Overbuilder Woes


Much to the delight of Adelphia Communications Corp., overbuilder American Broadband Inc. has scrapped its plans to overbuild the Buffalo, N.Y. area, where Adelphia is the incumbent.

Nor is ABI the first overbuilder to scale back on what were-until quite recently-expensive and bullish plans meant to bring incumbent cable operators to their knees.

RCN Corp., among the first overbuilders and certainly one of the most aggressive players, recently put the kibosh on plans to expand beyond its present markets.

And then there was Digital Access Inc., another overbuilder that hit a speed bump in Kansas City where it bailed out, citing draconian franchise terms and basically admitting that its resources were not unlimited.

The problem all three overbuilders face is a tough lending market, which has been rudely awakened to the free fall in telecom stock values. It's a woe that other overbuilders undoubtedly will be hit with in the months ahead, as they also try to secure new rounds of financing.

At first blush, this all sounds like great news to cable operators, who will no longer have to defend their monopolistic turf so vigorously or lay out capital to upgrade plant, deploy new services and price them attractively (a euphemism meaning cheap) to keep their existing customers.

After all, it was the rapid growth of direct-broadcast satellite that first forced many an MSO to really wake up and start aggressively rolling out digital cable just four years ago-and to price that service as attractively as possible, to stem defections to the DirecTVs of this world. And that strategy has worked, big-time.

Then came the onslaught from the overbuilders, aggressively bundling video, data and telephony at an attractive price. In some cases, they actually succeeded in stealing cable's customers.

Now the heat from the overbuilders is simmering down. The danger here is now that many cable operators are not feeling so strong a competitive threat, there could be a tendency to slow down deployment of advanced services.

You've really got to wonder if the cable industry would ever have rolled out digital video if, five years ago, it didn't have DirecTV Inc. and other DBS services eating away at its best customers-those with multiple premium services and appetites for pay-per-view and sports programming.

Tele-Communications Inc., now AT&T Broadband, led the charge for digital video five years ago and the rest of the industry wisely followed suit.

That strategy paid off in spades. In every survey from every organization that measures this stuff, digital video is a hands-down winner and has slowed the growth of DBS.

Likewise, would cable operators have bothered to roll out cable modems to provide high speed access to the Internet or telephony were the early overbuilders, like Ameritech Corp., not already in the game, breathing down their shoulders? You really have to wonder.

But back to the present. What many have predicted from the first day the new breed of overbuilders appeared seems to have come true: They're running short of cash to finance this risky endeavor and eventually will just pick up their bats and balls and go away.

But that's not quite the case. While many overbuilders are indeed scaling back, others--like Everest Connections Corp.-have just begun to offer a bundle of video, Internet and local and long-distance phone services in Lenexa, Kan. There, Everest is taking on Time Warner Cable and SBC Communications Corp.

And Everest has lofty expectations: It plans to reach one-fourth of that town's 15,000 residents by the end of the first quarter.

Those are fighting words, and I'm sure Time Warner and SBC are not taking the threat idly.