Broadband warrior

Tom Jermoluk takes on everyone from America Online to the local phone company in his bid to connect with the consumer.

Published September 12, 1999 7:00PM (EDT)

Nobody in Silicon Valley better illustrates the transformation that the Internet has wrought in the technology industry than Tom Jermoluk. In 1996, Jermoluk left his post as head of computer maker Silicon Graphics to become chief executive of @Home, a new venture then aiming to wire the country's cable systems for high-speed Internet connections. Before that, Jermoluk had worked at Hewlett-Packard and Bell Labs -- a sterling risumi, but it's the risumi of a hardware chief, not a traditional media poobah.

But, in fact, a media and telecommunications honcho is exactly what Jermoluk is. Jermoluk -- known as "T.J." to much of Silicon Valley -- has turned @Home into a unique hybrid of technology and content company, buying Excite and turning the company into Excite@Home. On the content side, Jermoluk has to compete with the portal giants -- Yahoo and America Online.

Meanwhile, Tele-Communications Inc., the giant cable company that was @Home's biggest investor, was bought up by AT&T. Now AT&T is Excite@Home's leading investor, and Jermoluk is part of the most powerful telecom company of all. Jermoluk's relationship with the other players at AT&T has reportedly included more than its share of controversy. Even as he has bid to turn his Excite@Home into a media player, Leo Hindery, the head of AT&T's Internet operations, has advocated sticking to the business of building infrastructure -- "pipes" in industry lingo -- and allying with other Web portals, such as Yahoo and America Online. The debate over strategy has turned into one of the more absorbing dramas of the business world.

When you started out, @Home was seen as a technology company, whose main mission was bringing high-speed Net connections into the home. Now, especially since you merged with Excite, your business is intimately wrapped up with building content. Why do you want to be on the content side of the media business?

Two reasons. One is rather philosophical; one is economic. The philosophical one is that if you build a car and you make it with 12 cylinders instead of 10 cylinders, and so it's 10 percent faster, it's still a car, and people know how to use it. But if you make it 100 times faster, you don't use it like you'd use your car anymore. Our belief is that the content that will come down the wires in a broadband world will be very different. It's not just that you're tired of looking at that little hourglass and you'll get your text-based pages faster, it's that you'll look at content a different way. The best example of this is in the corporate world, where people do have broadband. You see distance learning and IPO road shows and whatever. Because we're inventing this technology we feel that we're the best ones to create the technological environment from the content side as well. [But] we aren't content creators. We're a partner for content creators.

The second answer is economic. Over time, long distance became a commodity. [It's becoming the same with] Internet stuff: Buy a computer and give access away, or buy the access and give the computer away. The subscription part of what we do is $40 [a month] and that will move down over time. It might be $30, it might be $20, it might be $10, one day it might be free. If it is, and you're not participating in the incremental revenue coming from those subscription clients, then your business is to slowly put yourself out of business. Why not make sure that you're participating economically in both sides of the equation? Today, most people get subscription revenue and maybe you get a dollar in media revenue. But how do you know that over time that won't be $20 and $20, or that over more time it won't be $0 and $40?

I don't think there's anyone who will argue that 10 years from now we will be making more money from subscription revenue than we do today. Given this, I want to be on the other side of the equation, I want to make some money on what people are doing by gaining access, not just on the access.

What is it that you bought when you bought the Excite portal in May?

Three years in the market. Essentially 20 million registered users, a great brand presence that they've built, a strong reach. We bought a number of years of their efforts at doing that. The value of getting time to market is that getting market share gets harder and harder. So it's not just that it could take us three years to do it, but that three years later it might take you 10 times as much money or six years to do it. If we wanted to build our reach beyond that of our own internal network, we'd have to partner with somebody.

The idea is that if you're an Excite user and you've already personalized your service and that's how you'd like to use it, and I've sent you an e-mail and say, by the way, we have broadband service now in your neighborhood, would you like to have it -- and your personalization and your Excite front end and all that -- you're more likely to do it, so it's tremendous lead generation for us. [Excite's users are] our market. Otherwise I'd have to go find those consumers. I'd pay money like AOL does, $100, $200 or more a sub to acquire them, and for 10 million subs that's a lot of money.

The original backers of @Home were the cable company Tele-Communications Inc. and the venture capital firm Kleiner Perkins Caufield & Byers. Now that AT&T has bought TCI, they're your biggest shareholder by far. Where does Excite@Home fit in the big scheme of AT&T?

We are the sharp end of the spear for their entry into the world of IP [Internet protocol] technology. Everybody, AT&T included, believes that one day all of the current modes of transmission will become IP. Data is the first [part of it]. Voice will go that way; video will go that way. People argue about the time frame, but I don't think anybody is arguing that all of this won't happen. We're a valuable indicator of where all that's going to go, and how to build that network and integrate all the back-end technologies. People see the consumer side of it, but most of the infrastructure of our company is what has happened to make it work -- the proxy servers, the regional data centers, the backbone, the regional transport centers, the IP provisioning system, the billing system. How do you build all that? That's what our company does.

Leo Hindery, the head of AT&T's Internet operations, has advocated opening Excite@Home's lines to other content companies. The disagreements between you and Hindery have been very public, and the internal debate has hit the pages of the New York Times and Wall Street Journal. How did that happen? Is that a good thing?

I fully respect the power of the Fourth Estate and its ability to bring things to light on behalf of consumers. I think it's important to have conversations and show the press where things are going. For a company to operate successfully in our kind of industry, you have to have internal discussions and debates, people expressing different opinions.

You can imagine that in an industry with as much history together as the cable operators have, there are a lot of things they cooperate on and a lot of things they go different ways on. When you come together there's going to be differences of opinion. My job, and the job of @Home, is to maximize the strategies of our partners.

Does that mean you want to negotiate it all in the press? No, and I don't do that. I don't think you'll see many quotes from me on any of this. I'll talk about it in general or philosophical terms. I don't talk about what we talk about inside our company until it's the appropriate time to express our strategy. I feel very strongly that everybody has the right to an opinion, but in the end somebody has the authority to make the decision. Once you make the decision, you're all marching to the same drummer.

Isn't the chief drummer AT&T CEO Michael Armstrong? Aren't you essentially a general in the strategy that Michael Armstrong signs off on?

In the sense that the cable industry as a whole is our chosen partner and AT&T is the largest player in the cable industry, then clearly it's in our best interest to figure out how to be in strategic alignment with their initiatives. That doesn't mean 100 percent alignment. We are not a part of AT&T; we are a public company. We have other constituencies, like Cox and Cablevision and Comcast. AT&T has a dual role: It is a partner, and an owner. We have to work with them as both things. But also they are responsible to us as an owner -- when they are having discussions with us about our strategy, they are also looking at what's best for our company, not just what's right for AT&T. So that works both ways. If we're talking about working out the strategy of our company, my relationship with Mike [Armstrong] is the same as my relationship with [Comcast president] Brian Roberts or any of the others. If we're talking about AT&T then obviously I'm listening to him, because I'm trying to figure out where they're going so I can make sure we're lined up to try to help them.

Right now, what's driving the strategic thinking of the big telecommunications companies?

What everybody is trying to do is re-create the old AT&T, the vertical AT&T. What you need is the last loop, the backbone, and the ability to offer services [like TV, telephone and Internet] across the whole thing. That's the golden goose. There are certain regulations preventing that, but they're in the process of going away. In the next three or four years you'll see a tremendous amount of consolidation as people try to put things back together.

The thing that the communications companies like is that these services are sticky. Long distance isn't sticky. You can change your service supplier every day, and nobody would know. But your local number is as sticky as it gets. Nobody wants to change that. Your e-mail is fairly sticky, too. So they're trying to tie the rest of their services to that last, stickiest step, which is that last local piece of the connection. That way you're using our services, you're using our backbone, and AT&T can come in and say, "I'll sell you a wireless phone, a permanent fax number, I'll sell you a voice-to-fax translator, I'll sell you an e-mail address, I'll sell you a local telephone, I'll sell you Internet access, an entire bundle of stuff. That's what all telecom companies will try to do.

So do you see the regional telephone companies as your biggest competitors?

Absolutely. They are the other people with wires in the home and so they are the competition. All the other stuff is noise until they figure out who they're lined up with. In the end how do you reach out and touch that final consumer? All the other stuff -- Yahoo, AOL -- is meaningless until they team up and figure out how to exploit the asset of reaching out to the final consumer. Everything else is transient. The churn rate on this stuff is tremendous. You're not going to turn off your local phone and you're not going to turn off your Internet connection when it's on broadband in your home. Our churn rate is nothing.

As a consumer, I'm not sure I like the sound of that stickiness. Why should I want it?

The way the system works now is that I have a phone number at home, a phone number at work, I have a phone number in my car, a phone number on my handheld phone and a beeper, all of which have voice mail. I have to call five different numbers to check my voice mail. I don't want to do that. That means I want to have one number. But if I have one number that's pretty sticky. I don't want to change it.

Linking all the services sounds OK to me. But why can't I have that and still be able to switch carriers without changing my phone number?

I think technologically one day that will be possible. It's not today. There doesn't exist the technology to take your number and move it somewhere else. But with IP that will happen. When everything goes IP you will have an identifying number for wherever you are in the network at any given time. As a consumer I think that would be a good thing -- but that still doesn't mean you wouldn't buy a bundle of services from someone who can offer you a bundle of things. It costs me less money, because I only send you only one bill. Bills cost a buck or two bucks each, and if I'm offering five different services, I'm probably saving eight bucks, and I can offer you a better rate.

How far ahead do you look in your planning?

The vast majority of our planning is within a two-month horizon. It's pretty rare to have the luxury of actually being able to sit back and know what this will look like in a couple of years. Just about the only time we do that is once a year we go through a major yearly planning cycle where we plan the budget for the entire year and that oftentimes causes you to reflect on where you're going over the next two or three years.

It's very different [from Silicon Graphics]. We commonly worked on projects that were two or three years in scope. When we started a new initiative it was generally within a three-year horizon to when that product line would be developed. You had six months in the planning cycle, 18 months to two years in the engineering cycle and then another six months in the manufacturing and integration. And then it would hit the market, and it would live in the market for another two to three years, and then it would be replaced by the next thing. Here, that would never work.

By Mark Gimein

Mark Gimein is a staff writer for Salon Technology.

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