The recent announcement by Excite@Home (Nasdaq: ATHM) that it has surpassed 2 million subscribers focused attention on the company's ability to meet its target of 3 million by the end of the year. That target, which was reiterated in the announcement, would require a subscriber growth rate that, though not impossible, would be greater than the company has seen in more than a year-and-a-half, and before the merger of @Home with Excite.

The more-important and often-ignored question is: How does subscriber growth interact with other parts of the business? In theory, the more subscribers the @Home service has, the greater the potential for high-margin media and advertising revenues. In practice, the relationship between subscribers, advertisers, and media revenues is not a simple one.

An advertiser is interested in subscribers as viewers of advertising (i.e., eyeballs), not simply as subscribers to the pipe. In black-and-white terms, no matter how many subscribers there are, the pipe itself will still not have any viewers -- there isn't anything to view. Subscribers to the pipe, as such, are not of interest to advertisers.

Of course, what we have here isn't black-and-white, but something more subtle and, if I may, more multidimensional: the complex business model that is Excite@Home.

It's not enough to talk about @Home subscribers without looking at how they function in the total model. Specifically, where and how do subscribers join the part of the model that would be of interest to advertisers?

Let's look at how effectively @Home subscribers, who generate subscription revenues, also generate non-subscription revenues. This will give us an idea of how well the company can satisfy advertisers by leveraging its subscribers as viewers of the media and content it aggregates and controls.

That is where the integrated Excite@Home will succeed, fail, or merely exist.

The segmented company
In its Securities and Exchange Commission (SEC) filings, Excite@Home lists separate revenues for three business segments: Media and Advertising Services; Subscriber Network and Other Services; and International (which I'll exclude).

@Home's subscribers increased 20% in this year's second quarter, from 1.5 million to 1.8 million, closely tracked by subscription revenues, up 19.49%. And, with those numbers tracking each other, subscription revenues per subscriber (SR/S) were essentially flat, down a negligible 0.43%.

Meanwhile, media revenues fell 1.95%, from $76.2 million to $74.7 million. As a result, the quarter's 20% increase in subscribers was accompanied by an 18.29% decrease in media revenues per subscriber (MR/S), which fell to $41.52 per sub from $50.82 per sub in the first quarter.

                          1Q00      2Q00     2Q00 change
Subscribers              1.5 mil   1.8 mil   20.00%
Subscription rev (000)   $55,444   $66,248   19.49%
Subscription rev 
  per subscriber (SR/S)   $36.96    $36.80   -0.43%

Media revenues (000)     $76,223   $74,737   -1.95%
Media revenues
  per subscriber (MR/S)   $50.82    $41.52  -18.29%

Even without the nearly 2% drop in Q2 media revenues, the 20% increase in @Home subscribers alone would have resulted in a 16.7% drop in MR/S. Similarly, flat media revenues plus an additional 50,000 subscribers (matching the 350,000 added in Q1), would have dropped MR/S 19%.

In a nutshell, when media revenues are flat, media revenues per subscriber negatively track subscriber growth. Simple enough. More importantly, an increase in subscribers does not necessarily lead to an increase in media revenues.

In addition, while subscriber growth influences MR/S, there is no fixed relationship between the two. Yet MR/S is a basic measure of the value of subscribers in their role as media viewers, which is what determines their value to advertisers.

The integrated company
It should be said that although a higher MR/S is better than a lower one, these numbers are not easily normalized. Excite@Home is a unique company. There is nothing "normal" about this situation.

Nevertheless, media revenues have stagnated over the four quarters since the Excite acquisition -- despite a threefold increase in paying subscribers. The table below shows that there is no automatic, positive relationship between subscriber growth and media revenue. In fact (and without attributing cause and effect, although that should be explored), there currently is a negative relationship between sub numbers and media revenues per subscriber -- which, again, is a measure of how attractive the @Home subscriber base is to advertisers.

Excite@Home's segmented revenue numbers indicate that the more subscribers it gains, the less-efficient its media operations become, both in absolute terms and on a per-subscriber basis. The more the company's subscriber network segment overwhelms its media segment, the more lopsided the model becomes, and the more the promise of the integrated company goes unrealized.

Note too that Excite@Home's media revenues as a percentage of total revenues have declined for the last three quarters, from a high of 67% in Q3 1999 to last quarter's 50.25%. This is a critical measure of the company's ability to scale and operate its business coherently. It has gone backwards.

       Sub       Total*      Sub       Media and Adv. 
      Growth   Revenues   Revenues   Revenues  pct/tot.
1Q99  38.97%    $25,098    $20,086     $3,463  13.80%
2Q99* 34.78%    $70,542    $28,100    $42,442  60.17%
3Q99  35.48%   $112,562    $36,952    $75,610  67.17%
4Q99* 36.90%   $128,753    $48,103    $82,199  63.84%
1Q00  30.43%   $138,063    $55,444    $76,223  55.21%
2Q00  20.00%   $148,721    $66,248    $74,737  50.25%

*Amounts in thousands (000). Excite added 2Q99. added 4Q99. Total revenues include International.

Subscription revenues and subscribers (currently the segment's only significant revenue source) at best roughly keep pace with each other. While both subscribers and subscription revenues will increase, SR/S -- the value of those subscribers -- will be pressured from, among other things, competitive sub acquisition programs, which influence consumer expectations and in-turn further pressure access prices.

In effect, SR/S is on the front line of access commoditization.

That is why growing and maintaining the health of the media segment is critical to Excite@Home's business. In fact, that is why @Home acquired Excite, which is what created the current model. The Excite Network is the source of almost all of the combined company's media revenues, and erosion in some of Excite's key usage measures is reflected in flat or declining media revenues throughout Excite@Home's "condensing" consolidated results of operations.

The sub mission of Excite@Home
Excite@Home's subscriber numbers and estimated growth rate can tell us much about the Internet and broadband, technology adoption, and the consumer's need for speed. But, they don't tell us much about Excite@Home's business.

For that, we need to look at how the different business segments interact. Analysis of the company needs to shift its focus from "subscribers," which defines a relatively specific function, to "customers," a broader, more-useful term for a complex asset that is capable of generating multiple values, including subscriber value and viewer value.

Clearly, the company needs to grow its subscriber numbers. By definition, that will help the @Home service grow. But, it does not necessarily contribute to the efficient and healthy growth of the total business. Excite@Home cannot afford to have the growth of its subscriber segment come at the expense of its media segment.

[I've posted to the Excite@Home discussion board some tables with additional quarterly details on Excite@Home's subscriber growth and its media and subscriber network segments. You can get more information there.]

Related Links:

  • Excite@Home Plays With Pogo, Fool News, 9/1/00
  • Excite@Home: @ the 2 Million Mark, Fool News & Commentary, 8/23/00
  • Excite@Home: It Could Be Worse, Rule Breaker Portfolio, 7/21/00
  • Excite@Home Reports, Plays Chello, Fool News & Commentary, 7/20/00
  • Excite-able Duel, Dueling Fools, 7/12/00
  • Is Excite@Home Still a Rule Breaker?, Rule Breaker Portfolio, 5/15/00