Tiny N.C. Telco Takes on Time Warner

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Lexington, N.C.— Three cars were lined up at the drive-through window outside Lexcom Communications headquarters here recently, prompting a visitor to ask a woman counting cash behind a counter inside the building if Lexcom also ran a bank.

“No, we don’t own a bank. They’re just paying their bills,” the customer-service representative responded.

The drive-up service is one of the small-town touches executives at Lexcom Inc. — a 109-year-old phone company that expanded into the video business in 1997 — believe distinguish their company from Time Warner Cable, the incumbent local cable operator here in Davidson County and most other parts of North Carolina.

IN THE VANGUARD

Lexcom might have given Time Warner an early taste of the level of competition the nation’s second-biggest cable operator and other major distributors will face from Verizon Communications Inc. and SBC Communications Corp., which are constructing new fiber networks to market digital video products to phone customers.

While Lexcom is using different technology than Verizon and SBC — it hung its own hybrid fiber coaxial cable plant over the same telephone poles that carry Time Warner’s video service — the ability to market cable service to telephone customers, many of whom have been with Lexcom for decades, has helped it sell video packages to about 50% of the addressable homes where it competes with Time Warner.

Lexcom counts 32,000 telephone customers in Lexington and surrounding areas of Davidson County, a blue-collar community where there average annual income is $26,000.

With 120 employees, Lexcom is one of the largest employers in Lexington. Glass-plate manufacturer PPG Industries is the largest local employer.

Lexington Furniture was the largest local manufacturer, but the company has shut down several plants in the area and now builds its furniture overseas.

“Plants that have been in business for well over 100 years shut down. They’re all headquartered here, but basically what they’ve become is distributors, because the furniture is being made in China. So that put a lot of our people in Lexington out of work,” Lexcom vice president and director of operations Alan Bailey said.

38% PENETRATION

Lexcom passes about 28,500 homes with its cable plant, and sells video programming to 10,940 of those homes, achieving a 38% penetration rate since it began offering video service eight years ago.

It also sells mobile phone service to about 2,000 subscribers through an agreement it has to resell Cingular Wireless service, and it packages video, high-speed data, and local, long distance and mobile phone service on a single bill.

Lexcom president Richard Reese, age 76, led Lexcom’s entry into the cable business in 1997.

“We felt like there was a need here for somebody else to provide cable TV. Time Warner didn’t have a good system here at the time,” said Reese, a 24-year Lexcom veteran who has spent his career at small local telephone companies, beginning with Hickory Telephone in Hickory, N.C., in 1954.

Time Warner Cable acquired the Davidson County systems from Summit Communications Group Inc. in 1995.

The big MSO upgraded the systems to enable a 78-channel programming package in 1998, later upgraded to digital and now offers digital video, high-speed Internet and video on demand.

Time Warner officials acknowledge that Lexcom has provided more competition in North Carolina, but maintain DBS providers are still what they worry about most.

“DBS operators are by far the fiercest competitors,” said D.K. McLaughlin, vice president for governmental and public affairs at Time Warner’s Greensboro, N.C., division, which encompasses Davidson County. “While they [Lexcom] compete on a very limited basis, they’re not like a DBS operator that can go anywhere at any time.”

COMPETITIVE PRICING

Nonetheless, Time Warner charges customers in towns in Davison County where it competes with Lexcom $38.80 for its expanded-basic programming package. That’s about $10 less than what Time Warner customers pay for cable in other parts of the state, where the company doesn’t compete with overbuilders.

Lexcom froze the rates for programming packages during the first five years of operating its cable service, initiating the first-rate hike, a 6% increase, in 2003.

Reese said Lexcom has spent more than $40 million to build its cable plant since 1997, and does not generate a profit with its cable business. “Hopefully, someday we will [be profitable],” Reese added.

Lexcom was founded in 1896 as Lexington Telephone, and descendants of the Harris family, one the original proprietors, remain the majority owners. Lexcom resisted a takeover decades ago by AT&T, when Ma Bell still operated a local phone monopoly, and the company operates as an independent local-exchange carrier.

Communications technology has changed dramatically since Reese first began working at telephone companies in the 1950s, when his customers would place a call by picking up the telephone and talking to a local operator who’d say, 'Number please,’ and when making a long-distance call sometimes required assistance from two additional operators.

“There was no direct-distance dialing. There was no touch-tone calling. Most everybody had a party-line service,” Reese said, describing how many phone customers shared phone lines with several neighbors who often were already using the phone when another attempted to place a call.

ANTIQUES ON DISPLAY

Remnants of those old telco days are still on display in the lobby at Lexcom’s headquarters, where phones ranging from old rotary models to new cordless handsets can be leased by customers. Its lobby also contains several desks where customer service representatives meet one-on-one with customers, and displays of Lexcom’s digital video, HDTV, ITV and high-speed data offerings.

Lexcom executives boast that they handle service calls for their video service the same way they handle customer service for their telephone operation.

Reese recalled how a customer-service representative called him after a new cable subscriber had some interference with his picture soon after the company debuted its service, which led to a late-night service call from a Lexcom field technician.

“If it’s at night, and they want it fixed, we go out at night,” Reese said.

Time Warner’s McLaughlin said the MSO wouldn’t typically make a service call to a subscriber’s home in response to a technical problem with its video service in the middle of the night, but he noted that the company operates a 24-hour customer service line in Greensboro.

McLaughlin also dismisses the notion that Time Warner Cable, headquartered in Stamford, Conn., lacks ties to the local community.

“We hire local people; we pay local taxes. It wasn’t like we were the scourge of the earth and these [Lexcom employees] were the bright shining light,” McLaughlin said.

Lexcom created its own billing system, which it operates at its headquarters. The system creates one monthly bill for all of the services that Lexcom offers — local phone, video programming, cable-modem and digital-subscriber-line high-speed data services and wireless telephony.

The company’s 24-hour customer service team works from a building near Lexcom’s headquarters that also houses a central office for the local phone operation.

Bailey said Lexcom’s biggest expense in the video business is obtaining cable programming.

While Lexcom belongs to the National Cable Television Cooperative, and benefits from some of the volume discounts on programming contracts negotiated by the co-op, Bailey said it must pay premium networks and basic-cable programmers additional fees for VOD programming.

Time Warner Cable has been able to use the leverage that comes with controlling 11 million subscribers nationwide to negotiate contracts with premium programmers like Home Box Office, a Time Warner sibling, that allow the MSO to offer HBO On Demand and other subscription VOD content at no additional cost to customers, Bailey said.

Lexcom charges premium customers an additional $6.95 monthly for access to any SVOD channel, as long as they already subscribe to the corresponding linear channel. Time Warner doesn’t charge digital cable customers any additional fees for access to VOD programming.

Customers that order a Lexcom phone card are offered free installation on cable modem service, along with monthly discounts of $1 on Lexcom’s expanded basic cable programming package. They also get $1 monthly discounts on HBO, Cinemax or Starz!, plus a 15% discount on all Lexcom Telephone products.

Lexcom also offers customers HDTV and digital video recorder services, using Scientific-Atlanta Inc. set-tops. The company also offers digital-cable subscribers access to a walled-garden Internet service that they can access with their remote controls, including daily articles from the local newspaper, weather and entertainment information, along with basic games like blackjack.

SeaChange International Inc. supplies VOD servers to Lexcom for the company’s on-demand service.

Time Warner initially resisted Lexcom’s attempts to obtain cable franchises in the late 1990s, which led to a dispute with Lexcom.

The telco accused Time Warner of refusing to allow it to hang cable lines on telephone poles next to Time Warner’s plant, and Time Warner Cable accused Lexcom installers of moving the MSO’s wires to make way for their own.

The companies later settled the dispute through arbitration.

Now, Lexcom is impeding Time Warner’s entrance into the telephone sector in Davidson County.

While Time Warner Cable offers its new Digital Phone product on most systems nationwide, the MSO hasn’t yet reached interconnect agreements with in Davidson County with Lexcom and Piedmont Communications, a local telecom co-op.

McLaughlin said that North Carolina law doesn’t require rural telcos with less than 200,000 lines, such as Lexcom, to sign interconnect agreements with competitors, which has delayed an agreement between the two. But McLaughlin said he expects the company will eventually be able to offer a triple play of video, high-speed data and telephone service in towns where it competes against Lexcom.

“Our people are pretty skilled negotiators. At some point in time, we think we’ll all have an interconnect agreement,” McLaughlin said.

Reese said Lexcom plans to continue to take advantage of its rural exemption, and doesn’t plan to cut an interconnect deal with Time Warner Cable anytime soon. But he said the company may eventually reach an agreement to give Time Warner access to its network.

“There’s about three or four small companies [in North Carolina], some even smaller than we are, that still have the rural exemption, and we just haven’t seen the need to give it up yet,” said Reese. “But someday, we probably will.”

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