December 2, 2001 – This story comes in several parts.

How Consumers Saw It

About 4 million North American consumers use cable modems connected to the internet (through their local cable company) to a network managed by a company called Excite@Home. (Excite@Home arose from the merger of two companies called Excite and @Home. Before that merger, @Home was owned and controlled by the cable companies it served, and the cable companies retained substantial ownership positions in September 2001.)

In September 2001, Excite@Home filed for “Chapter 11″ bankruptcy protection, because its debts exceeded its income. At that time, Excite@Home and AT&T Broadband (which was a shareholder, creditor, and customer) announced that AT&T Broadband was offering to buy the assets of Excite@Home for about $300 million. This news was widely reported in the news media, and cable companies like AT&T sent reassuring messages to their customers.

In November 2001, AT&T sent several email messages to its customers. Buried at the end of the second paragraph of AT&T’s November 26 letter was this language: “If the proposal to purchase the Excite@Home network is not approved, your service may be temporarily interrupted and it will be necessary to move your service to a new AT&T Broadband network.”

On Friday afternoon, an acquaintence who is a customer of Shaw Cable (a Canadian cable company), wrote to me and indicated that his cable company was warning that all service might end at midnight.

As a consumer of AT&T’s cable modem service, I called AT&T’s customer service line (800-262-6300) and asked whether this was true (at 3:00pm on Friday). The AT&T staff replied that there was no possibility of a shutdown, and that it was a ridiculous rumor. I specifically asked whether there was any possibility that either my internet connection would be interrupted, or my email would be cut off. The reply: “Absolutely not.”

Less than 12 hours later, at 2:15am on Saturday, December 1, 2001, all internet services were terminated for AT&T customers, and all AT&T subscribers’ email accounts were disabled.

On Saturday morning, after I discovered that my connection wasn’t working, I tried calling AT&T. Half of my calls reached a strange numeric error message; the other half connected to AT&T Broadband, but after I navigated the voice-maze, the call was transferred to a busy signal and disconnected (in a series of calls, I tried every option). Finally, I was put through to a hold queue, and after 20 minutes an AT&T staffer acknowledged that service was disabled and would remain disabled for some time. She said that service would be restored “in a few weeks.”

“Excite@Home announced today that . . . . After determining that it would not be able to reach agreement with AT&T, the company terminated service to AT&T.” http://www.excitehome.net/news/dec1statement.html

On Saturday morning, both AT&T and Excite@Home claimed that they were not responsible for the disconnection. At times, they suggested that any outages were just normal technical problems. Later, AT&T acknowledged that service had been disconnected, and blamed Excite@Home. In turn, an Excite@Home spokeswoman said her company had not “pulled the plug,” and it was AT&T that was responsible. Later in the afternoon, Excite@Home issued a statement acknowledging that it had, in fact, “pulled the plug” after it concluded that negotiations with AT&T had broken down. Only AT&T’s 850,000 customers were affected, according to Excite@Home, and another 3 million customers of other cable companies continued to receive service while negotiations continued.

Saturday afternoon, AT&T notified its customers (using telephone automated dialing-announcing devices, ADADs) that service was interrupted, and that AT&T would be migrating all customers to its own network over a 10-day period. AT&T told reporters that 10% of its customers had already been switched to the new AT&T Broadband network, and that it expected all customers in the San Francisco Bay Area to be switched to the new network by Saturday, December 8.

What Actually Happened

Court Hearing: Consumers were not aware (before Saturday) that other creditors objected to AT&T’s buyout offer, and that a court hearing was scheduled for Friday, November 30. At that court hearing, the bankruptcy judge would decide whether Excite@Home would be authorized to terminate its existing contracts with its cable-company clients. Such contract terminations are permitted in bankruptcy, and are routinely granted.

The cable companies objected to contract termination, since they wanted to continue to provide service to their customers on the terms that had been negotiated in the contracts. They wanted to delay any contract termination, either to allow more time for contract renegotiations or more favorable buyout offers. If the company were sold and if the buyer were required to honor the existing contracts, the cable companies would avoid cost increases. However, if the contracts were not terminated, no bidders would offer more generous terms than AT&T’s $300 million offer.

Creditors and bondholders, pointed out that continuing to fulfill the contracts was impossible, since Excite@Home was charging the cable companies less than its cost to continue providing service. Nobody would extend credit to Excite@Home if the money would simply be used to subsidize below-cost services to cable companies, with no prospect of repaying debt or a turn-around. The result would be a total shutdown of the Excite@Home network and liquidation of the company’s assets, leaving 4 million cable modem customers without service.

Basically, Excite@Home sought to terminate the contracts so that it would be in a much more favorable bargaining position. Once the company was authorized to cut off service, it believed its cable company customers would have no choice but to agree to pay more for service, because the alternative was “mutual suicide.” And bankruptcy law is designed to permit contract termination, so that the company can continue to operate instead of shutting down.

The judge made it clear in his ruling Friday that he did not expect that Excite@Home would shut down completely, but instead it would benefit from the improved bargaining position he was authorizing. Commentators agreed: Excite@Home now had a superior bargaining position. Cable companies would have to accept new terms to continue service; there was no alternative.

AT&T’s Network Buildout: AT&T is not just a cable company — it also is a phone company, and it owns and operates its own data networks. While AT&T Broadband was a customer of Excite@Home’s cable internet services, Excite@Home was also a customer of AT&T’s network services. (AT&T was also a shareholder in Excite@Home, but its interests as a shareholder were worthless after the bankruptcy filing.)

As noted above, when Excite@Home filed for bankruptcy in September, it proposed to accept AT&T’s offer of $300 million to buy its assets. (That would have allowed creditors to receive about 20 to 30 cents for each dollar owed.) But other creditors immediately objected that the price was too low, and sought to block the sale.

Once AT&T realized that its bid for Excite@Home might not succeed, and that its contract with Excite@Home might be terminated, it decided to prepare to provide cable internet services itself, using its own networks. It began work immediately on its own cable-internet network. AT&T must have spent a lot of money and staff time planning to migrate all 850,000 of its cable-modem customers to its own internal network.

By Friday, November 30, AT&T was ready to migrate 10% of its customers to its own network immediately, and believed it could migrate the other 90% within 10 to 14 days. Accordingly, it believed it no longer needed Excite@Home. Thus, AT&T believed that it had the superior bargaining position.

When AT&T and Excite@Home tried to negotiate, they both found no room for negotiation, and realized that they could not agree on terms to continue service. At 2:15 a.m., on Saturday, December 1, 2001, Excite@Home disconnected all of AT&T’s customers and disabled their email accounts.

What Probably Happened

Excite@Home was reportedly collecting about $16 per customer per month from its cable company customers. According to news reports, Excite@Home needed to collect at least $20 per customer per month, in order to pay its expenses; the amount might have been $22 or $25 per month, but thus far Excite@Home has not been required to disclose its costs, since such a disclosure would hurt its bargaining position.

AT&T Broadband had its own staff estimate the cost to replace the services provided by Excite@Home, and probably concluded that it would pay only about $20 per customer per month to replace the services it was buying from Excite@Home. Again, the exact amount is not publicly known.

Scenario 1: Assume that AT&T Broadband believed that it could replace Excite@Home’s services at a cost of $21 per customer per month. Assume that Excite@Home believed that it could not cover its expenses unless it charged at least $22 per month. If AT&T’s projected replacement cost was less than Excite@Home’s cost to continue providing service, then no long-term deal was possible.

Scenario 2: Assume that the numbers were reversed: AT&T’s projected cost to replace Excite@Home was $22, and Excite@Home’s costs were $21 per customer per month. If the parties were equal, one might expect a deal to be signed at a price near $21.50 per subscriber per month. If this scenario were true, then failure to reach a deal could be blamed on poor negotiating skills or stupidity.

What About a Buyout?> Another alternative, expected to be raised during negotiations, was that AT&T or another cable company (or a group of cable companies) might make a new offer to buy Excite@Home for more than $300 million. If Excite@Home and its creditors thought the deal was acceptable, service would continue until a hearing where the judge would review the deal. But AT&T wasn’t willing to raise its offer to an amount it thought would be accepted. Perhaps one or more of the remaining companies may yet buy out Excite@Home, and AT&T might also make a new offer, but after the loss of 25% of its customers, Excite@Home has a weaker bargaining position than it did on Friday.

What About a Short-Term Deal? Since AT&T knew it could replace Excite@Home’s service in 2-3 weeks, it could have tried to negotiate for a deal to pay some amount only for that period, perhaps paying $30 or $35 per subscriber for one additional month. But Excite@Home had no interest in a short-term deal. It would receive no significant benefit from a short-term deal, and believed that it could use the threat of immediate network shutdown to force AT&T to sign a longer-term deal. It seems likely that AT&T believed the shutdown would last only 7-10 days for most customers, and Excite@Home may have believed it would take longer for AT&T to restore service to its customers.

What About a “Migration” Deal? Many AT&T customers are upset that they abruptly lost their email addresses (my address was This e-mail address is being protected from spambots. You need JavaScript enabled to view it