Michael Armstrong’s legacy at AT&T just gets darker.
The mega-telco’s myriad problems intensified yesterday, as its high-speed Internet service provider Excite@Home announced it had canned its auditors, Ernst & Young, and switched to AT&T’s accountants, PricewaterhouseCoopers.
Excite rushed to state it had no disagreements with the bean counters, but experts suspect that Ernst & Young had fallen from grace by doubting publicly whether Excite@Home could make it.
The serious problems at Excite come on top of countless others for AT&T, which is burdened by a mountain of debt, a failed local-phone strategy, and an anemic stock price.
Excite is almost $1 billion in debt and lost $346.3 million in the latest quarter. It is expected to run out of cash by Christmas – or earlier, if it gets delisted from the Nasdaq.
AT&T’s October 2000 decision to get modern and split itself in four pieces – broadband, wireless, consumer and business services – looks to have hit another snag as Chairman Armstrong has to decide what to do with Excite@Home.
AT&T owns 23 percent of Excite@Home but has 73 percent of the voting stock. It could pump more money into it to keep it going – or let it go bankrupt and pick up some of the pieces.
“No one, especially the cable partners – AT&T, Cox and Comcast – wants to see the ISP side of it go down,” said Telco analyst Mel Marten at Edwards Jones.
“But, if there’s a Chapter 11 reorganization, AT&T could pick up some @Home assets for, say, 30 cents on the dollar and keep it going. The nightmare scenario is if everyone thinks someone else is taking care of Excite@Home, and 3.7 million customers lose their Internet connection.”
Excite’s trouble further complicates AT&T’s bid to get a good price for its cable assets, for which Comcast recently offered $37 billion.
Another embarrassment for Armstrong came on the first day of this year. AT&T offered partners Cox and Comcast “put” options to buy their Excite@Home shares at $48 a share.
“As soon as the clock turned 12 on Jan. 1 this year they exercised,” said Guzman & Co. analyst Patrick Comack. “With the stock way below that, AT&T ended up giving them $3 billion in AT&T stock and letting them keep their stake.”
Marten said, “It’d be a huge tombstone for the industry if Excite@Home died.”
The merger of @Home with portal Excite was the biggest driver of the company’s current problems. It has been unable to find a buyer for its money-losing properties, which have been decimated by the dot-com ad bust. The company paid $1 billion for greeting card company Blue Mountain Arts in October 1999,
“They got mission creep, they tried to do too much and made some mistakes,” said Jupiter Media Metrix analyst Dylan Brooks. “Ironically, there are only two things dial-up users do more of online than broadband users, and one of these is sending e-cards.”
Excite@Home can’t get out of its ad contracts without paying millions back to advertisers, and its exclusive placement on Cox and Comcast cable systems runs out in December.
Although AT&T fought open access in court in Portland, Ore., it has lately experimented with it in Colorado, meaning it is prepared to let other ISPs handle the job if Excite@Home can’t do it.
Excite@Home was intended to be a marriage of access and content along the lines of AOL, but the economics proved very different. AOL makes $2 per customer on access fees, but then makes another $1 per person on ads, commerce and other fees. Excite@Home is stuck making $10 a month, which barely goes up as the customer uses the service more.
Independent telco analyst Jeff Kagan said AT&T’s woes through the ’90s have come from trying to reinvent itself every few years. “What’s amazing is they have 60 million customers writing them a check every month and the 10th-strongest brand in the world, and they haven’t managed to provide Wall Street with a map of how they intend to make the most of the opportunities before them.”
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Sad story
C. Michael Armstrong’s tenure at AT&T has been an unmitigated disaster – and now his high-speed Internet access company is going down the tubes. The sorry timeline:
* July 31, 1996 – AtHome Corp. appoints former Silicon Graphics exec Tom Jermoluk chairman, president and CEO.
* Jan. 19, 1999 – Broadband ISP AtHome buys portal Excite for about $6.7 billion in stock, paying a $3.3 billion premium.
* Oct. 6, 1999 – Leo Hindery, AT&T’s cable television business unit chief, resigns.
* May 18, 2000 – Jermoluk steps down as chairman of Excite@Home.
* Oct. 24, 2000 – AT&T Corp. says it will break itself into smaller pieces for the third time since 1984
* Oct. 25, 1999 – Excite@Home buys Blue Mountain Arts for $1 billion.