Three MSO Heads on Going Public

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After nearly a decade-long drought, four companies, including Charter Communications Inc., tapped the public markets with initial public offerings within the past six months. Three of those companies-Insight Communications Co. Inc., Mediacom Communications Corp. and Classic Cable Inc.-target customers in midsized markets. These systems all face the same problems as their larger MSO peers-upgrading systems, rolling out new products and rising programming costs-but with substantially lower revenue streams. Insight president Michael Willner, Mediacom chairman Rocco Commisso and Classic president Merritt Belisle all spoke separately via telephone with Multichannel News finance editor Mike Farrell to discuss their successes and their views of the ever-changing cable industry. An edited transcript follows:

MCN: Has going public been everything you thought it would be?

Michael Willner: And then some. I think we had open eyes doing it, but I also have to admit there were certain aspects of it that I really didn't anticipate.

I thought the process of going public would require a lot of attention and time on the part of senior management, and we would go through the process, and we'd do the road show, and we would price, and then we'd go public and go back to running our company. I didn't realize there were going to be a lot of other time pressures on us on a more permanent basis as a result of being public.

MCN: Like what?

MW: Just dealing with the Street. We have a lot of owners now. Before, we had a few trying to communicate the strategy. We never really cared about having people understand our strategies. I likely might not have granted this interview because I just didn't have any motivation to.

Merritt Belisle: It was a great experience, and I think it really improved the company's balance sheet. But with the stocks, with the sector trading off, it definitely constrains you relative to additional acquisitions. You don't want to make nonaccretive acquisitions. That part of it has been a little difficult.

Rocco Commisso: Well, I think it has positives and negatives, mostly overwhelmingly positive. We were the last company to go public. We hit the market at the right time, which has been, interestingly enough, the reason why our stock hasn't done as well.

But the positives, let me list them for you: It's given us capital. It gave us $380 million, gave us the ability to deleverage the company. It's given us over $600 million of unused lines. It's permitted me to incent employees and make this an employee-owned company.

I've decided out of my own pocket to grant options to every single employee in the company, in addition to making one-dozen executives or more direct owners of the company stock. I think it's a phenomenal thing for the employee base that they can share in the success of the company.

We expanded the investor base. We accessed another part of the capital markets, which is the public-equity markets, and it's giving us the capital to be able to continue growing, which we're doing.

MCN: The market's been going through some pretty severe gyrations.

MW: That is the understatement of the year.

MCN: Most of the cable MSOs, with a few exceptions, have been relatively unscathed. Why do you think that's so? Is this a kind of validation of the cable model?

MW: Well, you didn't have the run-up these high-tech stocks had, so I think this is clearly a market correction. But often in market corrections, stocks that didn't run up in the first place get hurt by them, but usually temporarily and less severely, and I think that's what you're seeing here.

MB: Well, I think to the extent that there were momentum investors in the cable business, that when the momentum investors decided to get out of the cable business, being one of the smaller companies and the newer companies hurt us.

RC: Yes, our stock is going down. It's gone down 40 percent or 50 percent since the IPO price. But our stock also didn't go up 200 percent or 300 percent like the IPOs of the dot-coms.

I think the markets, over a longer period of time, will come to appreciate the fact that we have cash flow, we have customers. We have above-average growth rates, and there's a high barrier to entry to our business. And I think they will understand that this is a great year and a great company and value our company accordingly in relation to what the initial public price was.

The other thing is, just bear in mind that we survived as a company without the public-equity markets for eight years. A lot of other industries without a public market, they cannot survive because they cannot access debt capital. If you don't have cash or revenue, you can't go out and borrow debt, whereas we can. Our industry is very resilient.

MCN: You're all trading below your IPO prices. Do you think it's because you're small operators and you don't operate in major metropolitan areas, or is it just because investors aren't really getting the story yet?

MW: I think our stock has reacted differently to this market than the others, and we are a smaller-capped company than the Comcasts [Comcast Corp.] and the Coxes [Cox Communications Inc.] and the Time Warners [Time Warner Inc.] of this industry, but we own systems that are more akin to the larger companies because they are very large.

We have an average headend size of 100,000 subscribers. We serve not rural, but midsized markets. Louisville, Ky., is not a small town, but it's our biggest city, so no, we're not in Chicago.

I think that to the extent the market perceives a difference between companies, they understand that this company is made up of systems that appear more like the larger-capped companies. I think the rural strategy is a good strategy, as long as you pay the right prices, which I think both of those guys [Belisle and Commisso] did. So I think they're taking a beating in the market, but it's probably unjustified.

MCN: What is your ultimate plan for services like digital cable, video-on-demand, high-speed data and telephony? Can you elaborate on rollout schedules or anything like that, and what kinds of returns you're looking at?

MW: For the existing company-excluding the systems we just announced in Illinois that we were acquiring-the rebuilds will be completed essentially by the end of this year.

We are now in the process of aggressively rolling out on a market-by-market basis our advanced digital product and our high-speed-data product-@Home or Road Runner, depending on the market.

We recently announced a joint operating agreement with AT & T [Corp.] for the delivery of voice telephony, which we expect to begin rolling out by the end of this year in the first market or two. We haven't yet chosen the market, so I can't give you a response to that yet.

In 2001, we will be aggressively rolling out voice telephony throughout the company, and we will be rebuilding and launching the advanced digital and high-speed-data products in Illinois as we bring our systems up to the same standards that we are completing this year at the rest of the company.

RC: We rolled out digital to more than 30 percent of our subscriber base in the past seven or eight months, and we expect to be over 50 percent to 55 percent by the end of the year. It's been a great product and generally one the consumer wants. It's generally the consumers who are willing to spend more money-they want more choice, and they don't mind paying more for it.

On high-speed data, we've got the deal with ISP Channel, and we launched in all kinds of markets. We expect to be able to launch by the end of the year to more than 40 percent of our subscriber base.

In terms of video-on-demand, we are in discussions, and we have said to the markets that 1999 was a year of launching high-speed data and digital, which occurred in the latter half of 1999. The year 2000 is the year of interactivity, and we're dealing with a number of people to see who we're going to go with, including VOD and developing our telephony strategy.

I think beginning in the year 2001, we would have a telephony strategy in place and be able to begin generating some revenues. I think we have many options. It's a question of do we do switched telephony? Do we do IP [Internet protocol] telephony? Do we become a CLEC [competitive local-exchange carrier]?

MB: Well, we've been watching what [Insight has] been doing, quite frankly. We've been evaluating and we will, by the end of the year-based on the technology choices and the economic models that we're able to see, what other people have done-go from there.

On the high-speed-data side, we're partnered with HSA [High Speed Access Corp.] in many markets, and we are aggressively rolling that out. We want to have a lot of high-speed Internet customers. That's something we're working very hard on.

On the digital side, rolling out AT & T's HITS [Headend in the Sky] product gives our customer base a near-video-on-demand alternative. And once we are able to determine that there's an economic model and a technology choice that we want to make in the video-on-demand side-that decision hasn't been made. We'll look at that later in the year 2000.

On the telephony side, we would look at an IP-telephony strategy over the long haul. We think that technology needs to get proven up. There are a lot of things that need to get fixed there. So we will examine that as it becomes available.

MCN: Cablevision Systems Corp. president Jim Dolan said at a recent conference that operators should look to get gross revenue of $500 per month, per customer. What did you think when you heard that? Is it realistic?

RC: I don't believe that. Clearly, I stated that I think making statements like that lead some crazy people to go out and invest money, thinking, "I can get a piece of that."

We're very happy if we could get $100. I mean, our company right now, for the first quarter, is in the $36 range, going up dramatically this year because of the new services we're introducing. And our models are based on being able to generate $60 or $70 in five years.

I'm not building this company based on the fact that I can get $500 five years down the road. If you look at a $36 rate, and you can double that $36 to $70 in five years, you're already dealing with a 15 percent compound annual growth in revenue. That's a phenomenal growth rate for the cable business.

And then from the subscriber growth itself, you can add another 1 percent or 2 percent, so you're up to 17 percent. I'll be very happy with that.

MW: I was sitting right next to him at that conference. I heard the bells and the cash register going off in my head, and I said, "Boy, I am going to be a trillionaire, like Paul Kagan said."

I think when you take all of the potential of this platform into account over more than a small handful of years, Jimmy's not off-the-wall in that statement when you start adding up e-commerce [electronic commerce] and all of the other telecommunications services that we're going to be delivering.

Our view is that we're going to get into triple digits in revenue per subscriber, particularly for the bundled subscriber who's buying multiple products from us and receiving discounts at the bottom of their bill.

We're charging $29.95 [per month] for high-speed data for @Home or Road Runner, plus, in some cases, we're leasing the modems for $15 per month if people don't want to buy them.

Our advanced digital product is currently breaking through 20 percent penetration in the nodes where we've had it launched for longer than a couple of months. The average revenue per digital customer is currently $24 per month, which is made up of the charge for digital, which is in tiers.

In telephony, the models work from a macro point of view. We originally anticipated about $65 per month in revenue and about $550 million in capital over a 10-year period to roll out telephony, including all of the subscriber devices and installation.

The agreement we have with AT & T reduces our capital by about one-half. It reduces our revenue per subscriber from $65 to about $40, but it increases our margin from 40 percent to about 70 percent.

We think it's a great model. We think it should be attractive to any cable operator. That's not even factoring in the use of the AT & T brand name for telephony, which we think is going to be a major selling point.

MB: I was there at that conference, and I started doing a little back-of-the-envelope of my own. I have a cell phone. I've got a handheld, and I've got one permanently stationed in a car. I've got cable TV. I've got Internet service and long distance and a couple of telephone lines. You start adding that up, and I'm not sure that if somebody could grab my bundle, they wouldn't be close to that number now. So I don't find it shocking.

Now what I would wonder there is also that if you look at Jim's and [Cablevision chairman] Chuck's [Dolan's] systems, the advertising component is very large. For all I know, they're making $5 in advertising per subscriber, per month. I don't know what their numbers are.

So I would tell you that the American appetite for information, entertainment and news is very large, and to sort of function in this modern world, you have to be connected.

There are a couple of paradoxes that people don't focus on. One is that in a lot of our markets, because they aren't metropolitan areas, people are more driven to be connected, as opposed to less.

The other thing is that our cost structure is much lower where we operate. So maybe we don't have $500 per month, but we have $300 per month. So at the end of the day, we wind up being a very profitable, successful company, which, in our mind, is what it's all about.

MCN: A lot of the focus in the industry seems to be centered on size. What are you doing to increase your subscriber base? Is it harder to make acquisitions now? The available pool is dwindling. Do you have a target number for the ultimate number of subscribers you want?

MW: There's a school of thought in this industry that a company can run very efficiently in a 2 million-subscriber range. As you get much bigger than that, I think some of my colleagues in the industry have probably experienced this. You start to inevitably have to layer on management, and that makes it different.

I'm very comfortable. Besides, when we close in Illinois, we'll be at 1.5 million subscribers. I don't feel compelled to grow. I'm not afraid to grow more, and we'll certainly look for opportunities to grow, but we're at a point where we can run very efficiently.

The systems are very, very tightly clustered. We have basically four major states that we're in. Three of them essentially have 450,000 subscribers in them. And those are good, tight operating entities.

I don't think you have to be at 5 million or 10 million subscribers, except for the buying power, which we have anyway because of the relationship with AT & T. So we don't lack that.

RC: We're growing. If you look at our numbers, last year, we grew at 1.8 percent. I think we're comfortable, and our models work, with a growth rate in the 1.5 percent to 2 percent range per year-organic growth, that is.

There should be no doubt in anyone's mind that satellite is growing at a much faster rate, so they've got to be stealing some subscribers from the cable business, or from the cable business' potential growth.

I think all of us, as we got into this business in the past five years, in our models, we didn't go out and project 10 percent or 20 percent subscriber growth. Our business model is based on the fact that we can do extremely well if we can grow our subscribers at a rate that exceeds the population growth in our markets. The population growth per year in the United States is 1 percent, and our company has been growing at 1.8 percent-2.5 percent in 1988 and 1.8 percent in 1999.

Our growth is better than the industry, frankly. We have higher growth rates than AT & T [Broadband], than MediaOne [Group Inc.], than Time Warner [Cable]. These are huge companies. It's a function of the markets in which you operate, what you charge and whether you have been able to deploy these services to your consumer base.

MB: We will never pursue size for size's sake. We are very interested in making accretive acquisitions. But if we're trading for 10 times cash flow, going out and buying something for 12 times cash flow is dilutive to our investor base. We certainly are looking and negotiating various acquisitions, but we're not going to sit there and do nonaccretive deals.

I would say it is tougher now. It's tougher now if you want to grab a fairly significant block of customers. So scale matters. If you have 100,000 customers, there's clearly a different pricing you're able to drive versus somebody that has 10,000.

We'd like to be 1 million [subscribers]. That's sort of our near-term goal.

MCN: Does the way valuations have skyrocketed discourage you? Do you have a limit as to how much you will pay?

MW: Absolutely, but every system is different, and you basically look at an operation and try to figure out what you can do with it, how much you have to invest in it and what your future cash flow is going to be, and discount it then.

Which is why I think there's a differentiation between the prices of larger systems versus smaller systems, because it's our view that it will be more cost-effective to launch all of these new telecommunications services in larger systems. Therefore, they are fundamentally worth more.

RC: Clearly, there's been a greater consolidation in the business, fewer opportunities. There's no doubt about that. But we're not 5 million subscribers. If we can buy 100,000, 200,000, 300,000 subscribers per year, we will do very well.

We're looking. Just this year alone, we looked at 400,000 to 500,000 subscribers. Some we passed. Some we're buying, but I'm not at liberty right now to tell you what deals I've done or not done.

From our position, there's less competition out there also from the Rifkins [R & A Management LP] and the Fanches [Fanch Communications Inc.] and the Falcons [Falcon Communications Inc.] and the Bresnans [Bresnan Communications] of this world for the assets I want to buy.

So because there aren't as many buyers for one asset, maybe one or two buyers could be logical to that asset. We can get some acquisitions done at favorable prices.

The ones that we're doing that have been announced, we're buying those. We're buying 27,000 subscribers for $46 million, which is less than $1,800 per subscriber. Some assets where once you bring them into our clusters and once you do the upgrades, they become extremely valuable properties. That's the way we create value, and we have always created value in this company.

MCN: Now the other buzzword is content ownership. Do you feel you need to own content? What kind of content would you own, or would you try to develop your own?

MW: Our content play is in the digital world. Our investment in Source Media [Inc.] is a content play for that particular platform. Cable operators do not have to own content in a big way, but I think that because we're in this space and we know our business and opportunities come before us, we do tend to invest in content.

And sometimes the only way to get content developed is to have the distributors create it by making investments in the content companies. That's what happened 20 years ago, when the cable operators were funding the launches of cable networks. We then became a victim of our own success in the regulatory world after doing that.

MB: We would like to be much stronger there. In our HSA rollouts, the Internet-portal page, it's structured with a lot of local content. There are a lot of local-authored pieces that come on to the site. So we would definitely like to be more content-rich locally.

One of the issues there is either through leasing some satellite space or as you consolidate headends, it becomes much more cost-efficient to sort of provide regional local news. So that's in the future for us. Michael [Willner] is much more up to speed on that because of the nature of his clusters. He can get there quicker.

RC: No, I don't think so. That doesn't mean we don't look at everything and we don't look at opportunities that come to our desk, but this is not the beginning of the content business. We're well into it. We offer our consumers 100 channels. Even if I own one piece of content, what would it do to us?

On the other hand, we do have an investment in ISP Channel. You can view that as content on the high-speed-data side. As we get into the new services-VOD, interactivity, telephony and so on, whether it's for companies like World-Gate [Communications Inc.], Diva [Systems Corp.], Intertainer [Inc.], and so on, we are not going to open up our infrastructure with all of the money we have spent and not get something out of it. So we may get a piece of the action or an ownership interest.

On the other hand, anything that's local, things that are new-we all learned our lessons that you just don't permit people to come into your network that you spent a lot of money on. They go public and make zillions of dollars, and we make nothing out of it. It is our intent, as we introduce these new services, to have a piece of the action, too.

MCN: What about programming costs?

MW: The costs for programming are becoming astounding, and it is a very serious challenge to the industry to find a way to keep our programming costs in line so that we do not have to experience another round of regulation talks, because we have to pass these costs along.

Our approach is to make as many new revenue streams available to ourselves by offering new services to subscribers so that we can get that $4.80 [per month] voluntary rate increase out of subscribers as much as possible.

On the other hand, we, too, are raising rates and raising them in excess of inflation because we have to, because the programming costs are going up at 10 times the rate of inflation.

RC: Programming is our fastest-growing knot. I don't know how to deal with that. The programmers have done everything they can to take advantage of our business.

It's just shameful. We've never had a problem in helping people get up and make a business model out of their product. But we do have a problem with the major programmers using the U.S. cable business, using the U.S. cable subscribers to subsidize their ventures in other services or internationally.

We do have a major problem with that. We don't believe that given the growth in advertising rates the basic programmers have had, they should be charging us. I don't think they should be charging us, frankly, because they're getting a huge bulk of their dollars from advertising that we don't share a penny out of.

Somebody charges us 50 cents per month or 40 cents per month. Well, for every [one of those], you've got stations like ESPN that also get $1.50 per month. But [ESPN] also gets $2 or $3 on the advertising, so we don't share any of that. It's just not right.

For those of us that don't have any programming interest, it's a pretty obnoxious way in dealing with our industry.

MB: Programming is getting more expensive every year and, unfortunately, it creates a political problem for us to be able to pass through those costs. There has to be some realization on the part of the content community that we've got a problem because we've got stock and bond markets that are looking for us to produce results for them, and we've got programmers that are taking the price up 15 percent to 20 percent.

The local cable guy can't be the whipping boy. We're taking all of the heat, and I'm not getting paid $7 million per year to play a sport or to do a song-and-dance routine. The cable operators and the broadcasters of America are funding this stuff, and there's got to be a balance.

MCN: If costs really get out of hand, could that force you, or companies your size, to look for bigger partners or to be absorbed by larger companies?

MB: Or even to take an equity stake, yes. If you had one of the large guys that owned enough of your stock so that under their agreements, you got the programming breaks, it's significant. It's significant.

RC: That could always happen, but right now, we enjoy our independence. We have done a phenomenal job for our investors-maybe not the newer ones that just came on board, but certainly for our older investors.

I control the company, and I'm a dealmaker, too. I'm an entrepreneur, and I will now do whatever is right to maximize value in this company.

MCN: Is that something you're looking into now?

MB: We have always been very open-minded. We think some of the large companies own a lot of nonmetropolitan markets, and they can't serve as effectively as we can because that's our focus. So ideally for us, we'd like to get 200,000 to 300,000 additional customers from one of the large MSOs where frankly, they can't say grace over it, and work out an arrangement in that transaction where we got their programming discounts.

MCN: You've all been in the industry for a while. Do you think it has changed for the better or for the worse? What have we lost that you would like to see come back?

MW: I wouldn't go back for anything. I look at this era we're going through right now. The only thing I can compare it to that I can remember is 1977, when some crazy guy at the time came up with the idea of launching this antenna in space and bouncing movies off of it into peoples' homes, and it became HBO [Home Box Office], and we were running around the country mortgaging every asset we had in order to put in these 10-meter earth stations that were huge receivers.

We called them "Earth Satellite Receive Stations," and it transformed the business from being basically a community-antenna-television service to a content business. What we're doing now dwarfs that in terms of the impact to the industry. That was nothing compared to this.

RC: The '80s were a period of high growth-no competition for video services, but highly risky because the capital markets were not there as easily as they are today. And it's like the CLECs are today.

The first half of the '90s was the toughest period, with reregulation, highly leveraged transactions and the shutting down of the high-yield markets. At the end of the day, it made [Cablevision Industries Inc. chairman] Alan [Gerry] sell his company.

You know, it's one of the reasons why he sold his company, but it indirectly gave me the opportunity to go and start my business. So the fact that it was a tough period, the fact that valuations were low, the fact that there were more people trying to get out of the business gave me the opportunity to go out and start the company.

And we saw the light, frankly, before Microsoft [Corp.], [Microsoft cofounder and Charter chairman] Paul Allen, AT & T, AOL [America Online Inc.] and everybody else. When we put together our business model in 1995 and bought our first asset in 1996, that was way, way before Microsoft made its investment in Comcast. That's when this thing started taking off.

The business has changed. It's a much more competitive model that requires a different way of dealing with the business. Luckily for us, we bought at the right price, and our mantra from day one is to make sure you buy right, [get] yourself enough money to go out and aggressively rebuild these assets. I did not believe that you could go out and build a company-a successful company-without also believing in the consumer.

MB: When I first got into it, it was more construction-dominated. The shows were about what kind of trucks and three-bolt clamps and things to use. So I think the industry has matured, and there are a lot more suits, so to speak, in the industry, and that's been a change. And some of that, when you start getting driven by lawyers and accountants, it's not for the better.

I think the other thing is that the cooperative mutual gains between the programmers and the operators used to be, "Let's launch this. Let's build this network. You know, CNN [Cable News Network]. Now we're launching something else." That's gone away. They are companies with net income, and we are companies with huge infrastructures that don't have net income, but they want more all of the time. So those are two changes.

A lot of that was inevitable. I think it's the speed with which initiatives are undertaken, digital being a prime example. What was the industry doing when it allowed DirecTV [Inc.] to come up with a digital product? Who was talking to our suppliers?

Two areas of leadership that have been the most sorely lacking are our efforts-our taking a couple or three extra years in terms of getting up to speed on the digital side. And the other thing is our [public relations] in Washington, D.C. It's been poor. It's gotten a lot better. Once [former National Cable Television Association president] Decker [Anstrom] came on, it had gotten better.

MCN: Do you think that with those changes, the industry has lost the camaraderie between cable operators that it used to have? It used to be an industry full of entrepreneurs. Now you've got some really big corporations involved.

MB: Yes, that was part of that speed. If you sat down with [Liberty Media Group chairman and former Tele-Communications Inc. chairman and CEO] John Malone and you said, "Look, you've got these [properties], and they don't make a lot of sense for you," boom-it happened.

MW: Even some of the entrepreneurial companies are now really big companies. Sure it's changed. It's a big industry now. I don't think we could have gotten to where we are without investment from the AT & Ts of the world, and there's a price to pay in terms of entrepreneurship when an industry transforms from its original founding fathers to corporate America. But every child has to become an adolescent, and that adolescent has to become an adult, and I think that's what's happening here.

RC: If you were to ask me where would I like to see change, I would like to see another 50 companies with 500,000 subscribers each somehow come back to the business. I can buy it.

You have new faces, and I miss most the entrepreneurs who have left the business. The Alan Gerrys and the [former Bresnan chairman] Bill Bresnans and the [former Marcus Cable president] Jeff Marcuses, the Fanches and the Rifkins, the FrontierVisions [Partners L.P.]. The people who were my pals, my friends and my heroes who are no longer there. I miss them.

On the other hand, it's been like that since we've known it. Yes, the [Adelphia Communications Corp.] Rigases are still around. Chuck Dolan is still around. The Comcast people are still around. Charter and [president] Jerry Kent, those guys are still around. But it's not the way it used to be in terms of having 40 or 50 quality entrepreneurs running around the industry. The number is much smaller than that today. So clearly, I miss that. On the other hand, I'm an entrepreneur, right? I'm around.

MCN: So now you're seeing AT & T and investors like Paul Allen get involved in the industry. Allen has also annoyed some operators by investing in an overbuilder. What do you think about one of your own competing against you-especially one who has all of those resources at his disposal?

MW: This is becoming a very competitive world that we live in. When Congress passed the Telecommunications Act in 1996, it was with the express intention of creating more competition in telecommunications across the board. We supported that bill, and in supporting that bill, we supported it with our eyes open, understanding exactly where this industry was going. Why are we surprised that it happened?

The nice part about it is the last piece-local-telephone service. And once that is finished, step back from where we were. Don't use that dirty M'word, but the monopoly we owned in the cable business before there was competition-and before that competition was launched when they launched the direct-to-home business-has given way now to a competitive business in our core business.

What's that, a $30 billion business? The opportunity to go into the local phone business-which, I think, is maybe four times the size-more than offsets the risks that are in the core business. Add to that high-speed data, t-commerce [television commerce], e-commerce, all of the digital stuff that we're talking about, video-on-demand products. I'll take competition over regulation any day.

MCN: Does that mean, though, that anything goes now? Is the old "cable club" mentality-where companies had an understanding not to enter other operators' franchises-gone now?

MW: It was a bit of a club, but not much of one. You know, in the acquisition arena, we were fierce competitors with each other, and before that, in the franchising arena, we were fierce competitors in competing for new franchises. So now we're going to be competitors in some marketplaces. I don't see as big a difference from the old days as being described.

MCN: Even when you look back three, four or five years ago, if somebody said they were going to overbuild, you just laughed at them because it was so expensive to do it.

MW: It's still that expensive. The only difference is that there's money available now.

MCN: But now that you have telephony involved in the mix and a lot of the overbuilders are really talking about selling a whole bundle, does that change the economics of things?

MW: I'd rather be the incumbent cable operator in a fully competitive market where a new guy comes in and tries to sell against me, products I'm already selling, because I have a presence in the market. I have a customer base that isn't going to evaporate. It may go down a little bit, but it's not going away.

And I think that technically, we have the best platform for the bundle, which, when somebody overbuilds us and duplicates the technology platform, they don't have the incumbency. So I just think we're in the best position in that competitive world, and that's why I'm in the business.

I think it's a tough model, the overbuild model. I'm not sure I understand why all of this money is running after it. There will be markets where overbuilders will be more successful than in others because of the incumbent cable operators' ability or inability to compete. I still think it's a very risky strategy. A lot of money got invested in something called wireless cable. Where is it? Where did it go?

RC: I think cable operators understand the failed model of the overbuilder, and at the end of the day, it just doesn't make sense. It remains to be seen whether the RCN [Corp.] model works or not. The Ameritech [New Media] model and the PacTel [Pacific Telesis Group] model didn't seem to work in the past. So it remains to be seen whether any of these overbuilds work.

I don't think RCN generates any cash flow still. So we don't mind having competition, but when people try to compete, they also have to have a business motive to show them that they can make money at the end of the day.

And I just don't think that over a long period of time, maybe the second guy and the third guy-for instance, the people who buy Ameritech. Whoever may buy Ameritech's assets, if they spend 30 percent or 40 percent for what Ameritech has paid, maybe they can make money.

MB: I think overbuilding is a very market-specific issue, and it has to be pulled off flawlessly by the overbuilder. I've been in overbuilds. I've watched overbuilds, and I don't want to be in undifferentiated price-commodity businesses.

And if that's your theory, then I don't know how great a business you've got at the end of the day. Who do you sell it to? If they're successful, they're a low-price leader, and then what happens? I mean, who buys that? The public market, or does some entrepreneur come in and buy it in Austin, Texas, so that you can someday do further battle with Time Warner-a not-insignificant corporation with adequate resources?

MCN: With cable valuations where they are today, do you ever see a time when you'd even be thinking of selling out? Do you see a situation where it would be advantageous for you to be hooked up with a larger company?

MW: I'm not sure size matters that much-at least at this size. I think if we had 20,000 or 30,000 subscribers, that seems to be pretty tough. And it especially doesn't matter to us because of our buying power with our relationship with AT & T.

But we are a management team that is personally very heavily invested in this company, and our interests, I think, are pretty much in line with our shareholders' interests because of that. That means you can't preclude any possibility as an option, which we won't.

We've taken the exit door in the past. If the exit door seems like the right strategy at some point in the future, we'll walk through it again. It's not something we're relying on. We're not counting on it at all.

MCN: You guys have proven that you're not just in the market to flip it over.

MW: No, we're not flippers. That's inefficient. [There are] a lot of transaction costs in those, and no time to get a return.

The funniest thing is that on the day we went public, I was interviewed on CNBC. Somebody said, I read on the Internet that you guys would be an inviting acquisition possibility. 'I looked at him and I said, "I just went public today, and I heard that I've got a big red target on my back already." I mean, give me a chance.

The whole process of going public is so inundated with transaction fees. I mean, to think that you do it and then just walk away in a month or two.

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