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Letter To My Dad About ATHM

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By Jon80FLT
May 1, 2001

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Hi all,

I just wrote this letter to my dad about ATHM. He bought some shares of ATHM on my urging, and I promised to let him know if my thoughts about the company have changed materially. I have not included any referencing links because he doesn't want to be bothered with checking the links. All of my info is from memory, and gleaned from the knowledge I have attained from lurking on this board, and reading the articles posted at the @Home IR website. I speak in generalities, but I think most of the info is accurate.

I thought I would share it with you all, too.

Long ATHM,
Jon
=================================================

Hi Dad,

This is a little long, but I wanted to give you a heads-up about ATHM. After A LOT of reading, its chances for success MAY be dimming a little. Personally, I'm not going to sell any of my shares, but the risks seem to have increased.

There have been a few recent developments that have made the future look murky:

1) There is a money crunch. Apparently, the burn rate of ATHM seems to indicate that they only have about 3 quarters worth of operating cash left. There are a couple things that they have done to try to raise capital:

a) they have sold/leased-back their fiber optic backbone to AT&T. Originally, one of ATHM's crown jewels was the fact that they owned a phenomenal "parallel internet." That meant that more than half the time you would never need to actually venture out on the internet, thereby avoiding all that congestion.

b) ATHM is suing Cablevision to recover 20 million warrants (stock options) that Cablevision paid 25 cents for, because Cablevision started offering their own ISP called "Optimum Online" in direct competition with ATHM...against the rules of the original agreement made between Cablevision and ATHM to offer ATHM exclusively thru 2003.

2) The appointment of a new CEO and Chairperson of the Board, Patty Hart. Ms. Hart originally was a bigwig at Sprint Long Distance, then she became the CEO of Telocity (a failed DSL company) where she basically setup the "fire sale" of Telocity's assets. The fear is that she is going to setup a similar "fire sale" of ATHM...divvying up all its assets between AT&T, Comcast, and Cox.

3) As with all the other Internet based companies, the advertising money has dried up. Banner ads don't work, and nobody has figured out how to serve up good Broadband advertising yet.

4) There are valid fears that Comcast and Cox can opt out of their exclusive agreements with ATHM (until 2006), as early as December 4, 2001 (After giving 6 months notice, i.e., June 4, 2001) and if they do opt out, they are entitled to buy all the "head-end" equipment at cost. The head-end equipment is the stuff that allows the cable companies to connect to the Internet, and ATHM's backbone.

Keep in mind ATHM is majority owned by not one company, but AT&T has "super shares" that give them about 75% voting control on the board of directors. AT&T recently gave Cox and Comcast $3 billion dollars worth of AT&T stock to gain this voting advantage, so, in essence, AT&T has control of the company. Some theories state that AT&T will be "absorbing" ATHM into its "AT&T Broadband" company after AT&T splits itself into four different companies: AT&T Broadband, AT&T Long Distance, AT&T Business Solutions, and AT&T Wireless.

The scuttlebutt is that C. Michael Armstrong (AT&T's current CEO) will become the CEO of AT&T Broadband, and that ATHM is an integral part of his vision of the future. Eventually, ATHM will cease to exist, and will just be part of AT&T Broadband. Is this good or bad? I don't know. I had invested in ATHM because it was the only "pure" cable broadband play on the market. AT&T definitely has deep pockets, so it will make sure that ATHM survives... until it absorbs it of course. But, AT&T Broadband won't be such a pure play... they will be concentrating on all the different aspects of broadband bundling; cable TV, cable Internet, local phone service over cable, and video on demand over cable.

5) Open access and AOL/TimeWarner: At this point, there is little fear with regard to AOL/TimeWarner, since open access will require each cable company to cough up phenomenal amounts of dough to create a "head-end" for each ISP that wants access to its cable. Right now, ATHM has exclusives with 80% of the homes "passed" by cable lines in the U.S.; AOL has the remaining 20%. AT&T is the largest cable company in the U.S. (with about 45% of the homes passed), AOL/Time Warner is 2nd largest (with 20%), then comes Cox and Comcast (at about 30% combined), and all the mom & pop cable companies share the remaining 5%. Since AT&T now owns ATHM's backbone, AT&T Broadband will be the "toll-booth" to the Internet for about 80% of the country. Even if Cox and Comcast opt out of their exclusive agreement with ATHM, they will still have to pay carriage to AT&T Broadband.

Are there any good signs right now? Not many, but:

1) ATHM is signing up new subscribers at a good rate. They expect to have about 5.5 million subs by the end of the year, and they seem to be on track to meet or beat that goal. Each subscriber brings about $14/month in as revenue...about $925 million a year based on 5.5 million subs; that's not chump change! Additionally, there is an almost non-existent turnover rate of subscribers, about 3.5%. The only time they lose a subscriber is when that subscriber dies, or moves away to an area that doesn't have broadband yet. Compare this to AOL's almost 50% turnover rate!

2) The connection speeds have not degraded since they started offering the service, despite all the FUD spread by the DSL companies that the network slows down as more people subscribe. I still get about 1.5 mbps downloading, despite there being about 4 million subscribers on the network right now. That's about 50 times faster than your dialup at 28.8 kbps. SPEED IS KING!! My download speed is artificially throttled at 1.5Mbps, but some other subscribers, on other cable systems, get to go more than twice as fast as me! (I do have a little "speed envy" towards them!)

3) ATHM is positioned in the "sweet spot" of the broadband revolution. Currently, only 4% of Internet users are on broadband, of that about 80% of them are on cable broadband, and of that number, 80% of them are subscribers to ATHM. This is a technology in its infancy. The think tanks are predicting that 75% of all Internet users will be connected thru broadband by 2008, as opposed to 4% now...so there is a lot of room for growth. Keep in mind, also, that there will be more Internet users by then, too. Right now, about 50% of the homes in America have a computer, and only 25% of them are connected to the Internet.

I could probably go on for a while more, but I'll summarize now my feelings about ATHM:

Like I said before, I'm not going to sell any of my shares of ATHM because I still believe in the broadband revolution and where ATHM is positioned in it. I am seriously considering buying more shares at this level, now that I am off margin! But this is a VERY risky stock to be in now... the future is really hard to see clearly. I haven't totally made up my mind about the good/bad of owning AT&T Broadband stock, which is what I think I will be holding before too long.

I promised you that I would let you know if I ever felt the story had changed about one of the companies I recommended to you... well, I have seen some pretty distinct changes in this company that may shake my opinion of it. I think the problems really started when ATHM bought Excite and wanted to get into the content side of the business instead of sticking with the connection side of the business. I also think this company is no longer in control of its own destiny; it's more like a pawn in AT&T's master plan.