It may be temporary, but McLeodUSA has shelved its plans to
challenge AT&T Broadband & Internet Services for control of Iowa's
For now, the Cedar Rapids, Iowa-based outfit is focusing on
its local and long-distance business, but it plans to revisit video at a later date,
"Have we given up? Absolutely not," McLeodUSA
vice president of business development Randy Snyder said. "We've slowed some things
down. Not because our model won't work, or because the economics aren't there, but because
about one year ago, we made a strategic decision to focus on telephone."
While Snyder dismissed speculation that the company has
abandoned the notion of competing against AT&T Broadband, some communities aren't so
sure, noting that its previously aggressive pursuit of local cable franchises has slowed
to a crawl.
Fueling the speculation was recent news that McLeodUSA's
Dakota Telecommunications Group subsidiary had also halted franchising operations in Iowa,
citing 15 overbuilds scheduled for various states this year. Instead, Storm Lake will be
the only community in that state DTG will enter in the near future.
This after DTG had looked at possible deals in Humboldt and
Dakota City -- two adjacent communities that sit 100 miles northwest of Des Moines -- as
well as Cherokee, Iowa.
The community most affected by McLeodUSA's new strategy is
Des Moines, the state's largest market and a city seemingly on the brink of issuing a
competitive franchise a year ago.
"We were down to three or four small items, and then
things didn't seem to go anywhere," city Councilman Tom Vlassis said.
"Personally, I think McLeod made a business decision that the local market was a
little too thin to support two cable systems."
At one point, officials were so convinced a deal was at
hand that they allowed McLeodUSA to begin installing 120 miles of fiber optic plant in the
city's rights of way, presumably so the company could hit the ground running once the
agreement was signed.
So that it won't be a total loss, Vlassis said, McLeodUSA
will use the new plant to deliver an array of telephone and Internet services in Des
Moines, where it already offers local and long-distance phone service to 5,500 residences
and 2,500 businesses.
"But my gut feeling is that we're not going to reach a
cable agreement," Vlassis said. "I suspect McLeod has lost interest in the
market and decided to stay with the telephone business."
Predictably, the beneficiary of McLeodUSA's pullback is
AT&T Broadband, which is already dealing with municipal electrical overbuilds that
keep popping up in Iowa. Officials with the MSO are equally unconvinced that McLeodUSA
will ever enter the cable market.
"Our sources are telling us that it's not going to
happen," said Deb Blume, regional communications director for AT&T Broadband,
which became the state's dominant MSO after its acquisition of Tele-Communications Inc.
"We hear they're concentrating on getting switches and being a phone company."
Blume speculated that McLeod ran head-first into what the
cable industry has been preaching in Iowa for years -- the fact that overbuilds are
ultimately too costly.
As proof, she pointed to a recent study by Washington,
D.C.-based research outfit The Strategis Group. Its review of duplicative wired networks
revealed that overbuilds do not generate enough cash flow to cover their debts.
The study -- based on hypothetical overbuilds modeled on
communities with 5,000, 50,000 and 150,000 homes passed -- found "little evidence to
indicate that an overbuilder can expect the business to be sustainable in the long
The results were similar even when adjusting the models to
account for presumed economies achievable by a telephone operator like McLeodUSA, which
was seeking to leverage its existing facilities.
"Basically, it's coming down to [the fact that] it
cost more than [McLeodUSA] thought it would," Blume said.
She added that signs that McLeodUSA would not follow
through on its overbuild plans were always there, including not having a representative
present when Des Moines called a press conference about its franchise. "I would have
thought people would have been concerned when that happened," Blume said.
Snyder conceded that there has been a "dramatic"
shift in the company's corporate strategy due to a desire to install its own switches in
Iowa, thereby reducing costs involved with simply being a reseller of U S West's telephone
"The cost of leasing [U S West's lines], versus what
you get [from consumers], doesn't leave a lot of margin," Snyder said. "The
customer remains on U S West's switch. Putting them on our switch means we only have to go
the last mile to get to the customer."
Snyder said McLeodUSA remains interested in the Iowa cable
market, including those communities where franchise talks stalled almost a year ago.
Also, the flagship cable operation in its hometown of Cedar
Rapids -- a community of 50,000 households -- remains under construction, and it will
expand into the nearby suburbs of Hiawatha and Marion, where the company will offer a
package of 97 cable channels, Internet access and telephone service to residents served by
That won't do much for Coralville, Iowa, where a proposed
10-year franchise approved by voters in 1998 was allowed to lapse almost one year ago,
when McLeodUSA objected to a plan that would have included Internet services in the gross
revenues used to calculate franchise fees.
"The issue has not been resolved, and negotiations
have been put on the back burner," assistant city attorney Christine Diehl said,
noting that the original deal defined Internet access as a cable service, making it
subject to the same 5 percent franchise fee imposed on video.
"Basically, McLeod has pulled up stakes and faded into
the background," she added, "but I think they're still contemplating coming back
into this part of the woods."
On Nov. 4, 1998, voters in Coralville approved McLeodUSA's
franchise by a margin of more 80 percent. Under the terms of the deal, the company had 60
days to accept. When it didn't, the arrangement was considered void, which means that a
new franchise will have to be negotiated and voted on before cable competition comes to
the community of 15,000 residents, located near Iowa City.
The situation is not as bleak in Iowa City, despite the
fact that McLeodUSA walked away from a 10-year franchise that was approved in 1998 by 87
percent of registered voters. As of last week, both sides were still talking, city cable
administrator Drew Schaffer said.
"I'd very much like to see McLeodUSA, or MCI [WorldCom
Inc.], or some competitor come in here," Schaffer said, adding that the city
continues to field complaints about AT&T Broadband's rates and programming changes.
"The business decision whether to proceed is
McLeodUSA's, of course," he added, "but we're trying to come up with a franchise
that everybody can live with. It remains to be seen if we can."
AT&T Broadband, meanwhile, is wrapping up its major
rebuilds in Iowa, including a $20 million project in Des Moines that will upgrade that
metro area to 750 megahertz.
In fact, for most of 1999, the MSO has been rebuilding
systems on its "wish list" -- a collection of smaller, rural systems, only one
of which was required to be rebuilt by the town's franchise. "You're talking about
some places where we can get in and do a rebuild in two weeks," Blume said.