Excite@Home Explores Spinoff of Search Engine

Under pressure to split its content service from its high-speed Internet access, Excite@Home Corp. has explored a series of moves that would effectively spin off the Excite search engine just two months after acquiring it for more than $8 billion.

Sources say that as part of the proposed spinoff, the Redwood City, Calif.-based company held talks with Yahoo Inc., a leading Internet search engine, about a merger with Excite.

But executives close to the companies say those talks broke off because Cox Communications Inc., a major Excite@Home shareholder, was opposed to splitting off the high-speed Internet service.

The developments underscore the turmoil Excite@Home faces as a result of a grass-roots crusade led by America Online that seeks to force cable companies to lease space on their high-speed networks to outside Internet service providers.

The initiative, known as “open access,” threatens to undermine exclusive agreements Excite@Home has to provide high-speed Internet access to the customers of cable operators, including AT&T; Corp., Comcast, Cox, Cablevision and Century Communications.

Sources say the company’s three large cable shareholders--AT&T;, Cox and Comcast, which together control 50% of Excite@Home--are not interested in merging the entire company with Yahoo because their ownership would be diluted and they would lose control. They also fear that the perception of conflicts of interest would deepen.

One of AOL’s allegations is that the cable companies are using their distribution muscle to favor content services that they own, such as Excite@Home, thereby limiting consumer choices.

Under another scenario, outlined in an article Monday in Business Week Online, Yahoo would acquire Excite@Home in a transaction worth about $17 billion.

But Excite@Home President George Bell shot down the Business Week story Tuesday, speaking at a BancBoston Robertson Stephens technology conference in San Francisco. “There is no truth to the rumors about acquisition discussions,” he said.

Bell, however, confirmed talks with Yahoo and other content providers about making their portals more accessible to Excite@Home’s 400,000 customers. “We’ve had talks with Yahoo and AOL about getting on the start page of a very powerful broadband opportunity,” Bell said.

The proposed deals would help blunt AOL’s allegations that the cable companies are discriminating against outside services.

Those charges have been leveled by AOL and other Internet service providers that rely on slower dial-up connections. They are lobbying local municipalities to force cable companies to lease space on their high-speed networks to outside parties.

Cable operators say they need these exclusive arrangements to recoup the billions of dollars they have invested in their networks to provide two-way services, such as Internet access.

Federal regulators have backed cable operators in the fight, hoping to ward off a patchwork of local regulations. But two jurisdictions--Broward County, Fla., and Portland, Ore.--have voted in recent weeks to require AT&T; to open its cable network to competitors. And several other cities, including Los Angeles, are studying the issue.

The regulatory uncertainty has hurt cable stocks, which have slipped from their 52-week highs in recent weeks. Excite@Home stock closed Tuesday at $43.38 a share on Nasdaq, less than half its June peak of $99.

The open-access debate has caused internal friction at Excite@Home.

Chief Executive Tom Jermoluk strives to build his service into a turbocharged version of AOL, with an assortment of content designed to distinguish his brand and retain customers. The purchase of Excite and IMall, an online shopping site, furthered his cause.

But AT&T; cable chief Leo Hindery would rather that Excite@Home be a pure distributor of content from a multitude of sources. Hindery staunchly opposed the Excite and IMall purchases, fearing that a deeper commitment to content would raise conflict-of-interest questions.

Sources say Hindery struck a handshake deal in January that would give Yahoo a nonexclusive prominent position on the Excite@Home home page in exchange for a fee.

That deal and similar pacts envisioned by the Excite@Home board with Disney’s GoNetwork, NBC’s Snap.com and Microsoft’s MSN portals would have weakened AOL’s case.

But Silicon Valley sources say the deal was nixed by Jermoluk and powerful Kleiner Perkins venture capitalist John Doerr, a board member of both Excite and @Home and the one who brokered the marriage.

Sources say Doerr and Jermoluk feared that the deal would undercut the Excite purchase and were incensed that Hindery was trying to make it easy for Excite@Home customers to leave the site for a competitor’s.