Cable Operators

Fresh Start for RCN

4/17/2005 8:00 PM Eastern

RCN Corp. has always played by a different set of rules. First, it broke the age-old rule of not overbuilding entrenched voice and video companies. Then, it showed a certain tenacity when it sought bankruptcy protection last summer but continued to launch new products, buy out partners and begin the process of crafting a new, polished image.

In the wake of RCN's recent relisting on the NASDAQ National Market — and in advance of its first financial statements in a year — this much is clear: RCN has ridden one heck of a bone-jarring roller coaster. But in many regards, it has never wavered from its original goal: to provide advanced voice, video and data services to select, high-end areas of the markets it serves and to produce the high revenue-per-customer results.

RCN: A Look Back
9/30/2004 9/30/2003
Total Revenues $121.4M $115M
Total Assets $75.4M $69.5M
Total Liabilities $1.3B $1.5B
Customers 382,231 385,694
Ave. Services/Customer 2.5 2.3
Residential Revenues
Voice $33.3M $34M
Video $54.7M $49.4M
Data $20.7M 18.7M
Adv. $1M $1.1M
Total $109.7M $103.2M
Source: RCN Corp.
Note: RCN will report new financial details April 30. The numbers in this table are historical and not a gauge of the company's present condition.

RCN's founders set out to shake up the telecom arena in 1997 when it began overbuilding incumbent operators in major markets like New York City and Boston. Within a couple of years, the overbuilder was flying high, securing franchises around the country and attracting deep-pocketed investors like Charter Communications Inc. chairman and Vulcan Inc. head Paul Allen.

RODE THE BUBBLE

In the span of six short years, RCN saw its fortunes rise and fall as the telecom and Internet businesses exploded and subsequently imploded. Investors, giddy with the prospect of making a quick buck in the telecom arena following the 1996 Telecommunications Act, threw gobs of money at RCN and other overbuilders. But the bottom fell out a few years later, and the monetary spigots dried up, leaving many telecoms — including RCN — in dire financial straits.

RCN, burdened with an untenable debt load as a result of its mad dash to build networks in as many cities as possible as fast as it could, opted to file for Chapter 11 bankruptcy last May. RCN converted $1.2 billion in unsecured debt into new equity and eliminated about $1.8 billion in preferred-share obligations, which puts the company in good financial shape, executives say. That fiscal manipulation has enabled RCN to take on every competitor it comes across, they add.

RCN's reorganization was quick. The company was out of Chapter 11 protection by the end of December. Compare that to Adelphia Communications Corp.'s restructuring, which has been ongoing since 2002. Of course, there were no accounting scandals or complex sales at RCN. Moreover, RCN's bondholders like the telecom business, and they like RCN — which made the reorganization quick and painless, says newly appointed CEO Peter Aquino.

Indeed, RCN's bondholders — now its shareholders — are so bullish on broadband in general, and RCN in particular, that they were willing to let the company buy out Pepco Communications, the Potomac Electric Power Co. subsidiary and RCN's partner in Washington, D.C., to the tune of $29 million while the company was still mired in bankruptcy.

“Pepco wanted out, and our investors were so bullish on the business and on us. They knew it made sense to own the entire market,” Aquino says. “We have the highest revenue per subscriber in the industry and our investors realize that.”

NASDAQ LISTING RETURNS

Wall Street also seems happy with RCN these days. Since the company came back to NASDAQ on March 21, the stock has stayed somewhat steady at around $20 a share. It's early in the game, but UBS Warburg LLC's top media analyst Aryeh Bourkoff believes RCN is well poised to do well in its markets going forward.

“We think the new management will focus on cost savings to build margins, and that is a positive,” Bourkoff says. “We also think they will focus on reenergizing the company. The challenges RCN faces are the same challenges it has always faced. Competition has been and will remain fierce. RCN's biggest issue has always been the high cost of entry into a market. But those costs have been written off with the bankruptcy, and that gives them a fresh start.”

Of course, the bankruptcy wasn't totally painless. Shareholders lost their equity in the company. Long-time CEO David McCourt stepped aside, and a new management team was ensconced. The board hired NTL Corp. chairman James Mooney to serve as RCN's chairman. They also convinced Aquino, who had been working on the company's reorganization, to come on board as RCN's full-time CEO. The changes have reinvigorated the staff and have given Wall Street investors something to be encouraged about.

RCN's aggressive plans to serve customers in the nation's largest cities have been pared down to the Northeast corridor for now, Aquino says. RCN has customers in Boston, New York, Philadelphia and Washington. It also serves customers along Chicago's “Magnificent Mile” and in San Francisco. All together, RCN has about 440,000 subscribers. The company hasn't released financial or customer statistics since the spring of 2004, prior to its bankruptcy filing. Its latest financial results are to be released to the public April 30.

“The Northeast corridor is priority No. 1 for us right now,” Aquino says. ”We're very proud of our operation in Chicago. And our system in San Francisco — the last one RCN built before it curbed its appetite for expansion — has ARPUs [average revenue per units] of over $100 per customer, which is one of the highest if not the highest in the country.”

Aquino admits RCN's long-term goals have shifted since it was forced into bankruptcy. “We had big plans for the West Coast,” Aquino says. “We had franchises in Seattle and Portland. We also had some systems in New Jersey, but we ended up selling those. We may sell off some more non-core assets. But we continue to look at our footprint, and we'll be opportunistic when it comes to acquisitions if the situation is right.”

HARLEM ON ITS MIND

Rather than set its sights on new markets, RCN is gazing inward. The company is actively looking for ways it can expand offerings within its existing footprint. One example: RCN has been chosen to provide voice, video and Internet services for the new Harlem Park Complex in the Bronx, N.Y. The mixed-use property will feature a 167,000-square foot office building and another 62,000-square feet of retail space. There will also be entertainment facilities and luxury apartments.

To be sure, RCN's executives expect its commercial opportunities to explode in the coming months and years. The company is offering its triple-play bundle of services to commercial customers in over 400 buildings in New York alone, including the Mandarin Hotel, ironically located in Time Warner Inc.'s new headquarters.

“RCN was the obvious choice to handle cable, phone and Internet services for a number of reasons,” said Michael Caridi, Harlem Park's developer. “RCN has proven construction expertise, an on-time delivery record, flexibility, and an innovative profit-share model.”

The bankruptcy made it difficult to sign on new commercial accounts, says Todd Narwid, RCN president of business services. But the division's growth is steadily picking up, he says, and the company didn't lose one commercial customer during the reorganization.

“The developers of Harlem Park thought they'd have to have several suppliers of telecom services, and they figured it would cost them a bundle,” Narwid says. “We offered a plan that gave them only one provider to deal with and an attractive cost structure that wouldn't cost them a lot of money. Our ability to offer voice, video and data services were key.”

RCN also agreed to host Stealth Communications Inc.'s “voice peering fabric” switch in Boston and Chicago. Voice peering, according to Narwid, allows members to establish peer-to-peer connections for voice-over-Internet protocol traffic. Users typically include businesses — competitive local-exchange carriers, cable operators and VoIP carriers such as Vonage Holdings Corp. RCN has agreed to provide collocation services as well as support services — including transport, Internet access and wholesale voice service.

“Again, with deals such as these, we become the single-source solution for customers,” Narwid says.

HIGH-END STRATEGY

Clearly, RCN is banking on its state-of-the-art network to advance its business — on both the commercial and residential fronts. “We have a tremendous network with fiber to the premises,” Narwid notes. “That gives us a leg up on all the competition. We are the holy grail of what the Bells are trying to do, and we already do it.”

UBS's Bourkoff believes RCN could be an attractive buyout candidate for the Baby Bells at some point. “They could be an attractive asset to the Bells over time because of their advanced networks,” he says. “They're expensive to build, as RCN knows.”

In the meantime, RCN continues to run its business for the long haul, and that pleases city regulators, many of which had to rejigger franchises and contracts when RCN filed for Chapter 11. For instance, local franchise authorities in Boston allowed RCN to recategorize itself as an open video system operator — as opposed to a traditional cable provider. The change gave RCN some legroom in its build-out commitments, says Boston's top cable cop Mike Lynch.

“We were concerned that all of RCN's customers in Boston might experience a disruption in service if we didn't dissolve the franchise,” Lynch says. “The new contract has language in it that puts them back on track with construction when their finances allow. But in the meantime, existing customers are ensured service.”

RCN continues to tweak its video product, although executives admit the service has become a commodity that is difficult to differentiate.

Most recently, RCN moved The Golf Channel, the Independent Film Channel and Outdoor Life Channel to digital from analog. At that same time, The National Geographic Channel was flipped from digital to analog. Craig Wertz, RCN vice president of video products and programming, says the changes are being made to make more room for HDTV channels coming down the pike at an increasingly breakneck speed.

Video may be hard to differentiate from the competition, but it still remains one of the most emotional purchases customers make, Wertz says.

“We've always sold the triple-play bundle, but phone service is not an emotional product,” he says. “People just expect it to work. Video and Internet are a bit different. They have more innovations, and there are more opportunities to appeal to different customers' tastes and needs.”

STILL ADDING SERVICES

Like other MSOs, RCN continues to roll out new products and services in both its video and Internet divisions to stay ahead of the competitive curve. Chapter 11 bankruptcy protection didn't stop the company from rolling out video on demand and digital video recorders last summer. Nor did it hinder the launch of an online interactive games service and interactive movie service.

RCN also added a new level of Internet service to its arsenal by offering a 10-Mbps service on top of its 7-Mbps product. The faster Internet access service is free to customers that take all of RCN's products. It's an extra $10 a month for those taking fewer services, according to Elad Nafshi, vice president and product manager of Internet and phone. And the innovation hasn't stopped since RCN emerged from bankruptcy. RCN also introduced WebWatch, an Internet-based security product, in Boston earlier this year. Nafshi expects the service to roll out in other RCN markets later this year.

Like other triple play providers, RCN is also exploring the idea of creating a grand slam offering by adding cellular service to its mix of circuit-switched voice, Internet and video offerings. Yet no deals are imminent, Aquino says. “We have to focus on operations right now,” he says. “We can't focus too much on big medicine. My job is to hit our targets, and we're off to a good start.”

November