Cable Vet Vaughn Builds an Overbuilder12/03/2000 7:00 PM Eastern
James Vaughn knows he's probably persona non grata in the cable business these days. The former chairman of FrontierVision Partners L.P. now heads up Western Integrated Networks LLC, a Denver-based start-up that plans to overbuild some old friends.
"I've been on both sides of the scenario," said Vaughn, who faced overbuilders in Elbow Lake, Minn.; Clinton, Ind., and Toledo, Ohio, during his days with Triax Cable.
"But I've always believed it's better to be the insurgent than the incumbent."
Surprisingly, it took less than a year for WIN to sign franchises in lucrative markets like Dallas, Houston and Austin, Texas, as well as San Diego and Sacramento, Calif. On deck are Los Angeles, Seattle and Portland, Ore.
The company's first customer will come online sometime next year in Dallas, where operators must begin offering service within six months of obtaining a franchise.
"Originally, we thought that if we worked real hard for a year, we might secure two franchises, covering maybe 1 million people," Vaughn said. "Instead, we have seven franchises in seven western cities, 3.5 million people under contract and 5 million expected by the end of the year."
A company's expected success can often be measured by the confidence of its investors. So far, WIN has raised $830 million in two rounds of private-equity financing, reeling in such Wall Street icons as J.P. Morgan & Co., Madison Dearborn, First Union Corp., Providence, Columbia Capital and The Blackstone Group.
It's an indication of the market's faith in Vaughn, who in 1995 borrowed $500,000 to launch FrontierVision. When he sold out to Adelphia Communications Corp. in 1999, the company had over 700,000 subscribers, making it the nation's 15th-largest MSO.
He then resurfaced earlier this year as head of WIN, where the mantra is to "deliver on the promise" the cable industry never kept.
Timing was critical to the company's success. It appeared on the scene at a time when the words "choice and competition" had become part of the industry's lexicon.
Company officials continuously stress that they're planning a "data network," a dedicated fiber-to-the-home system capable of delivering lightning-fast speeds of 10 megabits per second, both upstream and downstream, while also providing video and telephone services.
As such, they expect to out-perform incumbent operators in each of their markets, arguing that cable's shared hybrid-fiber coaxial networks are unable to maintain their speeds as additional subscribers hop on the system.
"It's like a giant party line," said WIN president and CEO Frank L. Casazza.
Not surprisingly, the markets chosen are among the nation's most lucrative. They're also among the best-defended. The competition reads like a who's who of the cable industry, including AT&T Broadband, Time Warner Cable and Cox Communications Inc. Vaughn dismisses the notion that all overbuilders are fly-by-night artists angling to sell to the incumbent sometime down the road. His own plan is to "exit through the market" by taking WIN public sometime in the next four years, thereby allowing investors to "get liquid" and realize the value of the company.
By contrast, Vaughn always planned to sell FrontierVision, and would warn each new employee "not to plan on retiring at FrontierVision."
"But I don't need to sell this company," he said. "So we'll take it public, make it an on-going concern that people who built it can enjoy, and I can gracefully fade away."
Meanwhile, despite arguments that no overbuild-private or municipal-has ever succeeded, one analyst believes some industry newcomers have a chance, depending on how well they're financed.
"The ones like Western Integrated, that are fully funded, have a shot," said John Mansell, cable analyst with Paul Kagan Associates. "The ones who aren't may be in trouble, because the market seems to be closing."
Another indication of an overbuilder's chances are the names on its investor list, Mansell said. In WIN's case, that includes The Blackstone Group, First Union and J.P. Morgan, entities that have invested in more than one overbuilder.
"It clearly says that some of these new companies have viable business plans," Mansell said.
Casazza said there's more to WIN than an Internet protocol-based network capable of tapping into three revenue streams. There are also its "go-to-market partners." There's Bechtel Corp. building the networks, Anderson Consulting integrating all the billing, customer care and management support systems, and Scientific-Atlanta Inc. delivering 10,000 set-top boxes per market, per month.
However, at the end of the day, execution on the customer-service side-where traditional cable operators have dropped the ball in the past-as well as smart marketing will mark the difference between success and failure, Casazza said.
"Quality-of-service is not very expensive," he said. "It's more of a mindset."
The job of satisfying the customer will fall to vice president of customer care Matt Zuschlag, who said that by emphasizing technology, incumbent operators have moved away from "the core blocking and tackling."
BUILDING A BACK OFFICE
"There's no rocket science to keeping customers happy," he said. "It's committing to do what you said you would do."
At Western Integrated, the plan is to create a back-office operation that features a single, end-to-end solution allowing customer-service representatives in one location to access the records of a customer anywhere in the country. If necessary, that same CSR can schedule a service appointment without the customer being aware that he's talking to someone perhaps thousands of miles away.
Zuschlag expects to have a leg up on competitors like AT&T, which is struggling to integrate the various customer service operations it inherited with its acquisitions of Tele-Communications Inc. and MediaOne Group Inc.
"It's going to take a massive convergence to get all that information on one platform," he said.
In the meantime, Western Integrated will build customer care centers in each of its markets, with sufficient staffing to ensure that in-bound calls reach a live person.
"When I have a problem, I expect somebody to pick up the phone, answer my question, take responsibility and handle it," Zuschlag said. "I don't want to go through menu options 18 deep to get a live person."
The key on the marketing side will be personal contact. As individual neighborhoods are activated, sales people will offer laptop presentations in the consumer's home, said William Brovsky, vice president of sales and marketing.
"It's the personal touch," he said. "It's comparing what the consumer is getting today against what we can offer.
"It's higher cost, no doubt. But you get a concise presentation and the consumer knows exactly what they're purchasing."
A big marketing tool will be a bundled package priced anywhere from $40 to $50 below the competition, Brovsky said. Research in the markets WIN has targeted found that up to 70 percent of consumers would be willing to switch service providers, he said.
Because it's cheaper to build cable networks than it is to acquire them, CFO James M. Kane estimated that WIN needs for only 20 percent of consumers in a given market to take a single service to be viable there. "But we think customers will take more than one service," he said.
Let's hope so, says one industry expert.
An overbuilder's success rests on two factors: a flexible business model that doesn't count on every subscriber spending $150 a month for a bundled package of voice, video and data services, and speed to market, said Michael Goodman, senior analyst with the Yankee Group, a Boston-based research outfit.
Goodman cited RCN Corp., a New Jersey-based overbuilder that has already launched service in Boston, the San Francisco Bay area and Washington, D.C. RCN's customer numbers at the end of the third quarter showed 239,000 video, 113,000 voice and 52,000 data subscribers.
"So there is no magic bullet that says that just because you're offering 'the bundle' that everybody is going to take it," Goodman said. "You need flexibility, because just as consumers don't want their cable operator dictating what they can have, they don't want an overbuilder dictating to them, either."
WIN will soon know if its strategy is going to work. Construction has begun in Sacramento, where a ratio of 60 percent aerial and 40 percent underground plant puts the cost at $90,000 per mile, or $1,000 for each of 452,000 homes passed, Kane said.
COMPANY 'SEEMS REAL'
The company will be targeting some 200,000 Comcast Corp. customers in a town where smaller service providers have in the past only wanted to serve small pockets of the community. All faded away just as quickly as they appeared.
"In the past, the typical overbuilder didn't stay long," said Diane Graber, Sacramento's administrative services officer. "Some left without ever putting a shovel in the ground.
"Western Integrated seems real, and is the first to want to serve the whole community. This is going to be the first all-out competition that we'll see."