RCN, WOW Pull Back But Add VOD, Tiering

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As the cable industry plods on through a year of dwindling stock prices and hot-and-cold running business segments, two overbuilders have adjusted to the times by halting new network builds to develop their existing markets.

RCN Corp., the competitive operator partly backed by Paul Allen, is trying to turn its financials around through a scaled-back focus. While the company has managed to shed $1 billion in debt since last June — and many of its business indicators have indeed improved — its stock still hovers near $2 per share.

At the end of the first quarter, RCN claimed 868,000 connections in seven of the top 10 U.S. markets, including 233,000 voice, 498,000 video and 137,000 data subscribers. Telephony subscribership was up 15 percent, video rose 33 percent and data surged 9 percent in the quarter.

The big change at RCN came in 2001, when executives realized the capital markets would be closed for some time, making expansion questionable. So the company shelved plans for new-market buildouts and focused on its existing systems, reorganizing its debt fit the scaled-back business plan.

In a deal struck with lender banks earlier this year, the company agreed to pare down its debt load in exchange for options to sell off non-core assets and keep more of the profits.

"It's a lot easier to renegotiate these kind of things ahead of time, as opposed to when you have your back against the wall," said RCN investor-relations chief Kevin Kuryla. "So we are really excited that we were able to do this.

"We think it was a good deal for both us and for the banks, because it gave us some additional flexibility that we didn't have."

Though RCN was forced to concentrate on existing markets, the results in those markets are promising, Kurlya said. So far, four systems are operating in the black, including Lehigh Valley, Pa., central New Jersey, Carmel, N.Y., and, most recently, Boston.

The Boston market is especially important for RCN because it is the first major market to turn positive — and its full-fiber network is a model for other RCN systems.

"Based on everything we have learned up in Boston, and with the bank deal behind us, we do think we have a clear path to positive [cash flow] in the next 12 months," Kuryla said.

Long-term, RCN's business model is based on getting one-third penetration of voice, video and data connections within its primarily residential customer base. RCN expects to increase its network connections 24 percent this year.

The company also is midway through a video-on-demand trial in the Philadelphia area, and "we're going to evaluate the progress in Philadelphia and determine how aggressively to roll it out across the company," Kuryla said.

RCN's network also is actively powered for telephony, so it will likely be able to add a voice offering, he added.

WOW: TIERED SERVICE

Another competitor still hanging in the battle is WideOpenWest LLC. The Castle Rock, Colo.-based company became the No. 13 cable operator in December, when it acquired the Americast cable systems and 310,000 customers in Chicago, Cleveland and Columbus, Ohio and southeast Michigan from SBC Communications Inc.

The Castle Rock, Colo.-based overbuilder has wasted little time in bringing cable-modem service to that new real estate.

In March, WOW began to roll out three tiers of cable modem service with three bundling options:

• 1.5 Megabits per second at downstream and 300 kilobits per second upstream offered at $49.95 for stand-alone service, $44.95 if bundled with basic TV or $34.95 if bundled with digital cable or Home Box Office;

• A 500 kpbs/300 kbps offering for $44.95 unbundled, $39.95 with basic cable or $29.95 with bundled digital TV/HBO;

• A 112 kbps/100 kbps service for $34.95 unbundled, $29.95 with basic cable or $19.95 with bundled digital/HBO.

Though it's still early, WOW president Mark Haverkate said the company is adding about 1,000 data customers per week. Most customers are taking the intermediate package, he said.

WOW has also ceased expansion efforts in its original Denver system to focus on its existing footprint, and there are no immediate plans to revive that expansion plan.

"We're going to wait for the markets to get better," Haverkate said. "They are terrible. So we have a lot on our plate right now, in terms of getting all services available to all customers, so that is really our first priority.

"Once that is done, it will be the end of the year, and we will look up and make a plan for next year."

WOW is also just starting to delve into telephony, using Gemini Voice Solutions' Internet-protocol system to offer a flat-rate long-distance service to a few hundred customers in Colorado. Plans are eventually to launch it throughout the entire service territory.

While times are still challenging, Haverkate said his operation is no different than any other MSO.

"We are trying to get installs up and churn down and customer satisfaction levels higher, and better performance at your call center — all of that, just the ABCs of the broadband business," he said. Competing with other operators "just raises the stakes a little bit. So your mistakes are more visible, and you have to take a more customer-service oriented stance, because they could quit at any time."

Long-time cable veteran Bruce Leichtman, now president of Leichtman Research Group Inc., isn't as enthusiastic about the prospects for overbuilders. They're in a market that's already well saturated by cable and direct-broadcast satellite, he said.

"If you are an overbuilder, there is not lot of opportunity out there except for stealing subscribers," Leichtman noted. "That obviously makes for a challenging offering.

"Are you going to do it by a price-based offering? Boy, being the low-cost provider is not a great position to be in — just talk to the old [wireless cable, or multichannel multipoint distribution system] guys, if you can find any of them."

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