Excite@Home Looks Dysfunctional; Drilling Schlumberger

Excite@Home (ATHM)

Jim: This outfit was originally known as @Home, until it bought Internet portal site Excite not long ago. And now, Mike, Excite

@Home is somewhat of an interesting animal out there in the Internet world.

Mike: Yes, it’s a camel. And thanks for that straight line. This is the quintessential company designed by a committee.

Jim: Yikes! And I was going to be charitable and just call it a hybrid.

Mike: First, though, let me make full disclosure. I’m an @Home subscriber, which means I get my Internet service at home from @Home, which provides high-speed broadband Internet connections via my cable television system.

Jim: So when you want to go on the Internet you don’t dial up a phone number, it just comes on to your computer.

Mike: Exactly. And it’s on permanently, as my cable hookup is permanently on my TV. If I want to go Web surfing I don’t have to wait. The pages appear on screen at lightning speed--and let me just tell you, I love my @Home. There are communities that have had problems with @Home because of slowdowns and brownouts, but I haven’t experienced that (yet).

Jim: And what do you pay a month?

Mike: Forty bucks, so it ain’t cheap. But to me it’s finally turned the Internet into an indispensable service. Movie times? I click on the screen. Traffic conditions, the latest news, you name it. It’s a dramatic improvement.

Jim: Fine, but what about the stock?

Mike: Uh, well, that’s a different story. Maybe the best way to deal with this is for me to give a quick rundown of this company’s history.

Jim: Good idea.

Mike: @Home was created by a bunch of venture capitalists in Silicon Valley, who hired some technology experts to figure out a way to pipe high-speed Internet access through the TV coaxial cables going into people’s homes. Then they lined up a couple of dozen cable companies that owned those cables, and put the two groups together.

Jim: In fact, one way of looking at the company is that it’s in partnership with those cable companies.

Mike: Actually, it is majority-owned by these cable companies, the chief among which is AT&T.; Now, eventually one of the other ventures that these venture guys were involved with was having trouble. That was Excite, which was lagging behind Yahoo and some other portals. So they engineered the Excite-@Home merger. So now we have this camel, and that’s the problem with this company.

Jim: How so?

Mike: The techie guys believe very strongly that providing high-speed data service to homes is not a business with a future of high profit. High-speed connections are going to become a commodity--that is, they’ll eventually get very cheap. There’ll be a lot of competition from telephone companies and satellite companies and who knows what.

Jim: They’ve got a point. Everybody and their brother is talking about offering that service.

Mike: So instead, the techies believe the formula for growth is to provide content--information, entertainment, etc.

Jim: Which is what Excite was trying to do, too.

Mike: Of course, the problem with the content guys is that they have no idea what’s going to make money on the Web. Their notion is to try every damn thing. They’re going to throw every peanut-butter-and-jelly sandwich at the wall and see what sticks, or at least what leaves a stain.

Jim: For example?

Mike: Excite@Home’s last brilliant idea was to go out and agree to buy a company called Blue Mountain Arts.

Jim: For a price that still makes my jaw drop.

Mike: Of course, it paid with Excite@Home stock, the real value of which is anybody’s guess. Blue Mountain Arts is not only a company that made no money, it was a company that had no revenue, because it was all about letting people send electronic greeting cards to one another for free.

Jim: And Excite@Home paid only about $788 million for it.

Mike: Yeah. Cheap at half the price. My point is that there doesn’t seem to be a basic business plan on the content side.

Jim: Small wonder that the stock is down about 40% since it peaked in early April, to the high-$40s. Now, we should note that the company plans to create a “tracking stock” that will reflect its content business. But what that will be worth, and how it will impact Excite@Home’s price, is also anyone’s guess.

Mike: And don’t forget: The @Home service itself depends on contracts with the member cable operators, which start expiring in 2002.

Jim: And there’s no guarantee that Comcast or Cablevision or what have you is going to decide that they can’t provide this service to customers just as well as they can through @Home. Not only that, but AT&T; just announced a tentative deal with Mindspring, an Internet service provider, that could give Mindspring customers access to AT&T;’s cable lines--possibly cutting @Home out of the loop. But would you consider this stock on the basis that it’s gotten pounded in the last few months?

Mike: I have real concerns about the long-term course of this stock. Now I’ll say again--because Tom Jermoluk, the chief executive, might be listening--that the service is fabulous. I’m glad I have it.

Jim: But not the stock.

Mike: Excite obviously is counting on its new tracking stock becoming the focus of the usual Internet mania. But I’m sorry, I never bought that mania before and I don’t buy it now, though I may go down with this ship.

Jim: I’m with you. Excite

@Home’s Internet service will grow--it has just reached 1 million subscribers this year. But it has to share those subscriber revenues with their cable partners, and so it doesn’t even get to keep all of that growth.

Schlumberger (SLB)

Jim: Here’s one of the grand old names in the energy business.

Mike: And, incidentally, an elocution teacher’s spot quiz.

Jim: Right. Your first instinct is to say Schlumberger as in “hamburger,” but actually it’s pronounced “Schlum-ber-zhay.” More to the point, it’s the industry leader in the oil field services industry.

Mike: It doesn’t produce oil or natural gas; it produces and supplies the equipment the other guys need for exploration and drilling.

Jim: Exactly.

Mike: Schlumberger is sort of like the Cisco Systems to the oil industry’s Yahoo.

Jim: Uh, OK. Schlumberger is a leader in providing rigs and drilling equipment and a variety of other services to the world’s oil giants.

Mike: Actually, this is fast becoming a technology company.

Jim: That’s true. Schlumberger has been working hard to depend less on its mechanical equipment and more on its cutting-edge technology to help energy companies become more efficient in getting oil and gas out of the ground.

Mike: And this is a good sign for Schlumberger, because the low-tech business of providing drills and rigs is becoming a commodity--our word of the day.

Jim: Not only that, it’s a business directly linked to the price of oil. So Schlumberger is trying to smooth that out by peddling its technical know-how. But for all of Schlumberger’s assets and leadership, I wouldn’t buy its stock.

Mike: Really? I’m shocked. I would. But you’ve got the drill, so spin with it.

Jim: Look, one could argue it’s a buy right now, because oil prices have hit their highest level since the Persian Gulf War in ’91. And if they stay in that area, they’ll prompt oil companies to do more exploration. That’s good for Schlumberger.

Mike: So what’s the problem?

Jim: That I see Wall Street discounting that theory. I mean, oil just eclipsed $26 a barrel, and you know what Schlumberger’s stock has done? It’s dropped nearly 15% in the last two weeks. Where’s the logic?

Mike: You want logic from the stock market? That just makes it more of a buy.

Jim: Not to me. I’m thinking oil could hit $30 a barrel and I’m still not sure investors would bid Schlumberger much higher.

Mike: I disagree. Wall Street will come around, and the momentum is on for Schlumberger. And if oil prices stay where they are or go higher, as many expect they will, it all plays into Schlumberger’s hands.

Jim: And if they don’t? Look, another reason I’m neutral on Schlumberger is that, even with the stock’s recent decline to the high-$50s, it’s still selling for 55 times its expected ’99 earnings per share. A 55 multiple for a dirty, greasy oil-service outfit?

Mike: You mean for a gleaming high-tech outfit.

Jim: Please.

Mike: You know one man’s grease is another man’s lubricant.

Jim: What? Look, the bulk of its earnings still come from oil services, not its newfangled technologies. So I’d pass for now because the stock is overpriced.

Mike: Sorry, I see Schlumberger and other service companies benefiting big time from this up cycle in oil prices, and Schlumberger more than anyone.

Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book, “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

Excite@Home

Monday: $49.00

Schlumberger

Monday: $58.19