The AT&T @Home Fiasco: A New Business School Case

By , December 2, 2001

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 \n markwelch@home.com This e-mail address is being protected from spambots. You need JavaScript enabled to view it , but on Saturday morning, all email sent to that address was returned to the sender with a note that the account was disabled). It seems “obvious” that AT&T could have negotiated a deal to simply continue email service, or to allow email forwarding, either at AT&T’s expense, or for an optional fee charged to the customer directly by Excite@Home. It seems likely that this option was not considered because both AT&T and Excite@Home devoted all negotiation time to other matters (like the per-customer price, or potential buyout bid prices).

Pulling the Plug on AT&T May Help Excite@Home: It seems likely that there was little room for any deal to be reached between AT&T and Excite@Home. However, the other cable companies can’t replace Excite@Home in just a few weeks, so a shutdown poses a greater threat to their businesses. It seems likely that the other cable companies believed that Excite@Home would never “pull the plug” because doing so seemed like “mutual suicide.” In other words, they may have thought that Excite@Home made only “idle threats.”

By pulling the plug on AT&T and terminating service to 850,000 customers, Excite@Home showed its resolve, and its willingness to accept damage in order to move forward. At the same time, the cable companies must realize that without AT&T’s participation, the overhead costs for Excite@Home will need to be spread across a smaller number of customers. If more cable companies pull out, leaving Excite@Home with fewer customers, the result may be an unaffordable price tag, forcing Excite@Home to shut down completely, leaving millions of customers with no service. Alternatively, cable companies must worry that Excite@Home will sell its assets (probably for even less than the $300 million that AT&T offered in September), and that the buyer would raise rates even higher.

What Went Wrong?

AT&T’s Failure to Notify Customers: I fault AT&T for lying to some customers (when I called at 3pm, the risk of service interruption was very high, but AT&T staff assured me that rumors of a deadline were false, and that a shutdown would “absolutely not” happen this weekend). I also fault AT&T for keeping the rest of its customers”in the dark.” Even before the hearing on Friday, AT&T knew that it was quite likely that service would be terminated on Friday night or Saturday morning. After the court ruling on Friday, it was even more likely.

While AT&T might have believed that Excite@Home was bluffing and would continue service beyond Saturday, it had to realize that Excite@Home knew that AT&T was completing its own network buildout, so any delay in terminating service would simply reduce Excite@Home’s bargaining position.

I also fault AT&T for not providing a clearer message to customers about the likely length of a potential “interruption” in service while switching to AT&T’s own network. Most consumers read the word “interruption” to mean a short period of time, minutes or perhaps hours. But AT&T knew when it wrote its November 26 outage that the interruption would last for about five to seven days. Perhaps AT&T did not want to disclose the likely time period because it didn’t want Excite@Home to use that information to improve its own bargaining position.

Excite@Home’s Shutdown of Customer Email: There is still time to reverse position, but it seems absurd to me that Excite@Home simply purged the email accounts of all 850,000 AT&T customers. (Many customers are probably also upset about the deletion of “personal home pages.”) For customers who have used their @home email address as their only email address, and for others like me who have had their @home email address for four years, the sudden disabling of the address is extremely annoying. Those email addresses are “out there,” on web pages and business cards, and even in ads printed in the Yellow Pages.

Surely, Excite@Home could negotiate terms — either with AT&T or, more likely, with customers directly, to allow continued use of these @home email addresses. Excite@Home could offer web-based email services, for a fee, or could license another company to do so. Or Excite@Home could charge a fee simply to forward email to a customer’s new address. Assuming that just 50,000 of the 850,000 customers paid $10 per month, that’s half a million dollars in revenue per month (though it would likely decline rapidly as customers complete their own migration).

Allowing the Shutdown: Depending on which scenario (above) is correct, it seems likely that there were simply no terms that both companies could agree to. Once the contracts were terminated, and with AT&T continuing to rapidly build out its network, Excite@Home probably concluded that it simply had no choice but to terminate service to AT&T customers. In addition to cutting its expenses for serving those customers, Excite@Home showed that it was not bluffing, and may have provided “new perspective” for the people who are negotiating on behalf of the other cable companies. The action might also help adjust consumer expectations, which might result in less complaint if the cable companies raise rates to meet new contract terms.

Faulting the judge and the news media

On Saturday, December 1, after it was clear that AT&T’s customers had been disconnected, a number of vigorous criticisms were posted in internet newsgroups, criticizing the judge’s legal ruling and also criticizing the news media’s poor coverage of an event impacting millions of consumers.

The News Media: In fairness to c|net and other news outlets, these events occurred in the wee hours of the morning, when the companies’ spokespersons were “unavailable” (and of course neither company wanted their spokespersons to be available). Since both companies were taking a “hardball” negotiating stance, and expected the other camp to surrender, they were probably glad that their actions could be hidden by claims of “late night” and ‘weekend’ and “to the best of my knowledge” statements. When the ‘real story’ is clear on Monday or Tuesday, it will all be “old news” and thus they hope there will never be a prominent article profiling the dismal failure of both companies to consider their customers’ interests, or perhaps even the cable companies’ shareholders’ interests.

Since the companies were (and perhaps are) still engaged in negotiations, neither wants to publicly disparage the other — hence they made sure their spokespersons did not reply to queries, blaming the weekend, and using weasel words (“to the best of my knowledge”) while disseminating false information. Only late on Saturday, did @Home admit that it pulled the plug, and that its earlier statements that it had not done so were false.

I exchanged emails with several reporters on Saturday, and I did one phone interview. I believe that all the reporters are working hard to gather verifiable facts — but what they face is a lack of reliable sources.

A few folks argue that reporters could do research and quote from posts in internet newsgroups. Unfortunately, most of these posts are either anonymous or pseudonymous, with “spam-blocking” email addresses and no other contact information.

We also need to understand that both AT&T Broadband and Excite@Home have been engaged in “crisis management” and “crisis PR,” which apparently means shoveling misinformation and lies, along with apparent tidbits of truth, and so the reporters must waste a lot of time — first, to just reach anyone at a company, and then trying to separate the truth from the lies. That’s part of “crisis PR” — deliberately create confusion so that you can later blame the reporters for “mistakes,” or falsely claim that misstatements were due to a lack of information. Another strategy is determine when the reporter’s deadline is, and then promise a response an hour after that time, so the PR person sounds like they are trying to get information, when in fact they are trying to delay the story.

The Judge: Some folks have complained that it was unreasonable for the bankruptcy judge to refuse to consider the injury to consumers, if Excite@Home were authorized to terminate service without warning. In other words, the judge failed to consider the interests of all the “stakeholders” involved in the case.

Alas, customers don’t really count in bankruptcy proceedings: the primary concern is the interest of creditors. Even so, the judge might have concluded that the interests of all cable modem customers would be better served by empowering Excite@Home, so the company would have more leverage to negotiate terms that would allow it to continue providing service for years to come.

On Friday, the judge specifically rejected arguments made by one cable companies that he should delay the case to hear from customers. In fact, he probably viewed that request (made by a cable company) as a self-serving attempt to delay the case (with delay benefitting the cable companies and draining assets from Excite@Home).

But everyone must recognize that if customers are not “stakeholders” recognized as parties in a bankruptcy proceeding, they are not ignored. Customer relationships are assets of the bankrupt business, and should be nurtured to maximize the value of the company. Deleting customers’ accounts without advance notice, and refusing to explore profitable alternatives (such as offering customers web-based email services, or email forwarding, for a fee), is not a good way to maintain strong customer relationships, nor to maximize the return to creditors.

The judge listened to the parties (the bondholders and other creditors, and the cable companies) and concluded that the cable companies would not negotiate terms that would allow Excite@Home to survive, unless the existing contracts were terminated. Termination of existing contracts is a standard action in bankruptcy court.

In this case, the judge believed that the cable companies would negotiate terms to continue the service, because shutting the service down would be “mutual suicide.” If he believed AT&T would give in, he was wrong. It might even be that when the judge gave Excite@Home the right to terminate service to the cable companies and their customers (people like me), Excite@Home adopted a excessively “hardball” negotiating position.

What happened, in the end, was not the judge’s fault. The judge applied the law of bankruptcy as it was intended: a bankrupt company can terminate contracts if continuing them is not financially feasible (and in this case, continuing the contracts at an operating loss was not possible since Excite@Home lacks funds to continue operations, and nobody will lend money to a company that will simply use the money to operate a money-losing business with no prospects of a turnaround.

Clearly, as midnight approached on Friday, Excite@Home realized that no terms could be reached with AT&T, and Excite@Home knew that by pulling the plug on AT&T, and showing that it was not bluffing when it threatened complete shutdown,its negotiating position with the other cable companies would be improved. (The other cable companies aren’t in the same position as AT&T because they can’t migrate their customers to another network in 10-14 days, and some of them might need many months.)

The Likely Outcome:

AT&T: When the dust settles, assuming that AT&T restores service to most customers by next Monday, I expect that AT&T will keep at least 90% and probably 98% of its cable modem customers. The key will be keeping its promises: if customers can get DSL installed before AT&T can restore cable modem service, the customers will be lost. If AT&T can restore service first, then most customers will cancel their DSL installation orders.

As angry as most customers are, we probably all expect better service now that the “finger pointing problem” is eliminated (Over the past four years, I had a number of service problems that AT&T blamed on Excite@Home and Excite@Home blamed on AT&T Broadband.)

Alas, while AT&T Broadband is more stable and unlikely to enter bankruptcy soon, it remains the “unwanted stepchild” at AT&T, and we should all expect more corporate turmoil, and probably changes of ownership.

And I predict that one thing is certain: all of this will be used as justification for more rate increases (both for cable modem service, and for DSL service which is priced to compete with cable modem service).

Excite@Home: Finally, it will be interesting to see if Excite@Home can reach long-term agreements with the other cable companies who DON’T have their own network infrastructures nearing readiness. It’s unclear if Excite@Home’s business is even viable after losing AT&T’s 850,000 customers (representing 20% to 25% of Excite@Home’s total customer base, depending on whose numbers you believe).

Business Case: I expect that this case will provide great fuel for discussion in business schools for many years to come. Hopefully, after it’s all over, some of these numbers and bargaining positions and strategies will be disclosed publicly so we might know who was bluffing and who was not. If a million or more cable customers actually lose service permanently, I think someone will write a book about it.

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