Today's column is the transcript of a private chat that the Rule Breaker portfolio managers held recently about Excite@Home and Amazon.com, the portfolio's worst performers year-to-date. Today's column will deal with Excite, which had dropped 67% since January 3 before today's 16% jump, and tomorrow's will discuss Amazon. Let us know what you think of this format in the poll at the bottom of the article.
Brian Lund: We're here to discuss "Excite@Home (Nasdaq: ATHM) vs. Amazon.com (Nasdaq: AMZN): Buy to Hold?" We bought these stocks; do we want to continue to hold them? Let's start with a look at Excite@Home. What was the rationale behind the purchase?
David Gardner: We bought @Home at the time because of its positioning as "the America Online (NYSE: AOL) of broadband." We all know how well AOL has done by helping people sign online simply and enjoyably. AOL is a service whose main screen has barely changed in the last 5 years, a service many of whose customers could pay much less a month and get similarly served. But the addictiveness, the switching costs of learning new interfaces and getting a new email address, etc., have made AOL very sticky and one of the world's great 1990s success stories. I foresaw similar potential in @Home as the world transitioned from 28.8K to megabits per second.
Brian: Has it panned out?
Jeff Fischer: I recently wrote the bearish side (for perspective on our holding) of a Dueling Fools on ATHM. My main arguments were that management is unfocused and that, as a shareholder, you're at the whim of AT&T...
Brian: which now has 74% voting control over Excite@Home on 25% ownership.
Jeff: But perhaps I missed the main point -- timing. Excite@Home may be a company before its time (in a sense), and ultimately that will mean it will always lag AOL. As quickly as it's growing, broadband is still just a niche market. And by the time content catches up enough to make people WANT broadband, competitors will have watered down ATHM's advantages.
Brian: Let's talk about that. ATHM loses exclusivity on most cable lines in 2002.
David: I think the exclusivity worries are overrated. @Home will continue to get its hand around this market. In the intervening time, there are still 18 months of pure exclusivity for the company with its present providers.
Brian: Will compelling broadband applications be available by then to make this an attractive market?
Jeff: It is an attractive long-term market, sure. Everything will be broadband one day. But I no longer believe (and haven't for a while) that Excite@Home will be dominant. AOL will.
David: That's interesting, and perhaps true. But Excite@Home remains first-mover in getting the most people to use its service. In fact, many more would be paying for it now if the cable companies could get out to all the houses. (Like mine!) And the company, while it may not match up to AOL's eventual market share, is at least positioning itself to be there as a strong player, getting pretty large monthly checks and cash flows.
Brian: Will broadband become a commodity?
Jeff: Well, no more than a dial-up connection, I don't believe. So I don't view that as an issue. Look at cable TV. People still pay a good monthly fee for that.
Brian: But if connectivity prices fall, Excite@Home has no fallback. Nico pointed out in Friday's column that media revenues have been stagnant for four straight quarters.
Paul Commins: Turkey and provolone on whole wheat, please. And a diet Mr. Pibb, please.
Paul: Oh, sorry.
Jeff: Well, with that in mind, the company's brand comes into question -- how strong is the brand? Will people go with AOL DSL, or Excite@Home cable? I think most AOL subs will stay with AOL, and they'll definitely take AOL cable where they can. And where the most people go, the largest, best advertising deals go, too.
Brian: I don't think that Excite@Home has a real brand, the way AOL does. AOL can only make money in dial-up because of its brand.
Jeff: Excite@Home hasn't capitalized the way AOL has on ad and commerce deals. Anyway, though, overall, I believe Excite@Home will have a decent long-term business. It's a wing of AT&T, though, and I don't believe that we're seeing AT&T managers running it like a true Rule Breaker.
Brian: It lacks control of its destiny, at least.
David: I agree. And I agree that AT&T is not running it like a Breaker. Where are the ads?
Brian: How could it be a Rule Maker?
Jeff: I don't think it can be a Rule Maker because cable is a geographically limiting business. Rule Makers must be convenient to all, as the criteria state. So, I don't see Excite@Home tweening into a Rule Maker. I don't see it in a death rattle, either. I just see another mediocre AT&T wing.
David: True. One route to Rule Maker would be via Excite. What do you guys make of Excite, these days, as a route to convenience?
Brian: What does the name mean to anyone?
David: Have any of you guys tapped into Excite in the past 3 months?
Brian: No.
David: Me neither. From a momentum and branding standpoint, Excite seems to be getting less relevant, rather than more so.
Jeff: Excite has margin dynamics similar to Yahoo!'s, which helps numbers overall. Excite@Home needs to build it into a commerce portal the way Yahoo! has, though, and it hasn't done so well there.
Paul: Wait a minute. Isn't Excite really all there is? Isn't exclusivity a temporary issue any way you look at it? We're supposed to be trading bandwidth on a commodity market in the next few years. In this context, exclusivity is just a short-term brand-building edge. So doesn't it all -- everything for ATHM -- come down to the Excite brand? If the Excite portal is marginalized, what's left?
Brian: That was Nico's point, I think.
David: AT&T probably isn't too interested in Excite in that way.
Brian: As Nico said, AT&T management focuses on subs, but they are not the future -- the long-term future, anyway.
David: I think the exclusivity is overrated. AOL never had exclusivity and did fine. Granted, AOL built its brand better, but I'm just arguing that talk of exclusivity running out is a red herring, as @Home will, the day that happens, continue to be the #1 provider of cable Internet with buzz and a growing customer base.
Brian: But their brand is the only thing that will let them keep charging premium rates for connectivity.
David: Kleiner Perkins smashed these two companies together, part of its keiretsu. Moosh. I have no great passion for @Home anymore, though I do think they have relevant positioning with their @Home service that continues. Excite should be built as the brand, and yet AT&T doesn't have that focus for the company. Plus, I hate companies that merge (literally) their brands. "Excite@Home." Who makes such decisions? They're falling down on our RB branding attribute. Period.
Paul: I think "Excite@Home," the name, is the coolest part of the whole package.
David: You probably liked Salomon Smith Barney too, Paul? :)
Brian: I don't see it building a brand for the future, and I don't think it can survive long with connectivity alone.
Jeff: My final thought: When we find something better -- something with more potential to expand endlessly -- I think we should strongly consider replacing ATHM.
Tune in tomorrow for the Breaker Boys' discussion of Amazon.com. In the mean time, let us know what you think about the company on our Excite@Home discussion board. Also, give us some feedback on our discussion format by voting in our poll:
What do you think of the chat format?
- I like it. It adds vivacity and a variety of perspectives.
- At least it's easy to read.
- It's no better or worse than your normal columns.
- I don't think it adds much. Dump it.
- I like the format. Change the participants.
