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by Jeff Fischer (

Paris, France (Dec. 7, 1998) -- The promising new filly in the Rule Breaker's stable is @Home (Nasdaq: ATHM), the high-speed Internet service provider. Assuming that you've read the @Home buy report, today we'll address other aspects of the company's business and consider key numbers. I hope to show why, of the several potential Rule Breakers that we've considered, this is my favorite. (Of course, I reserve the right -- as does this portfolio -- to be horrifically, horrendously wrong!)

Granted life by the leading cable companies in North America and Canada, @Home is in a position essentially by itself. Day-by-day, the company is blanketing two countries with Internet access that is 50 to 100 times faster than a 28.8 baud modem. As the Fool's buy report shared, the company has the support of industry giants. TCI, slated to be acquired by AT&T, owns about 40% of @Home. In August, TCI demonstrated continued support when it bought 800,000 shares, or 32%, of @Home's 2.5 million secondary offering at $46 per share.

Beyond high-speed Internet access based on broadband cable modems and -- take a deep breath -- hybrid fiber coaxial cable technology (can we say "barrier to entry?"), what does @Home offer?

Services and the Serviced...
@Home provides original editorial content by subject, including news, sports, entertainment, and finance. Like AOL, it groups content by channel, breaking channels out for shoppers, game players, children and, perhaps eventually, Fools. At Home is already signing major advertisers to its content (more on that in a moment).

The company has three business segments creating its revenue. They are @Home, @Work, and @Media.

1) @Home provides everything the Internet enthusiast (or beginner) could desire in Internet access at the ol' homestead. The service provides personalized Web access to news, local weather, sports, stock quotes, local dining information, and more. This is called @Home Assistant. Among other services, there's also @Home Experience, which includes digital audio, high-speed multiplayer gaming, real-time news and entertainment, and interactive shopping. There over 210,000 @Home subscribers. This segment should account for 60% of next year's revenue.

2) @Work offers Internet connections for businesses (called @Work Internet), as well as connectivity for remote users and corporate Local Area Networks (called @Work Remote). The average @Home subscriber creates $40 in monthly revenue, while the average @Work account is worth $900 to $1,200 per month. The company has sold over 1,600 @Work accounts. @Work should haul in 30% of 1999's revenue.

3) @Media is the business wing of @Home, creating advertising sales and advertiser-supported services and transactions. Current advertisers include Procter & Gamble, the Gap, Honda, and Toyota. Alongside those, @Home recently signed up seven consumer companies (Intel, Johnson & Johnson, First USA, Bank of America, Levi's, and Toys R Us) in a test program to create advertisements specifically for broadband, high-speed connections. @Media's revenue growth is exceeding expectations, up almost 100% in the third quarter from Q2.

And the growing numbers of those served...
@Home is expanding fast on all fronts. Its service is available in nearly 50 cities, up from 31 at the end of June. Sixteen new markets will be added by year-end, bringing its reach to 66 cities. @Home's cable partners own hookups to 60 million North American homes, and if current negotiations with Roadrunner cable services are sealed (Roadrunner is a potential competitor discussed in the Fool buy report), another 27 million homes could instantly be in reach.

Outside of these markets, there are over 25 million homes unaffiliated with cable companies in North America. Ever aggressive, @Home will offer turnkey operations in these areas. (The company even stands to gain more revenue per member from independently addressed markets.) To close this section, remember that even though @Home can reach millions of homes, only 10 million homes have been "passed" (made ready for its services). Thirteen million
homes should be wired for @Home by year-end, and 20 million by the year 2000. Once wired, a home is persuaded to subscribe.

Great Expectations
@Home should meet its goal of 310,000 subscribers by January 1, 1999, up from 147,000 six months before. From there, it's estimated that @Home will have more than 1 million subscribers by the end of 1999, and 5 million by 2001. These numbers are based on the company's quickly expanding reach to new homes and the open situation that develops as @Home enters the TV-based market.

Total revenue of over $150 million is possible next year, more than tripling this year's projected $46 million. But what about profits?

Last quarter, the company had a positive gross margin for the first time. At Home should be profitable before income taxes and depreciation next year, and -- as the Fool report shared -- management believes it could have positive earnings by the end of 1999. At Home's predictably growing revenue and declining build-out costs bode well for this. Beyond that, investors pay a premium for companies with predictable streams of revenue, represented here by
dependable subscribers paying monthly fees. At Home is an ace in this regard.

For every season, no churn, churn, churn...
How happy are subscribers? Churn (or cancellation) is incredibly low. The average Internet service provider experiences a 40% churn rate (AOL has become an exception), but At Home's churn is consistently only 4%. Management recently described this performance as "If you see it, you buy it. If you buy it, you keep it."

Need proof?

@Home is already the second-largest online service provider in every market that it has existed for over one year, with subscriber numbers that are twice that of its next largest competitor. Not only that, but the average @Home user is online 60 hours a month (as our Foolish buy report stated), or nearly three times as long as AOL users. Not surprisingly, @Home users are apt to spend twice as much on e-commerce, making advertising on @Home
twice as attractive.

Brand name poised for more growth...
Demand for service is strong enough that @Home has an installation backlog of usually one week. In order to shorten this and increase its brand and market awareness, too, @Home is working with the retail channel for consumer installations. The company now has an installation program set up in 25 retail stores, and that number should double by December's end.

An open situation...
Wildcards exist. That's good.

TV services are launched in 1999, presenting an open opportunity. At Home is also poised to work more closely with AT&T. At Home's technology is capable of Internet telephone offerings, which -- though not an immediate market -- could suddenly come into play if AT&T's acquisition of TCI is completed. The digital set-top market, telephony, and other areas make this an open situation with potential for growth beyond current expectations. Once the
groundwork of a network is laid, a company will focus on how to leverage it. At Home is still building its foundation (both its network and its subscriber base), and is only just beginning to consider the potentials of leverage.

Valuation... not as wild as it might seem?
We don't worry about near-term valuation, but heck, when we find a company leading a new, important, and open opportunity market that appears to be valued at a reasonable price, even better! Let's look.

The average cable TV subscriber is valued at $2,000 based on membership life, fees per member, advertising gained, and so on. Much like cable TV, America Online is usually valued on a subscriber-based model (we've done that here for years), but the average AOL member is only worth $1,400 because easy alternatives to AOL exist and switching costs are low (though switching costs are now
increasing, because members don't want to switch e-mail accounts, lose bookmarks, load new software, etc.).

@Home, unlike AOL, doesn't yet face serious competition in the high-speed cable Internet access market, so its members should be valued at a higher rate than those of AOL. Plus, not only are switching costs higher for @Home users, their churn is lower, their usage is higher, and the monthly revenue stream they represent is higher. We haven't seen models of this anywhere, but I feel safe valuing an @Home subscriber at about $1,700 to $1,800 apiece. (With AOL members valued at $1,400, and cable subs at $2,000, this middle number is reasonable.)

@Home has 210,000 subscribers. Multiply that by $1,800 and you get a cool $3.78 billion valuation. Look forward just one quarter (ahem, make that just one MONTH), when @Home should have 310,000 subs, and the valuation jumps to $5.58 billion. Not surprisingly, that's close to where stock is valued right now. Well, "one billion dollars close." At Home is worth over $6.5 billion now.

However, our value doesn't include @Work accounts, nor the lucrative media side of the business. The average @Work account brings in $900 per month, so its potential annual and lifetime value is obviously much higher (over 22 times higher!) than an average @Home account. When you add this value and the value of commerce and advertising, @Home's market value of $6.5 billion seemingly makes sense -- and it might not even account for near-term growth beyond one quarter or two quarters.

If @Home can reach over 1 million subs by the end of 1999, we could have a valuation of... well, I don't want to guess. The math is easy, but the stock market is another matter. Let's just say that next year's subscriber estimate is triple the number of subs estimated for the end of December. If this estimate is reached, what that would mean for the stock is anyone's guess.

To discuss Rule Breaker investing, please visit the new and very active Rule Breaker Message Board. To close, if you missed the Cash-King columns on Thursday and Friday, go back in time to read them! Therein, a former full-service broker describes life as it was when he was smiling and dialing -- he certainly wasn't focused on helping investors like you beat the market.

Fool on!

--Jeff Fischer


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