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Author: DGunn1 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 55215  
Subject: To Steve Frank at NBC Date: 12/10/1999 5:33 PM
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Dear Steve,

I enjoy your commentary and generally easy-going manner as analyst for CNBC. However, I think you missed a good opportunity with Milo Medin of Excite@Home earlier this week. Perhaps this email can provide you a second opportunity. Let me prefix this by letting you know I was a former advertising Director at both AOL and Excite@Home and have a 20 year multi-media advertising background.

As you know announcing one million subscribers is a milestone for many companies. You started the conversation with Milo by stating that in 1995 TJ said we'd be at one million subscribers a year later. Under normal circumstances 1995 is pretty far back to slam a company on a prediction. It is generally agreed that the Internet travels at roughly three times the speed of time, thus you basically were suggesting we missed our 1985 projection. This seemed pretty unnecessary to me. You ended the discussion by saying we were going to probably miss “our” 1999 number of 1.3 million subscribers according to Mary Meeker. A friend of mine who has a substantial number of E@H shares called me very concerned we were going to miss our 1999 number. I had to explain to her that we are missing Meeker's number, not ours. I believe E@H has met its number for more than eight consecutive quarters. Your statement was extremely misleading.

I would like to challenge you to a more positive perspective. Can you name a single ISP that became profitable just after hitting one million subscribers? E@H will announce profitability in a few weeks. How many millions did MindSpring and Earthlink lose in their last quarter with more subs? I was with AOL when we hit five million, yet we were far from profitable. You might want to go back quarter by quarter and see how many subs it took for them to hit profitability.

How, especially considering we did it with broadband, did we achieve profitability at one million? This is an incredible success story. It's simply the model Steve. Lets compare AOL and E@H in terms of infrastructure and marketing for customers. AOL had to build out and/or lease most of its infrastructure. For E@H this is a shared process. E@H takes it from the cable head-end to the Internet and the cable partners take it from the head-end to the consumer. They upgrade what is already a substantial infrastructure. How many AOL disks have you received over the past three years? Serious promotional expenditure for AOL. I recently attended an analyst conference for E@H. They showed a chart that said the cable partners will spend $400 million in 2000 to promote the service. This does not touch our bottom line.

How about growth? Have you ever wondered why AOL has so desperately cried out about the Open Access issue? Because they have done the math. You should too. Project out over the next several quarters and before long E@H will announce more quarterly subs than AOL. Each quarter thereafter gets worse for AOL. Remember, over half of E@H subs come from AOL. Our exclusivity contracts were NEVER EVER going to be overturned. If you don't agree with this, let me know and I can easily straighten this out for you, but its' not the purpose of this email.

About the “letter,” that was simply AT&T trying to ease along the MediaOne deal. In my opinion it was pretty much a waste of time. That being said it was entirely positive news (although actually no real new news) for E@H. It stated post-exclusivity—thus we win and MindSpring recognizes that. We knew there would be post exclusive ISPs. If the technology is there, and if price is agreed on, E@H takes a cut from every competitive sub every month—new revenue stream.

Both the tracking stock for Excite and the “letter” are pretty clear indicators that AOL is history for cable until at least post-exclusivity. Don't think DSL will be there to save them either. Next time you talk to someone from AOL ask them how many DSL customers they have, how the infrastructure is holding up, and take a look at some of there broadband content. Good luck getting any answers.

AOL doesn't get it. They need to get focused on the new millennium. They think its still “I want my MTV and VH-1.” They menu consumers through their product like its' a magazine. Its' all about personalization and 1:1 marketing. Everything that is important in my life is one click away off my Excite home page. Through MatchLogic (largest profile lists-over 70 million, and largest opt-in email list—over 7 million), E@H targets consumers 1:1. Its' no secret why our revenues per page are far superior to any other portal or ISP.

AOL is a closed network. Is this the best long-term scenario? Any consumer can reach any page from E@H except for AOL. Is that our fault?

AOL is a narrowband ISP with content. E@H is a broadband ISP with content. E@H is AOL on steroids. By mid-2002 E@H will have from eight to ten million subscribers. Probably half will come from AOL. That's a lot of churn. Remember other contract exclusives run well into the next several years. And remember E@H has a minimum three additional non-exclusive years after their contracts end.

AOL is the clear narrowband ISP leader and has a market cap to support it--$204 billion. Yahoo is the clear portal leader and has a market cap to support it--$93 billion. E@H is the clear broadband portal leader, yet has a market cap that is 5 times less than Yahoo and 12 times less than AOL--$17 billion. Go figure.

Why don't people understand what I have just written? This is pretty simple. If you disagree with anything I have stated please let me know. Maybe you can take a second look at our models. In the next several days many analysts are going to say very positive things about E@H. Maybe you can beat them to it and look exceptionally smart.

Respectfully,

Dave Gunn




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