Excite Chello takes the high-speed road

UK internet users may be among the beneficiaries of portal company Excite@Home's decision to merge its non-US cable interests with Dutch broadband service provider Chello.

If the deal goes through, the combined company, to be called Excite Chello, would become the largest provider of broadband cable internet services outside of the US. But the organisation also plans to expand aggressively across Europe, Asia and Latin America. This means that cable TV watchers around the world would be able to use the same cable lines for high-speed internet access.

Between them, Excite@Home and Chello already operate in 15, mostly European, countries, but their joint penetration into the UK broadband market is pretty much zero, with Excite being only one of many portal options in the country.

As yet, however, Excite Chello's plans for the UK remain shrouded in mystery and have been the subject of much rumour - although a lot of it is optimistic from a consumer point of view.

But clearly, if Excite Chello wants to act as an internet service provider (ISP) and provide its customers with varying forms of content, it needs a UK partner that already has cable lines in place because it has none of its own.

Telewest tie-up?
Gossip has long linked Chello with Telewest, the UK's second largest cable operator, which is part-owned by Excite Chello shareholder Liberty Media. Telewest's own Blueyonder broadband service has hit trouble since it was launched earlier this year, having so far largely failed to expand much beyond its home counties bridgehead. An Excite Chello deal might give it a chance to make a new start, however.

But according to Scott Smith, director of internet strategy for Europe at The Yankee Group, the marked absence of any official word on such a deal suggests that clandestine talks are taking place, although they have so far come to nothing. "Somehow or other, Excite Chello will find a partner it can do business with," he says.

There is the faintest possibility that Excite Chello could team up with BT, with which Excite is already developing UK-centric portal services. And such an alliance might suit the telco because it would neutralise further possible competition in the broadband access space.

"BT's slowness in unbundling its local loop has already caused huge delays to the growth of broadband services in the UK market," says Smith. "Now Excite Chello looks like providing some serious competition and motivation to speed this process up unless BT is able to take a proactive role in its operations."

But Smith believes that it would be good news for consumers if Excite Chello is able to go it alone or find another partner. "Chello has the advantage of being able to tackle the market from other angles since it has a broadband offering not merely for copper wire but for satellite as well. This frees it up to consider all sorts of options," he explains.

Tim Johnson, principal analyst with market researcher Ovum, is a little less optimistic. "This merger would be a good thing, as far as it goes, for countries where either party has a significant footprint. Excite Chello is very gung-ho about expanding its broadband business and it would be nice to get a bit of that spirit in the UK where everybody seems to be taking such a leisurely approach," he says.

But there appear to be some minimal signs of change in the UK broadband market that Excite Chello so obviously wants a piece of - even if it remains tight-lipped about its strategy.

For one, Telewest has just cut the monthly charges for its cable modem service from £50 to £33. It is also reportedly planning to drop its one-off £50 installation fee to make its internet package more competitive against the £39.99 that BT charges for an equivalent service. So the timing could be right for Excite Chello to push costs even lower.

However, Johnson believes the fact that the UK is currently crawling in last in the European broadband race, could cost it dear for cultural reasons. "I speak all the time to people in the UK who don't even know what they are missing. They are not aware of what broadband internet access is or what it can do for them, so little has anyone marketed it to them," he says.

Bright future
Regardless of whatever deals may lie ahead for Excite Chello, or what its UK strategy might be, the company appears to be well set up for the time being.

It will be equally owned and controlled by Excite@Home and the United Group, which owns Chello parent company United Pan-Europe Communications. The United Group plans to invest $93.8m in the merged company, a figure that will be matched by Excite@Home, while Liberty Media is putting in a further $187m.

Excite Chello, which is currently valued at more than $5bn, is also looking to go public by early 2001, in a move that would raise yet more capital. Chello has now cancelled its own planned initial public offering as a result of the merger.

The new company intends to use its first injection of capital to try to boost its subscriber base from 300,000 to 500,000 in advance of flotation. It already has exclusive rights to deliver broadband internet services to more than 30 million homes with cable access and provide TV set-top box services to more than 10.5 million cable homes.

It also wants to add 10 more local web portals to existing ones in the UK, Germany, France, Spain, Italy, Sweden, the Netherlands, Australia and Japan within the next 12 months.

George Bell, Excite@Home's chief executive, said in a recent statement: "Excite Chello presents a rare opportunity to take everything that we have learned and built over the past six years, and use that expertise to accelerate the global broadband market and create an instant leader in the field."

But with that field currently so under-exploited in the UK, consumers will be hoping that Bell's words will be backed up by appropriate deeds.