Excite@Homeless?

The cable Internet service is running out of cash
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Backing from giant media companies is giving Excite@Home Corp. no immunity from the Web-wide financial crunch, with the high-speed Internet company gasping for cash.

Excite@Home is down to about three months' worth of money in the checking account, but it does have immediate access to funds that would carry it an additional three months after that. The problems are less severe at the company's capital-intensive high-speed-access business and more at the Excite portal, where ad sales are falling well short of expectations.

But Chairman George Bell is scrambling for cash, looking to cut expenses, lay off workers and sell assets to ease the high pace of the company's losses and set it up for new financing. AT&T Corp. is the controlling shareholder and has agreed to a quick cash injection, but it has no commitment for the kind of money Excite@Home is going to require over the next year or two to expand its high-speed Internet business, the side that surprisingly has the best prospect for stability.

Bell is looking to sell or restructure some assets, such as the Blue Mountain Arts greeting-card site or Matchlogic online ad-targeting firm.

"The point here is to conserve and raise cash to support our core broadband franchise," says Bell, who came from the Excite portal side of the company's operations. As for the media business, "instead of a slightly upward trend in the second half of the year, we see a decline, probably severe."

Excite@Home is no different from Yahoo, NBCi, iVillage or dozens of other Web sites that have discovered that advertisers are skeptical of toying with new outlets for their messages when the economy turns sour. The difference is that the company sits in the center of cable operators' efforts to sell high-speed data access over their existing cable plant, a critical element of plans to develop new sources of revenue.

Operators can switch to a different data provider in short order, as Cablevision Systems Corp. is about to do after years of fighting with Excite@Home. But Excite@ Home also supplies significant sales and customer-service support and, of course, owns cable customers' e-mail addresses.

Excite@Home's financial situation is precarious. The company burned cash at a rate of $32 million a month during the first quarter, leaving just $105 million in the bank. That's half the $201 million the company had at the end of December.

AT&T agreed to a quick sale-leaseback of Excite@Home's national backbone for up to $85 million, a deal that does not include the company's regional data centers.

The big question is how far AT&T will go. The telco own 24% of Excite@Home's equity and 74% of its shareholder votes. When times were good, AT&T Chairman Mike Armstrong was eager to buy more, cutting a deal for stakes owned by MSOs Cox Communications Inc. and Comcast Corp. at $48 per share, or $3 billion. But, by the time Cox and Comcast exercised their options to force AT&T to buy the shares, they had dropped to $8.64. They now trade at $4.

"AT&T has gotten pretty embarrassed here," says one Internet analyst. "I wonder whether AT&T cares if this thing sinks or swims, as long as they get the network assets they want." AT&T says that it wouldn't discuss any moves beyond the backbone deal.

Some of the company's biggest moves are turning sour. The big one, of course, was @ Home's decision to buy Excite in the first place. That $6.7 billion deal was designed to lessen @Home's heavy reliance on distribution of high-speed data and give the company a quick injection of content.

Unlike the high-speed Internet business, the Excite portal business requires very little capital and generates huge gross margins—when there's revenue, that is. Now, as the @Home side is hitting its targets—cable modem service rose 16% in the first quarter, to 3.2 million—Excite's advertising sales are sliding.

But at least @Home used stock as the currency to buy Excite, so it wasn't incurring any interest costs. The merged companies actually paid cash to buy online-greeting-card site Bluemountainarts.com, the Internet side of a long-established small greeting-card maker.

Even though Bluemountanarts.com had not generated a penny of revenue, Excite@ Home agreed to pay $970 million and put up 40% of that in cash, unheard of at the time in Internet deals. That's $350 million in cash. By getting cash and hanging on to the print-card business, Blue Mountain's Schutz family may go down as among the smartest dealmakers of the Internet era. Analysts expect Excite to try to sell the greeting-card site.

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