Playing Chicken on the Information Highway

Will bondholders pull the plug on Excite@Home's network?

It has been a dismal year for Excite@Home. The Redwood City (Calif.) provider of high-speed Internet access over cable television networks has seen its stock price fall from $10 last November to 6 cents now. It has lost $1.4 billion in the first nine months of the year. And on Sept. 28, the company filed for bankruptcy protection because of a severe cash crunch.

Now, things may get pretty rotten for the 4.2 million customers who get broadband service over Excite@Home's network. Because of a fight in bankruptcy court over the company's assets, subscribers could see their service cut off in the next few weeks. "It'll be a customer-service nightmare," says analyst Jordan Rohan of Wit SoundView Corp.

LITTLE TO LOSE. At issue is Excite@ Home's network, which almost every major cable company uses to transport the Net traffic of their customers. AT&T, the largest provider of cable TV and long-distance services in the country, has offered to buy the network for $307 million so it can continue providing Net service to its 1.4 million customers and those of other cable players. But Excite@Home's bondholders, who control the company now that it's in bankruptcy, say they'll shut the company down before they sell the assets at such a low price. "If they're not willing to pay more, then they should be ready to see the service turned off," warns Don Morgan, a managing director at financial firm MacKay Shields, one of the largest bondholders.

Bondholders are playing a dangerous game of chicken because they feel they have little to lose. If the assets are sold for $307 million, they figure they'll get almost nothing. AT&T's offer requires that Excite@Home continue to make capital expenditures at the same pace as before it entered bankruptcy and that the network meet certain performance requirements. On top of that, some high-priority debts would be paid and Excite@Home executives would receive severance payments. Bondholders believe they would get less than $50 million out of the $307 million total.

The showdown comes on Nov. 30, when Judge Thomas E. Carlson hears both sides in U.S. Bankruptcy Court in San Francisco. To keep their customers from being stranded, the cable companies are scrambling to come up with alternatives for carrying their Internet traffic. AT&T and Comcast Communications say they're exploring their options, but decline to provide details. One analyst says AT&T is planning to offer free dial-up Net access until broadband service is restored. A spokeswoman for Cox Communications Inc. acknowledges that "if they shut down the network on Nov. 30, our customers would lose their service."

The cable companies are vulnerable to an Excite@Home shutdown because of the design of its network. The cable players own the link from each broadband customer's house to the so-called head-end, a facility in each neighborhood that collects cable-TV programming and then zaps it to subscribers. From the head-end, their customers' Internet traffic is transferred onto the Excite@Home network, which carries it around the country.

ERODING VALUE. To bypass that network, cable players would have to install connections at every head-end where they have broadband customers. There are nearly 600 such locations around the country. The process could take large players six months and cost each one about $100 million, analysts say.

The standoff could be postponed. Judge Carlson could decide on Nov. 30 to force Excite@Home to continue providing service while he urges the two sides to come to an agreement. But bondholders argue that any postponement would hurt them. They contend that Excite@Home's assets are valuable now and will become less valuable as days pass--because AT&T and other cable companies will develop alternatives. "Waiting certainly gives the cable companies more alternative means to provide the service," says Andrew Watt, a debt analyst for Standard & Poor's.

If the bondholders and AT&T play this game of chicken to its ultimate conclusion, it will be Excite@Home's customers who suffer.

By Peter Elstrom in New York

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