensible: Excite. More appetizing: Carl's Jr. It's hard to argue with a burger and fries.
By the way, would you like fries with that cable-modem connection?
Fool: You're the new marketing head guy: What's on tap?
Smith: On Monday we launched a new multi-million dollar advertising campaign around the Excite service. What is interesting about this campaign is that it is the first time Excite@Home has branded and marketed the Excite service as more than a portal destination. Our marketing efforts will continue to consolidate around the Company's broadband position, and we'll nationally promote Excite as the consumer service and experience, regardless of access, and co-brand @Home with the local market cable operator.
Marketing is not just advertising, though. You can expect more deals like our recent MTV deal, where we teamed to build content that is perfectly suited for broadband.
The Future
Fool: On February 14, 2000, The Industry Standard quoted Tom Jermoluk saying, "By the time all the exclusives roll out, you're looking at 20 million customers or more. We'll have more customers than AOL has today at the end of all of our exclusive periods, but in a broadband sense." The company then said in its latest earnings report that your target was 10 million subscribers by the end of exclusivity. That's about a 25% quarterly growth rate, which is well below the 40% that had been suggested in the previous quarter.
Smith: Just to recap, the targets we communicated in our most recent earnings report were to reach 3 million subscribers this year, 6 million next year, and 10 million by the end of 2002 -- all significantly above prior expectations.
The inconsistency here is what is meant by "end of exclusivity." Our exclusive cable contracts only begin to run out in the second half of 2002. Each arrangement has a different "cliff," or end date and some of those dates run through 2006. The 20 million TJ spoke of represents our view of where we could be by the time all of our exclusives expire, while George was referring to only the first cliff, which is in June 2002. The common misconception that we see in the press is that all of our exclusives end in June 2002, while in fact they phase out over four years beginning 2002.
Fool: Do you see sub growth slowing in the near future?
Smith: No, we see them expanding faster and, in fact, we recently increased our sub estimates for the Street to 3 million for this year, up from the 2.6-2.7 million where most analysts had us. We already see more demand than supply. Don't forget, analysts expect that by 2003, more than two-thirds of users coming online will go directly to a broadband connection and never experience narrowband.
Fool: Regarding Excite, how is FreeLane doing? Is the portal growth slowing, and/or will we be seeing any new initiatives to try to increase its market share?
Smith: The way we are thinking about Excite is as the premier consumer online brand and experience. As I said earlier, we will always market the Excite service and the Excite personalized experience, but it will come to stand for more than narrowband. Don't get me wrong here. We will always put a huge emphasis on our content experience, but we will define it by broadband, narrowband, wireless, set-top, and any other platforms that we deploy across.
Fool: AOL and Time Warner have agreed to allow access to their cable properties.
After 2002, what are the odds that Excite@Home would offer its content over
Time Warner cable?
Smith: I think the question is really if Time Warner will want to carry the Excite@Home broadband portal over its cable lines? I assume that they want to carry the product that consumers want most. Otherwise, their consumers will never be "excited." But seriously, you know the drill about speculation.
Fool: Near term, your industry has been all about explosive growth. For the investor who wants to own your company for the next 10 or 20 years, though, how do you plan to create the most value for shareholders after industry growth slows? And what will most likely be your primary profit drivers over the next decade?
Smith: There are two real value drivers currently: First, our network. The @Home network is poised to become as powerful an enabler as Intel. Think of it as the cable version of "Intel Inside." It is our infrastructure and offers our shareholders a value that is sustained long after the dot-com craze dies. Second, the Excite service is the most personalized portal experience online today. It took years to build and is unique. It's difficult to replicate. And, as we expand it to other platforms such as wireless, its value to both our customers and shareholders will increase.
In the future, we see growth in a number of areas that we are investing in today that won't reach their explosive growth phase for another 2-5 years. What I'm referring to here is: (1) International, which we are investing in for 2000, (2) Business-to-Business, with our Business Solutions division, and (3) Advanced TV, which we've been developing in the back room for more than two years. We're investing in and planning for these markets that haven't even begun to kick in yet. It's hard to predict 20 years out in any industry, but the Foolish look for a long-term trend (broadband) and THE leadership company (Excite@Home).
And thanks, Fools. You should know that I've been following Excite@Home through you guys for a couple years.
Fool: Thanks, Byron, and Fool on.
On Monday, David Gardner will provide his reactions to the interview, and present thoughts about Excite@Home as a Rule Breaker. David would like your help, so if you have thoughts or questions to share after reading the above interview, drop by The Motley Fool's Excite@Home discussion board and post away.
