Allen Taps Into CLEC World

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Paul Allen's "wired world" moved to embracecompetitive local-exchange carriers with Vulcan Ventures Inc.'s deal last week to buya $1.65 billion stake in RCN Corp.

Vulcan gets 22.9 percent of Princeton, N.J.-based RCN, aformer MSO offshoot that now competes against incumbent operators in New York, Boston andseveral other cities.

Vulcan already owned 4.5 percent of RCN, bringing its totalstake to 27.4 percent after the deal closes.

RCN gets much-needed capital to continue its costlybuild-out of fiber networks in the Boston-to-Washington, D.C., and San Francisco-to-SanDiego corridors.

RCN chairman David McCourt said the deal would bankroll RCNuntil 2003, eliminating the need to raise more capital in 2001.

McCourt has proven skilled in raising money --Vulcan's investment means RCN has raised about $4.6 billion over four years.

McCourt said RCN has about 10 percent of its network builtout already, and the company expects to have one-third of it completed by 2003.

The deal apparently indicates that Allen's CharterCommunications will offer switched telephony on its own -- the way Cox CommunicationsInc., Cablevision Systems Corp. and Adelphia Communications Corp. have -- instead ofstriking a telephony deal with AT&T Corp.

Charter also said RCN would provide telephony services toCharter's Los Angeles system. That system, with about 500,000 subscribers, could be atesting ground for other telephony launches in Charter systems.

"We think L.A. is a perfect market to bring a set offunctions to the customer first," Vulcan president William Savoy said during in aconference call with reporters. "It's going to take a lot of work to activelyput the customer on the plant."

But Savoy added that the RCN investment allows Charter toset its own telephony destiny. "We've put ourselves in a position where we alonedetermine our success or failure," he said, "We are not relying on anyone elseto deliver to us. We are doing this for our own benefit."

On the content side, Vulcan also formed Broadband Partners-- a group made up of RCN, Charter and other Vulcan investments, including ones in HighSpeed Access Corp. and Internet portal Go2Net Inc.

Vulcan said Broadband Partners will focus on developingbroadband-portal applications for high-speed Internet services.

Savoy said Vulcan wants to bring high-speed Internetconnectivity to the television set, and not necessarily the PC, adding that althoughwhatever works on the TV would also work on the PC, the latter is not a top priority.

"There are three revenue streams that drivecable's revenue: new services, video and telephony," Savoy said. "Thisannouncement should bring into focus how those three streams can be exploited. We'refocusing on TV as the point of deployment, as opposed to the PC. Through the relationshipwith RCN, now we have telephony experience in our portfolio."

CIBC Oppenheimer Corp. cable and telecommunications analystAryeh Bourkoff said the deal was a good one for RCN, but the benefits are less apparentfor Allen and Charter.

"Clearly, this is a positive for RCN, which now hassecured sufficient funding through the extent of its business plan," Bourkoff said."It eliminates the financial risk for its buildout. For Paul Allen, this is aconsiderably more risky strategy. It does give him a foothold in major strategic marketslike New York and Boston, but it is an overbuild strategy. RCN is the second or third[cable operator] in those markets."

Bourkoff believes Vulcan's investment in RCN haslittle to do with telephony -- a segment Allen has largely ignored in his cableoperations. What is driving the deal is the opportunity to expand Charter's cablefootprint and its Internet-access offerings, he added.

"I don't think this secures a telephony strategyfor Paul Allen at all," Bourkoff said. "He is almost too late to the game. Thisis very much a way to get into strategic markets quickly. And I don't think this isthe final piece."

SG Cowen Securities Corp. cable analyst Gary Farber saidthat while it is unusual for a cable company to get into bed with an overbuilder, hedoesn't see that strategy translating over to Charter.

"If you think about it, [RCN] is not that muchdifferent than some of the markets AT&T is in," he said.

Farber added that RCN's video markets will do more tocreate economies of scale for programming and other costs related to both companies'cable operations.

However, Farber does believe that RCN's telephonyofferings could one day be available in Charter cable markets.

"If the RCN strategy works, there are probablyeconomies going both ways for both companies," Farber said. "[RCN is] furtherahead on telephony, and then you have the cable side with new services. They have similarviews of the world."