Posted on 11/30/2001 3:38:37 PM PST by spycatcher
*update* SAN FRANCISCO--A bankruptcy court judge ruled Friday that angry bondholders and cable partners of Excite@Home must go back to the bargaining table, leaving four million customers of the high-speed Internet service in limbo.
Judge Thomas Carlson said Excite@Home could cancel contracts with its cable partners. Carlson didn't rule on whether the cable-modem service would be shut down, but the cable companies have threatened to cut off service if their contracts, which expire at midnight Friday, were terminated.
Attorneys for the cable companies said Friday afternoon they were unsure whether or when they would shut off the service. Representatives for Excite@Home said they did not have any comment on Friday's ruling.
Despite threats from the cable companies, Carlson and numerous attorneys for bondholders and unsecured creditors said that shutting off service was highly unlikely--chiefly because such a move would be detrimental to all parties involved. Excite@Home and various cable partners, including AT&T Broadband, Cox Communications and Comcast, share infrastructure and content, and the companies split revenue that comes from paying subscribers.
If cable companies enrage customers by switching off their high-speed Internet service, the judge and bondholders argued, then the cable companies would harm themselves and shrink their customer ranks. One bondholder said cable companies would engage in a "murder-suicide" pact with the Excite@Home if they switched off service.
"It's clear that the continued operations have substantial interests to the cable companies," Carlson said to a packed courtroom where attorneys, Excite@Home executives, journalists and others jockeyed for seats and flooded into the courtroom's aisle and rear.
Corporate America has been keenly watching the bankruptcy proceedings of Redwood City, Calif.-based Excite@Home, which became the largest Internet company when it was formed in a $6.7 billion merger of Web portal Excite and cable company @Home in January 1999. It remains one of the most high-profile and strained marriages of the Old and New Economies, with AT&T owning about three-quarters of Excite@Home's outstanding stock.
Victory for bondholders Carlson's decision was a major victory for bondholders and unsecured creditors, who are desperate to boost revenue of Excite@Home and thereby minimize losses on the bondholders' and creditors' investment. By some estimates, Excite@Home is burning through $6 million per week because of outdated contracts with the cable companies.
Although the contracts are complicated documents and vary widely depending on the cable partner, the agreement is weighted in cable companies' favor. With the average cost of Excite@Home service at about $46, the cable companies collect roughly 65 percent of that, while Excite@Home collects only 35 percent.
Interim contracts that parties negotiated in October are slightly different than the official contracts that may now be renegotiated, but the interim agreements also funnel a disproportionate amount of money toward cable companies. Contracts are also slightly different in Canada, where cable companies take as much as 80 percent of the revenue, leaving only 20 percent for Excite@Home.
By allowing Excite@Home to renegotiate its contracts with the cable companies, the judge opens the door to new contracts that substantially increase Excite@Home's cut in revenue. Because Excite@Home filed for Chapter 11 bankruptcy protection in September, the judge said that Excite@Home may legally break its existing contracts in order to increase its chances of survival.
But the decision also opens the door to a termination of Excite@Home's high-speed Internet service to more than four million subscribers. The cable companies, including Cox, Comcast, Charter Communications and others, have stated or implied for weeks that new contracts could result in termination of the service.
"The contract is the means by which we operate a service," an attorney representing cable company Charter Communications said in court Friday. "If there is no contract, there is no service."
But attorneys for bondholders and unsecured creditors said the cable companies' protestations are nothing but idle threats--an attempt to hang onto lucrative contracts without having to renegotiate them at potentially less favorable rates.
"They're playing a high-stakes game of chicken at the expense of customers," said Richard Slack, a New York attorney representing Excite@Home's bondholder committee. "The court was pretty clear about the importance of renegotiating contracts."
Even after Carlson heard arguments for two hours and ruled that Excite@Home could renegotiate contracts, attorneys for the cable companies protested. One said he planned to appeal the decision. Several other attorneys for cable companies argued that the judge should, at a minimum, let the companies continue operating under the existing contracts for several days.
But Carlson said it was in the best interest of the consumers to renegotiate the contracts immediately. He rejected cable companies' argument that the contracts should be maintained in order to preserve the Internet service of 4.1 million customers.
"Bankruptcy typically causes much disruption," Carlson said. "While the cessation of customers' Internet access is regrettable, it does not jeopardize public health or safety."
A shutdown would strand 45 percent of the cable modem users in North America, disrupting small-business owners, telecommuters and even students, since many cable companies have donated high-speed data lines to schools, according to a research note by Anthony Gikas, an analyst at U.S. Bancorp Piper Jaffray.
Excite@Home customers have grown increasingly upset as their Internet access provider has struggled through bankruptcy proceedings. Many say termination would force them to rely on dial-up connections, which are vastly slower than high-speed cable modem access. Digital subscriber line (DSL) is another fast alternative to cable access, but the service is not widely available, and it requires new hardware and installation fees.
"I will cancel all of my AT&T services" if Internet service is terminated, said Bryan Kennedy, a software engineer in Dallas. "This affects my family's ability to work at home. The cost of setting up DSL and going through the process is too much of a headache. I would go back to a dial-up account until I could find a reasonable high-speed alternative."
Some sources have said that the cable companies hope to extend their contracts at least through next week, when AT&T is expected to make a $307 million bid for Excite@Home's cable assets. If and when the sale is finalized, AT&T could renegotiate contracts again.
AT&T's bid has also become rife with controversy. Many Excite@Home shareholders and creditors say the company's cable assets are worth vastly more than $307 million--some insisting that fair market value is as high as $1 billion.
AT&T Broadband representatives said this week they could assume about 20 percent of Excite@Home customers if the company shuts off service. Excite@Home has been in meetings for the past several weeks with AT&T as well as other cable companies.
Sources close to the deal said few of those involved in the talks really want a shutdown of Excite@Home, and some bondholders are willing to accept bids even marginally more than $307 million.
"Anything is possible with enough money," said Bill Weintraub, an attorney who represents the bondholders committee. But he added that the $307 million offer was "clearly inadequate at this point."
But its such a cash cow for them. There are virutually no new costs for them once the nodes are in place and everyone is pinging along.
This is WAY scarier than midnight Y2K!
Ewwwww!! OK, seriously, if you don't mind AOL, then I guess its all right. I won't go back to them ever. I was a customer of AOL when they went through that capacity shortage a few years ago. I almost never got a connection. I vowed then to never deal with AOL again.
I don't know how they do it now, but AOL used to have that annoying proprietary software along with their highly filtered interface. Perhaps they have stepped up to the real internet now, I don't know. And if I ever see an instant message again, I'll scream. Those things had a habit of popping up at the most inopportune times and I absolutely hated it.
DSL or satellite access is the only way -- other than cable
The silver lining is that I will want to spend so little time at my computer that I will not be needing that carpul tunnel surgery after all....
Let's hope so. Funny how @Home has been losing money so, but no word on competitor RoadRunner. @Home capped the streams, perhaps to save on costs, and yet are losing millions per day. Maybe they deserve to go under. I guess they can't hope for a gov't bailout like those opportunist airlines. Pity.
"I might do an ipconfig or winipcfg and try to use my current address and subnet as a static IP. After all who's to say that they will just turn off all the routers? They may just turn off the DHCP servers."
"Just called the comcast hotline and got the 5:00 PM update. They said that @home has the right to end service at midnight tonight, but that comcast does not expect any interruption of service."
For all Insight@Home Customers [actually some good news] from their situation update page...
"We are working hard to avoid any inconvenience to our customers. In mid-October, we, together with other @Home affiliates (including Cox, Comcast, and Mediacom), increased our payments by over 50% to ensure uninterrupted service until an agreement among the Creditors could be reached; this was done at no additional cost to our customers. @Home affiliates including Insight are supporting AT&T in its bid to buy the @Home network. If the network were to go dark, there would be no cash coming in nor would there be any bids for @Home's assets. Therefore, it makes no sense for @Home to "pull the plug."
If the unlikely occurs, we will cover your cost of a dial-up service until we can transition you back to our broadband service. As I mentioned in our earlier note, we are talking with AOL Broadband and Road Runner, and believe we can expedite a transition."
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