Ops See Swaps as Cables Endgame


Chicago -- Cable consolidation should slow down this year,
but operators will then gear up for an endgame of system swaps, according to Charter
Communications president Jerald Kent.

"By the end of this year, most [consolidation] will be
done," Kent said, speaking to reporters after a panel session at the National Show
here last week. "It's like a game of 'Monopoly' -- you buy what you
land on, trade some properties and build out your hotels, which are your new services. The
next phase is going to be swaps."

Although Kent did not elaborate on which systems his
company might swap, Vulcan Northwest Inc. president William Savoy said there were still a
few properties worth buying. Vulcan controls Charter.

"The bulk of consolidation is done, but I don't
think it's over," Savoy said. "You'll see a lot of swaps taking place.
We're in discussions with everyone. There are still a few transactions left."

Adelphia Communications Corp. chief financial officer Tim
Rigas said that in the coming years, cable operators would look to rationalize their
clusters, swapping out those systems that do not fit with their overall strategies.

But the consolidation slowdown could force out some of the
private institutions that have been financing deals.

For financial buyers, the opportunities are few. The
Carlyle Group managing director Frank Yeary said his company would exit cable, mainly
because there are no deals left to be done.

"We have monetized most of our cable holdings in the
past 12 months," Yeary said. "Clearly, this is a business where the large
operators see a lot more value in the business than the stand-alone operators."

But as North American operators begin to focus on
delivering advanced services like high-speed Internet, digital television and telephony,
private-financing firms are shifting their focus to international markets and equipment
vendors, Yeary said.

"North American cable is priced out for most private
financial buyers," he added. "We continue to be excited about the business in
Europe and Asia. We're also spending a lot of time around the edges of cable --
equipment [vendors] and companies that service the business."

Yeary added that as cable valuations climb, it may also
make the market ripe for overbuilders like RCN Corp., a Princeton, N.J.-based competitive
local-exchange carrier that offers cable and telephony in selected markets on the East and
West coasts.

"Five years from now, when you have a handful of major
players, the trades and the swaps have been done and you have $6,000-, $8,000- and
$9,000-per-subscriber valuations, I do see a situation where the cable operator says,
'I have one-half or three-quarters of a market: Why not overbuild instead of paying
$8,000 per subscriber?'"

Rigas, who has battled overbuilders in the past -- Bell
Atlantic Corp. and ally FutureVision of America Corp. unsuccessfully competed against
Adelphia in Toms River, N.J., in the early 1990s -- said cable operators still have the
upper hand when it comes to delivering a full basket of services.

"Five or six years ago, the RBOCs [regional Bell
operating companies] were threatening to come in," Rigas said. "The model we see
is that we have a better infrastructure. We have Hyperion [Telecommunications Inc.,
Adelphia's CLEC subsidiary] in virtually every one of our systems. We're taking
a part of the telephony market today."

Rigas added that Adelphia is a "big believer" in
Internet-protocol telephony, and as the technology becomes available in the next five
years, the MSO will most likely expand its telephony offerings to residential customers.

"Understand that where you have a market with 100
percent control by one group, 40 percent of that market is up for other people to take
away part of that market share," Rigas said. "With the cost savings of IP
telephony, you can go into a market with a [residential] product that is priced 15 percent
to 20 percent less [than the incumbent carrier]."

Savoy said the way to counteract overbuilders is to be
proactive and aggressively deploy digital set-top boxes.

"You have to aggressively bring new technologies to
the homes," Savoy said. "If you're going to spend $4,000 or $5,000 per
customer or better -- if you're going to pay that kind of multiple -- you have to
keep [existing customers]. That said, you're going to see more competition, and
you're going to see more opportunities for clusters to get rationalized."

Yeary, though, said that if the current climate continues,
overbuilders might become attractive targets for private financiers.

He added that the basic financial model for an overbuilder
is to spend about $500 to $900 per customer to build a hybrid fiber-coaxial cable system.
In return, they get three revenue streams -- from video, telephony and Internet. And if
they can capture 25 percent of the market, they can make a bundle of money.

"If the financial markets begin grasping onto that
business model, you're going to see more funding of overbuilders," Yeary said.