An Overbuild Showdown Against AT&T

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Sacramento, Calif. — Western Integrated Networks' local overbuild of AT&T Broadband will not only be one of the nation's largest, it also may be the most closely scrutinized.

While some overbuilders have disappeared without turning a shovel full of dirt, raising legitimate questions about who will be left this time next year, WIN is building a WINfirst high-speed broadband platform in Sacramento that will compete for almost 300,000 customers currently controlled by AT&T Broadband.

Its goal: to pirate away enough video, high-speed Internet and phone customers to silence critics who believe the network will never be completed, and generate enough revenue to continue building.

Analysts are watching closely to see if Sacramento comes in at WIN's projected cost of $1,000 for each of almost 500,000 marketable homes passed.

Why the close scrutiny? Unlike overbuilders such as Seren Innovations, which has Northern States Power Co., behind it, and RCN Corp., with almost $2 billion in backing from Microsoft co-founder Paul Allen, privately held WIN will sink or swim in Sacramento on its own.

If it succeeds, it could breathe life back into the overbuild craze that was sweeping the nation a few months ago. If it doesn't, overbuilders will have a hard time getting future funding.

The Sacramento build is easily one of the most ambitious ever, consisting of 4,000 miles of coaxial and fiber-to-the-home plant — 60-percent aerial and 40-percent underground — and a price tag approaching $500 million.

That's the problem. Even with $890 million of private equity, critics believe that if WIN does complete the Sacramento overbuild, it won't have enough money left to make good on networks it wants to build in high-profile venues like Dallas, San Diego and Seattle.

Another question is whether AT&T will be willing to forego rate increases in the area in order to put pressure on WIN, which will need every dollar it can find.

"If you were AT&T, would you sacrifice your rate increase for one year, if it meant driving out the competition?" said one former city insider familiar with WIN's plans.

That insider, who is admittedly skeptical about the project, said WIN was being overly optimistic with its per-household projections, arguing that the company's coaxial/fiber-to-the-home strategy threatens to make the project prohibitively expensive.

"When you add in set-top boxes, marketing costs and everything else, it's easy to go from $1,000 to $7,000 or $8,000 per household," the insider said.

WIN officials hold fast to their $1,000 estimate, including set-tops, marketing expenses and other factors.

COAX PLUS FIBER

WIN's plan calls for using coaxial cable to deliver video service and fiber-to-the-home to deliver high-speed data and telephone services.

The theory is that by consigning video to its own coaxial wire, it frees up enough bandwidth to deliver high-speed Internet services at speeds faster than what any residential or business customer will ever need. WIN also will be able to add additional video channels without degrading the strength of its data offering.

As for whether it can fund the project, WIN senior vice president Bill Mahon argues that the company doesn't need to build the entire network to begin generating revenues. From the beginning, he said, the plan was to spend $200 million getting the Sacramento network up and running. From there, the system will be expected to generate enough revenue to fund future construction.

"We think we'll have enough customers to maintain this level of construction, even if we don't raise any additional capital," Mahon said.

WIN does have its defenders. Bob Lane, telecommunications analyst with Boston-based research outfit The Yankee Group, stated it's not how many cities WIN plans to build, but which cities.

"It's just as good to spend that money in one market, if you're smart about the market you spend it in," Lane said. "One of the biggest risks is having too much construction going. There are more economies of scale if you have a lot of customers in one city, than a few customers in a lot of cities."

In the case of Sacramento, Lane said WIN has chosen a venue known for its younger, more affluent population. It is a technologically savvy community that continues to attract high-tech businesses looking to get away from more seismically active Silicon Valley.

Lane defended WIN's plan to use coaxial to deliver cable, while leaving Internet and phone service to travel over its fiber. With cable, which offers all three over a single wire, the signal will degrade as more channels are added. By spinning off the video, WIN will free up even more bandwidth for the more lucrative data and voice services.

"That network will provide speeds beyond what any consumer will ever need," Lane said. "It will also increase the bandwidth on the HFC wire, so you can add a lot more channels."

HANGING IN A HANGAR

The Sacramento build is being run out of a remodeled 186,000-square foot hangar at the former McClellan Air Force Base. When completed, it will house WIN's headend, a call center consisting of 160 work stations manned by customer service reps 24 hours a day, as well as administrative and marketing operations.

"We're already running out of room," Mahon said.

The facility will also act as a "super call center." If, for example, a call to the Dallas call center cannot be answered immediately, it will be routed to the Sacramento center. The CSR will have the training to handle the call without the customer knowing that they're speaking to somebody in California.

"We want to keep the number of rings down to three before you get to talk to a live agent," Mahon said.

The project is being overseen by vice president and general manager Winston Ashizawa, who came to WIN after a stint as chief information officer with the Sacramento Municipal Utility District.

Ashizawa said the speed of WIN's system would offer the convenience of having a single provider for three services.

"Our system will be able to go to 100 megabits," he said. "It's unlikely that anybody will need those kinds of speeds. And people like the idea of having a single point of contact. If you're making a big change, how many call centers do you want to talk to?"

Bernard Gibson, director of marketing and sales, said a basket of up to 300 cable channels, high-speed Internet access up to four telephone lines would generate 16-percent to 22-percent discounts compared with rivals' offers.

"That's going to be our selling point," he said. "You'll have one point of contact, one service provider and one bill."

Marketing will be deliberately low key, aimed at areas where the network has been activated. The idea is to avoid repeating the mistake Pacific Bell made when it launched digital-subscriber-line (DSL) service with catchy, widespread advertising long before it was available in all markets, Gibson said.

"They only thing they did was flood their call centers with calls from people that had to be told that they couldn't get the service," he said.

So far, construction in Sacramento has come with all the predictable headaches. Crews of up to 30 men working in the Natomas housing development have been hearing criticism from homeowners angry at having their streets and front yards dug up.

WIN was recently in the news when it fell behind on its restoration work — jobs that can be as big as repairing sidewalks that have been dug up or as tedious as removing paint sprayed on city streets to mark the location of underground utilities.

Adding insult to injury, mayor Heather Fargo ordered that WIN's construction permits be lifted until the company had caught up on its repair chores. It didn't help that a local resident had fallen into a hole allegedly left uncovered overnight, or that the mayor's mailbox has been knocked over — twice.

After a hasty meeting with City Hall, the permits were reinstated and work resumed.

"They had some early problems," said Chuck Daldorf, Fargo's chief-of-staff. "But for the last 30 days they've been great."

AT&T: WE'RE READY NOW

AT&T plans to respond to the latest competition with a fully upgraded system in Sacramento acquired in January from Comcast. Both digital cable and high-speed Internet access have already been launched, with plans for local phone service on the drawing board. The system will be part of a central California/Nevada cluster being put together that will consist of 1.7 million households and 950,000 subscribers.

"WIN's plant won't be completely finished, so they'll have to go node-by-node," said Jeff Harkman, AT&T senior vice president. "So, if you want high-speed Internet access, you can go to AT&T."

The MSO has been mining another resource by training its field technicians to answer a consumer's questions about AT&T's various services. It's also instructing customer service reps on how to "save" customers who might want to discontinue their cable service in order to go with another provider.

Observers wondered, however, why the company would launch in the Natomas area, where most residents may not have the disposable income to buy enhanced telecom service.

"This is our way of showing that we intend to build everywhere in Sacramento," said Ashizawa, insisting that it was a company decision, and not one required by the city.

Other local jurisdictions that have issued franchises to WIN report seeing no evidence that the company will not live up to agreements in those communities.

In Seattle, WIN may be the last, and best, hope for introducing competition to the local broadband market. At this time last year, it appeared that Seattle would be the first city in the nation with five cable operators in the local market.

Since then, RCN and WideOpenWest have put their local overbuild plans on hold. But with WIN holding Seattle's first-ever citywide franchise, local officials believe their incumbent operators, AT&T and Millennium Digital Media, will also have to pursue agreements covering the entire community.

"We were concerned about WIN," said Tony Perez, director of the Seattle Cable Office. "But they've been up here talking to real estate people about locations for their primary processing center. So, it looks like we're still on track. We don't have any reason to think otherwise."

The same is true in San Diego, where Time Warner and Cox Communications have divided up the local market between them, but show no inclination to compete on each other's turf.

"There's nothing that prevents them from competing," said San Diego spokesman Mark Jaffe. "But WIN's citywide franchise is going to put pressure on the incumbents."

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