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Bankrupt Excite@Home will cease operations in 90 days, with the expiration of stopgap funding agreements made Monday to keep the Internet service going, according to a source close to the negotiations between the company and its cable partners.

AT&T, meanwhile, announced Tuesday that it is dropping its $307 million acquisition bid for Excite@Home. The move comes after Excite@Home shut down service to AT&T in the wake of a bankruptcy court hearing last week.

On Friday, a U.S. federal bankruptcy judge ruled that Excite@Home could stop service. The company's creditors wanted to shut down the network to put pressure on its cable partners and potential buyers in an effort to get better terms on contracts and a buyout. But now, with AT&T dropping its bid for the Internet service provider, the gambit appears to have produced mixed results.

Excite Nets Extra Cash

By threatening disconnection, Excite@Home managed to squeeze $355 million out of its partners, which came up with the money to help keep the Excite service going.

Two of the largest partners--Cox Communications and Comcast Cable Communications--provided the largest share of the payment to ensure three more months of continued service. Now, Excite@Home has decided that once that three-month period is over, it will stop services, according to a source close to the talks.

"The company has hard assets that can be liquidated, individual pieces of the technology," says Lydia Leong, an analyst from Gartner. "They have technologies that might be valuable to someone.... But I don't think it will be a lot of money."

AT&T Walks Away

After Friday's bankruptcy court hearing, when AT&T neither raised its acquisition bid nor came up with additional cash to help the failing service provider, Excite@Home made good on its threat to cut off 850,000 of AT&T Broadband's cable Internet subscribers. Now, AT&T has decided to withdraw its bid to buy the company.

Guaranteeing uninterrupted service to its customers formed a major part of the reasoning behind AT&T's acquisition bid in the first place, says Eileen Connolly, an AT&T spokeswoman.

"The $307 million wasn't [just] for routers and switches," she says, noting that AT&T is building out its network infrastructure. It has already begun moving its subscribers who formerly used the Excite@Home network to its new network.

A source close to the negotiations said that AT&T had been asked to pay $125 million for continued service--and had agreed in principle--but creditors would not provide suitable service guarantees to ensure that Excite@Home continued operating.

What remains unclear, according to the source, is whether the other cable companies that provided the $355 million face the risk that Excite@Home creditors will go back to bankruptcy court soon anyway, get the service halted again and pocket that money.

Angry Customers

Excite@Home's moves have already begun to burn bridges with subscribers.

"I'm going to start looking into DSL [Digital Subscriber Line]," says Brian Horsfall, a systems analyst in Des Moines, Iowa. "It's not as fast, and I'm not sure if it's as reliable, but e-mail has been a real problem" with Excite@Home, even before losing service temporarily on Saturday.

About 30,000 of Mediacom Communications' customers in Iowa, like Horsfall, lost Internet service for a few hours and e-mail for a bit longer over last weekend--collateral damage from Excite@Home cutting off AT&T. Mediacom acquired some of AT&T's customers around Des Moines earlier this year, and Excite@Home still had them registered as AT&T subscribers.

Just Covering Costs

Creditors claimed in bankruptcy court that the value of the deals that Excite@Home had in place with cable partners were not covering costs, and forced them to take losses of $6 million a week in operating costs.

Now, according to industry insiders, with no buyer for Excite@Home's assets, deteriorating relationships with subscribing consumers, and cable companies moving customers off the service, the creditors simply wish to salvage what capital they can, and shut the service permanently.

One cable company spokesman said that Monday's interim deal for more cash was structured in a way to pay out the Excite@Home fees over time, rather than letting the company take the money and run.

"It's possible that they could do anything ... but it's structured in a way so that they can't get all the money up front," says John Pascarelli, senior vice president for marketing and consumer affairs for Mediacom.

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