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FOOL GLOBAL WIRE
by Jeff Fischer (TMFJeff@aol.com)

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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<< 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. >>


OK, we all know by now that Jeff made a math mistake and is off by a factor of 10. $210,000 x $1,800 = $378 million.

Jeff has made his reasoning clear. Valuing TCI at $1,800 per customer is what he feels is appropriate because that puts it between AOL and cable rates. I don't agree but let's accept that.

With this logic and the math error pointed out, can we then agree that Jeff would feel that ATHM is, in fact, overvalued by a factor of 10? I'd agree that something like $6-$10 is a fair valuation for this company.

-chris
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OK, we all know by now that Jeff made a math mistake and is off by a factor of 10. $210,000 x $1,800 = $378 million.

http://dailynews.yahoo.com/headlines/technology/zdnet/story.html?s=n/inter_ctive_week/technology/19981207/19981207506

This is another bad news, which sounds very similar to my experience with RoadRunner in my area. With customer ready to sign up but only able to go on a waiting list of unknown time frame into the future, there must be real technical problems in the cable modem concept.

My suspecion goes like this, cable is a big pipe of very high speed of 50 times the dial up modem but you have to share with 200 other customer on the same switch. It works fine if no other customer is on-line. When users get on, it slows down for everyone.

The solution is to add a limit of 128K, which is about 3 times of modem speed and will allow 50/3 or 16-17 customers to go at the lower speed full bore. When more people in the 200 customer group get on the large pipe, it collapses again.

Sounds just like the sorry netwrok experience I had when networking was the new thing and I had Apple talk card in PC to go on a stupid Apple network, lock up shared printer every morning when co-workers come to work and turn on just about every computer in the building.
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OK, we all know by now that Jeff made a math mistake and is off by a factor of 10. $210,000 x $1,800 = $378 million.

Yikes, and I just read Jeff's article and accepted like a blind fool.


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With this logic and the math error pointed out, can we then agree that Jeff would feel that ATHM is, in fact, overvalued by afactor of 10? I'd agree that something like $6-$10 is a fair valuation for this company.

Chris, I'm assuming you didn't read the Fool's Rule Breaker articles. So incase you missed them, just go to: http://www.fool.com/foolport/FoolPortInfoLinks.htm. and check them out. Each of the 5 principles necessary to become a Rule Breaker are listed on the right hand side of that page. @Home is not a value play and no one on this board or in our articles ever said it was a low PEG stock. It's a Rule Breaker and a potential gorilla company. Basically, the term gorilla was coined by the authors of the "Gorilla Game"; Moore, Johnson and Kippola. A Gorilla locks up a market with a proprietary technology that leads to the creation of a new supply chain & ultimately presents customers with significant switching costs. Perfect Gorilla examples are MSFT, IBM and CSCO. If interest in finding potential gorilla companies before they become large caps you may want to get a copy of that book or the Fools new Rule Breaker book coming soon. But for now just go read the Fool's rule breaker principles and I think you will understand why so many of us like the potential for this company.

Best wishes,

Spirit
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I agree that the allure of ATHM is not as a value play.
However, the valuation comparison with AOL, also not a "value play" in my book, was presented by Jeff Fischer. Given the error noted by doubleswitch, and putting aside pride, does TMF still feel as it does about ATHM given the numbers are off by a order of magnitude. It certainly gives me pause.
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<<Chris, I'm assuming you didn't read the Fool's Rule Breaker articles.>>

I've read them all. Hey, I like TMF. I agree with the general spirit of the Rule Breaker approach with the major exception of this insane concept that valuation doesn't matter.

<<If interest in finding potential gorilla companies before they become large caps you may want to get
a copy of that book or the Fools new Rule Breaker book coming soon. >>

I'm looking forward to the book. But this has nothing to do with ATHM. ATHM is already a big-cap. It's a huge-cap, in fact. It's already priced for total dominance in an industry which doesn't exist yet.

Just one comparison. ATHM has a higher market cap than Network Associates, the world's leading network security company, one of the 10 largest software companies in the world and the largest 3rd party provider to Microsoft products in the world. Network security/virus projection is still a young industry which is growing rapidly and NETA is the clear gorilla (it is in the gorilla portfolio at the site run by the authors of that book) of the industry. It will do about $1 billion in sales this fiscal year compared to $35 million for ATHM.

ATHM market cap is already bigger than several Dow stocks.

I think ATHM would make a splendid gamble if it were priced a the start-up that it is. When it already has the entire market that could ever possibly exist already priced into its stock, I do not understand the appeal of it.

After today's move, ATHM is valued over $7 billion. That's insane. I cannot see any possible scenario which has this stock trading higher in 5 years. In a few months, maybe, but this stock trades on fantasy and momentum.

How many companies in the U.S. still have a higher market cap than ATHM? A couple hundred? Maybe not even that many.

-chris
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<@Home is not a value play and no one on this board or in our articles ever said it was a low PEG stock. It's a Rule Breaker and a potential gorilla company.>

Spirit:

Does this mean that Jeff's math mistake does not matter at all?

If so, then why engage in any such "valuation analysis" of any Rule Breaker stock whatsoever?

Clearly Jeff's valuation is specious, based on the mistaken 10x factor. Can we at least agree on that?

Of course, this concession would not mean that @home is not a fine Rule Breaker choice. It simply means that such a "valuation analysis" can not be used to support the case in favor of purchasing @home at its current price level.
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Clearly Jeff's valuation is specious, based on the mistaken 10x factor. Can we at least agree on that?

Of course, this concession would not mean that @home is not a fine Rule Breaker choice. It simply means that such a "valuation analysis" can not be used to support the case in favor of purchasing @home at its current price level.


Folks, I mean neither to pick on Jeff for an arithmetical error, nor to defend him. But this is just another reason why it's important to do your own analysis. I mean, how'd you like to buy the stock because you thought the Buy Report sounded good, then discover that, oops, they made a little calculation error, and changed their minds -- before they ever bought, since they had a 5-day window! Wouldn't you feel pretty sheepish? And wouldn't we see lots of people posting irate messages about being misled by TMF?

Don't go there. Make your own final decisions and be prepared to accept the consequences of a stock that doesn't beat the market -- will you be able to handle that? Then fine.

Barracuda

P.S. I have no position in @Home and have no idea if it's a good investment or not.
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Fools,

That was my math error, in an article that was obviously of itself separate from the buy report and buy decision. I'll write of it ASAP and clear up my mistake. It has nothing to do with my opinion of the company, though. That's the same. The current valuation has about two years of growth (arguably) figured into it, if you believe in subscriber-based models (and I usually do). The stock market does try to look a few years ahead, and will continue to do so. So if things go well, ATHM will continue trade on the future expectations regarding the next two years (as the quarters roll out, investors always readjust but still look ahead a few years). More on the numbers very soon.

Apologies for any confusion my math error (which I quickly removed for the sake of other readers) might have created.

Fool on!
Jeff
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<<The current valuation has about two years of growth
(arguably) figured into it,>>

By that, I assume you mean 20 years of growth... :)

(anyone remember the Monty Python skit about the mattress salesman who overstated everything by a factor of 10?)

Is ATHM really going to have 10x as many customers in 2 years? C'mon, you gotta be kiddin' me.

-chris
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I bet they will have close to 2 million in 2 years or more
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<<Is ATHM really going to have 10x as many customers in 2 years? C'mon, you gotta be kiddin' me.>>

Darn tootin! I've been waiting patiently for cable modem access here in Tallahassee, FL for over 1½ years (since the first cable modem display in Comcast's Mall office). Well, after some e-mails, I come to find out that they expect the infrastructure to be finished by year-end and service to start rolling in mid '99. And that's in Tallahassee, not a metropolis.

In addition, I read yesterday in Investor's Business Daily that Dell and Compaq are both in a rush to offer cable modems as part of their shipping computers. First, probably, as an option and then like they are doing with zip drives.

We are at the start of a five year explosion, and ATHM is at ground zero! I only have 20 shares, because that's all I can afford. I wouldn't bet the house on it, but maybe all the furnishings!

The only things holding back the growth are 1) Building the infrastructure, 2) Glitches that will occur (like the frequently mentioned Fremont one) because this is a new industry, 3) Manufacturing capacity for cable modem boxes and 4) Enough qualified people to set up and service them (as is the problem in all technological fields today). Rock on!

Scott
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<<The only things holding back the growth are 1) Building the infrastructure, 2) Glitches that will
occur (like the frequently mentioned Fremont one) because this is a new industry, 3) Manufacturing
capacity for cable modem boxes and 4) Enough qualified people to set up and service them (as is
the problem in all technological fields today). Rock on!>>

I'd add in another factor:

5) This is a product that only a select few tech-savvy early adapters will be using.

That might change in 5 or 10 years but not anytime soon.

Kind of like laser discs or DVDs except there is much more involved in switching over to a cable modem than there is in buying a DVD player.

Maybe they'll double their customer base in the next 2 years but by a factor of 10? I think that's incredibly unrealistic.

-chris
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I'd add in another factor:

5) This is a product that only a select few tech-savvy early adapters will be using.

That might change in 5 or 10 years but not anytime soon.

Kind of like laser discs or DVDs except there is much more involved in switching over to a cable modem than there is in buying a DVD player.

Maybe they'll double their customer base in the next 2 years but by a factor of 10? I think that's incredibly unrealistic.


I disagree. This is not AOL we're talking about. We're only talking about 2 million people. Yes, for AOL to increase its subscribers by a factor of 10 in two years would be ridiculous (currently 13 million subscribers). For @Home, you're talking about going from 300,000 to 2-3 million (the lower number seems to be bandied around right now). How many people has AOL signed up in the last 6 months? 12 months? Are you really suggesting that between hardcore internet junkies like ourselves and maybe 10% of AOL's 13 million subscribers that they aren't 2 million who would switch?

Hasn't @Home increased its subscribers by a factor of 10 in the last 18 months? The first few 10s are easy. Put it this way, how long do you think it will take them to go from 100,000 to 1,000,000? Longer than 2 years? I doubt it.

Don't get me wrong, I still have doubts about a lot of things about this company, but I don't think it's going to take them long to get to 2 million subscribers. Ten million subscribers, that will be a challenge.


SiegeFrog
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As a side note, you may want to take a look at Broadcom brcm which build the chips they use in cable modems.
gd
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Chris,
You couldn't be more wrong about this one. You don't have to be tech savvy to use a cable modem. In fact it is easier to use than a telephone based modem.
Whenever friends come over I show them my cable access to the net. They are so impressed they want to get it themselves.
The broadband is easier to use, not harder. That's why it's the technology of the future.
gd
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