A silver lining in demise of Excite@Home

Cable operators could eventually see connectivity costs drop more than 50%

The collapse of Excite@Home is leaving customers panicky, if not disconnected. If they don't flee, cable operators should be better off financially.

Operators are scrambling to provide connectivity, leasing regional and national lines from telcom providers to replace Excite@ Home's national Internet backbone.

But after some big, immediate costs are paid, the cost of cable operators' in-house network will be less than the 35% of high-speed Internet subscribers' fees they had been paying to Excite@Home. Operators estimate that their connectivity costs should drop more than 50% in some cases.

Such costs had typically run $13-$15 monthly per subscriber. When Excite@ Home lapsed into Chapter 11 Oct. 1, creditors squeezed operators into paying about $20 a month. But cable executives estimate that, once Excite@Home is replaced, the monthly cost will fall to $6-$8 per sub.

"Margins are better than they were before because we're putting more subscribers onto an existing infrastructure," said Majid Mir, Charter Communications' senior vice president of telephony and advanced services. Charter switched most of its 150,000 customers on Excite@Home to a new network but is paying $1 million to keep e-mail and 7,000 subscribers in Oregon connected for three months.

With the Excite@Home network, e-mail servers and domains held hostage by bondholders, Comcast and Cox forked over $160 million each to keep service to roughly 1 million high-speed Internet subscribers. The two would spent $60 million each to keep customers connected to Excite@ Home for three months anyway, so their incremental cost is $100 million. Neither would disclose the cost of making new arrangements, but it will probably take two years to recover.

Comcast President Steve Burke considers the effort worthwhile, likening it to "letting go of one trapeze and grabbing another one without hitting the ground."

AT&T allowed its customers to be cut off Dec.1. It was well-prepared, though, and restored connectivity to 80% of its customers within four days and to virtually all within a week.

Morgan Stanley media analyst Richard Bilotti estimates operators' cash flow from high-speed Internet service should grow from $12.15 monthly to about $16.50.