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    Home Latest News

      Overbuilders or Underachievers?

      By
      eWEEK EDITORS
      -
      July 2, 2001
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        Whats the difference between two and three? In the case of competitive cable it could be life and death.

        As their counterparts in the telephone business drop like flies after hovering around the honey pot of local competition, upstart cable competitors are managing to survive in one-on-one combat with entrenched operators despite similar financial constraints.

        “The first CLECs [competitive local exchange carriers] were extremely successful,” says Mark Haverkate, founder and CEO of competitive cable operator WideOpenWest. “What happened after that was that CLEC 2, CLEC 3 and CLEC 10 came in and they were all competing for the same customer. What were doing is coming in and being the second cable guy and potentially the better Internet guy. We see more of a duopoly economic model, rather than having three or four or five companies competing with each other. We have a much more stable market in which to compete.”

        While the markets may be stable, theyre also somewhat static these days. Faced with the same dearth of capital that stopped the CLECs, competitive cable operators — sometimes known as overbuilders — are also reining in their growth plans.

        “At the time being, were not going into any new markets,” says Nancy Bavec, spokeswoman at competitive cable operator RCN. “We have taken the position of growing our existing markets.”

        To some outside financial experts, the inability to grow rapidly enough to gain significant market penetration is simply a slower death than the rapid collapse of the CLEC industry.

        If the harsh economic climate continues, the outlook for midsize and large overbuilder systems offering video, telephone and broadband Internet services is fairly grim, according to The Strategis Group.

        “The emerging competitors will have a hard time over the next few years,” says Karekin Jelalian, senior analyst at Strategis. “Many will find it hard to achieve enough positive cash flow to finance their business, and will become reliant on outside investors for funding of expansion and even continued operations. If the capital markets remain tight, some companies will have to cease operations. Weve already seen some of that happen.”

        Gerry Kaufhold, chief multimedia broadband analyst at Cahners In-Stat, describes the overbuilder future more bluntly: “Its yet another deep money pit with dubious payoff at the end,” he says.

        Facing that market sentiment, WideOpenWest took a quantum leap in May, from a wobbly upstart to the nations 13th largest cable company, by acquiring the Ameritech New Media cable unit with 310,000 subscribers in the upper Midwest. Spun off from Ameritechs parent, SBC Communications, the cable properties in Chicago and Detroit pass about 1.5 million homes. At an estimated $1,000 per customer, the deal looks like a bargain for WideOpenWest.

        The Ameritech deal produces an immediate revenue stream with the potential to boost income per household through new services. Bell Ameritech only made modest efforts to promote new services.

        “The network itself doesnt need upgrading,” WideOpenWests Haverkate says. “What they havent done is deploy high-speed Internet. That was due, in part, to the fact that they had been acquired by SBC.”

        While revenue from the new cable operation will support growth in WideOpenWests new suburban Denver market, where it competes with AT&T Broadband, Haverkate says buying established business does not represent a new business model.

        “Its not a change of strategy at all,” he says. “We always wanted to do multiple markets. Instead of building five cities from scratch, how about if you take over four of them and be three-quarters of the way to the finish line. A year from now, there wont be that much difference from Denver, where we have built from scratch to Chicago or Detroit, where we acquired properties.”

        A Tough Fight

        Still, theres no question that WideOpenWests entry into two major cities through acquisitions looks easy compared to RCNs attempts to invade the hometown of cable giant Comcast. After prolonged wrangling with Philadelphia city officials, RCN threw in the towel last spring, settling for growth in the suburbs.

        “We just didnt see any end in sight,” RCNs Bavec says. “We knew that residents in Philadelphia wanted competition and wanted choice. But in order to provide cable service, you still have to get a franchise.”

        The conflict in Philadelphia goes to the heart of the overbuilders business model — targeting selected neighborhoods with potential for high penetration rates. Instead, Philadelphia officials wanted RCN to go citywide.

        The Philadelphia standoff is unusual, because the federal Telecommunications Act of 1996 clearly mandates competition in all communications arenas, including cable. In Boston and New York, RCN is able to focus on high-density residential buildings, where tenants will buy bundled packages of cable video, telephone and high-speed Internet.

        “Were achieving the market share targets that we set out to achieve,” Bavec says. “Our goal is to get to about 30 percent of the market share in areas where we pass. We believe we have a unique business model. There isnt anyone out there doing the things that were doing to the extent that were doing it.”

        The small collection of overbuilders has grown noticeably, despite the financial hardships.

        “Over the past couple of years, over 16 new overbuilders have emerged that are using high-capacity, two-way, fiber-intensive networks to offer telecommunication and multichannel video service bundles,” Jelalian says.

        As one of Microsoft co-founder Paul Allens major investments, RCN represents an alter ego to Allens Charter Communications, a traditional cable company and multiservice operator. “Hes involved in a lot of interactive advanced technologies and content applications, which were interested in carrying over our network,” Bavec says. “We all stand to benefit by the things hes doing in developing broadband content.”

        As a 27.3 percent stakeholder in an overbuilder, Allen is something of a renegade to the major cable companies, which feel threatened by the money pouring into competitive telecommunications. While the market collapse and competition has hit cable companies, the major players are less vulnerable, says Char Beales, president of Cable & Telecommunications Association for Marketing.

        “Charters a major player, and theyre less nervous about overbuilders than they were last year,” Beales says.

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