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Post of the Day
October 7, 1999

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Excite@Home

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Subject:  ANATOMY OF A DEAL: ATHM/T/AOL
Author:  firenza

So here is what I've seen in the past 2 years leading up to what I anticipate will be a deal with AOL/ATHM/ATT

In 1997 ATHM goes public, first broadband to IPO. From the start there has been a dialogue, a sizing up between AOL and ATHM. AOL knew they needed a broadband strategy, but felt that ATHM had absolutely NO bargaining power. CEO Tom Jermoluk (TJ) stuck to his guns with AOL, never giving an inch.

Meantime, In the Fall of 1997, ATT finally gets the CEO it needs with Armstrong. He is immediatley appalled by old T's lack of inroads or understanding of the internet. He immediately cuts deep into ATT's staff, trying as hard as he can to lob through as much of the old blood as possible. T's stock goes from mid $30's in Aug 1997 to $60 12/97. It was then that I predicted that ATT would try to take out AOL. Yes I was laughed at. The post was on 12/20/97 on the old AOL Fool Boards. Fast forward to June 1998, ATT makes on unsuccessful attempt to take over AOL. After being rebuked, Armstrong is irrate. He immediately goes to work on his back up plan, Buy TCI and get ATHM. (see Forbes article for the sweetheart deal Malone got, T was desperate)

http://www.forbes.com/Forbes/99/1018/6410126a.htm

I am told more important to Armstong than the telephony, was ATHM. Armstrong has a plan. "AOL can deal with me now, or deal with me later, but either way, they are going to have to deal with ATT!!!" (mmmm....I think he was right). In the meantime, ATHM continues to roll up subs at an impressive rate. T inks a deal with Time Warner (owner of Roadrunner) in 1/99 for access to it's cablelines for telephony. The hope was for a merger of Roadruner and @Home to be part of that deal. It couldn't be done though... it would mean too much flack on the TCI deal. Roadrunner would have to wait. Besides, T isn't done acquiring cable properties. They need to stay cool about Roadrunner, it will have to be the final deal. T will have to get past TCI approval and then Media One approval, not to meantion the "forced access" issue. With roadrunner in the fold it would look too much like a monopoly.

So, Malone becomes T's largest shareholder and still has control of LMG.A.

"...the one thing which Worldnet screwed up on ... was that they never developed any unique content."

Now the one thing which Worldnet screwed up on in the early days when they could have taken on AOL with ease (remember Worldnet was the one who dropped ISP rates and made AOL follow) was that they never developed any unique content. T was so familiar with being a dumb pipe, they just didn't understand content. Armstrong did. Armstrong was instrumental in engineering the merger of Excite and @Home. Yes you heard me right. You ask...."then why all the talk about spinning it off lately?"

2 scenarios: 1. Hindery was behind all that. Remember it was Hindery who was locking horns with TJ from @Home about not wanting content. 2. Armstrong only combined the 2 so they would pose an apparent threat to AOL and thus force them to the bargaining table. One more aaspect of T appearing to not need AOL. Excite has now served it's purpose.

So ATHM gets Excite, they get a great talent in CEO George Bell, a brilliant guy. I saw him on Charlie Rose one night (pre merger), very impressive.

In the midst of all this T decides to go after MediaOne, they use RoadRunner the other cable broadband service. Malone also happens to be a way big shareholder of Time Warner owner of Roadrunner. "So you mean Malone owns large pieces of both Roadrunner and @Home?" Pretty shrewd guy huh....better go back and read that Forbes article.

Now all along ATHM and T knew they would have a fight on their hands with "forced access". AOL ramps up it's forces and rallies locals. T with it's solid Washington ties and the FCC needing to solve the issue of competition in long distance, felt they could get past that issue. Afterall, if T enters the long distance market via internet telephony, it would get the "last mile" long distance issue resolved for the FCC. So the FCC needs for T to get internet telephony. They need it badly enough that FCC chairman Kennard actually comes out and blesses T and ATHM's broadband rights. Locals like Portland dispute the transfer of cable license to T. Well 1. They can not impose a condition on the transferral that wasn't a condition of the original license, 2. It is not an issue which they control..there are numbeous other arguments, like mandating what equipment T would have to use to provide open service, again not allowable. But the Portland issue is another post entirely.

So AOL has locals trying to hold ATT/ATHM up with a prolonged open access fight, local to local. The FCC is ready to issue their own rules on this which would scrap the locals arguments, but ATT doesn't want that. ATT wants it decided in a court of law. Why? Because if it comes from the court, it is a matter of law, if it comes from the government, it is potentially a tempory victory. It becomes an issue which can be revisited by the government at the whims of politicians. Thus T decides to go for the fight.

Now ATT is in the middle of all this, when Leo Hindery starts fighting with Tom Jermoluk (TJ). Now Leo screw's up Armstrong's carefully orchestrated "united front". A divided house is shown to AOL and the market, "open access" issues become front page business news, and T and ATHM stock prices decline seriously.

Well Armstrong had another plan, one which I haven't heard anyone, anywhere talk about. Armstrong decided that the way to REALLY force AOL's hand was to get 15 or so million subscribers for ATT Worldnet. What?? you ask...How would he pull that off?? MAKE WORLDNET A FREE ISP!! AOL despite it's great ad revenues still relies heavily on subscriber fees for it's bottom line. Armstrong was ready to put the final strangle on AOL. Don't ask me how I know....I know. T was ramping up for this final assault on AOL. Talks contine with AOL throughout all of this. These guys are playing chess, they aren't in a cold war.

Word starts to get out that T/ATHM/AOL are in talks. Interestingly George Bell moves over to ATHM from Excite. Word of talks gets ATHM stock price out of the $30's but the rumor did little to nothing for ATT stock price. And to make matters even worse, Leo Hindery comes out and denies that any talks have or are going on. THAT was the last straw for Hindery as far as T was concerned. The slight blip up in T's stock price evaporates. T comes out the next day an admits that talks were ongoing. Hindery looks like he's (a). lying or (b) totally out of the loop.

"My guess, AOL becomes the preferred content site of ATHM...right there on the first page."

ENTER MALONE (this past weekend I believe) previously of TCI, now the largest ATT shareholder by my estimates and contoller of LMG.A. Well Malone has had about enough! He reads the riot act to the ATT board. He has seen his investment in ATT decline by hundreds of millions of dollars while this has all transpired and believe me, he's not one bit happy. He wants something done and he wants it done quickly. Monday Oct 4th, ATT announces that they are considering a tracking stock for it's internet and broadband divisions. Are you listening Mr. Malone??? "We're really, really sorry....is there anything else we can do to make you happy???" Mr. Malone replies, "GET RID OF HINDERY....NOW!!!" "Whatever you say Mr. Malone"....Wednesday, October 6th...Leo Hindery leaves ATT (albeit with roughly $200 million in his pocket....for his troubles). So who fills his job...I'll tell you my theory later. Steve Case makes a statement that finally confirms from AOL that indeed talks are ongoing. And in what I find an interesting change of tenor says that , to paraphrase "AOL is willing to work out any kind of deal with ATHM/T that is mutually beneficial to all parties. Then what I think is the most contrite phrase is that Case says, "he is willing to be patient" That a deal might take a few weeks, but he was willing to be "patient" Advantage....T/ATHM. Oh yeah...Oct 6th, ATT drops plans for free Worldnet ISP. You won't find that in any press release, then come to think of it, there never was a press release about the free Worldnet to begin with. It was Armstrong's "Manhattan Project"

So this leaves me wondering what the actual structure of the deal might be. There are just too many scenarios to even write about, but I have a favorite:

1. One thing which sticks with me is that George Bell moved over to ATHM, that might indicate that indeed Excite's usefulness is over. It has served it's function of getting AOL to get serious about making a deal. In turn, T/ATHM might be ready to let Excite go to embrace AOL's content. My guess, AOL becomes the preferred content site of ATHM...right there on the first page. ATHM keeps the first page, but AOL gets eyeballs steered to it and only it. ( oh yeah..and AOL buys Excite back..the reason for the authorization of all those AOL shares recently) In turn, ATHM gets a share of AOL's ad revenues which originate from @Home eyeballs. ATHM remains an independent company. AOL remains AOL. TJ moves over to ATT to take over Hindery's as head of internet and broadband and George Bell steps into TJ's old spot as CEO of @Home.

One other thing.....the Portland issue is dropped, remember it was postponed to early November from mmmmmm...today Oct 6th. I guess someone told the courts that this thing could be worked out by November, but not by Oct. 6th.

All of this is just my humble opinion of course.

Next installment...How the MediaOne deal got approved and @Home merges with Roadrunner...starring Mr Malone, of course.(remember, no more forced access fight, no more regulatory hurdles on the cable properties, time to really put the ATT Death Star together.

But there is one other force in thedistance...mmm....looks like Paul Allen.

THE END??