Cable Overbuilders Stage Comeback from Near-Death (1 Viewer)


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Stand against retrans!!!
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Apr 18, 2005
DeKalb County, AL
RCN, WOW, Grande, Frontier, Knology & Others Display Renewed Strength

Although they're receiving plenty of attention for the fiber-rich networks that they're frenetically building throughout the U.S., AT&T Inc. and Verizon Communications are not the only rivals that MSOs face on the ground these days.

Despite a big shakeout in the first half of the decade, several major cable overbuilders are still lurking in the shadow of the looming competition from the nation's two biggest phone companies. While they may not strike fear in many MSOs' hearts because of their smaller size and challenging economic propositions, these companies have returned from the near-dead to become an emerging force in cable land again.

Indeed, such surviving overbuilders as RCN Corp., Knology Inc., WideOpenWest (WOW), Grande Communications and Frontier Communications may actually pose greater competitive threats to cable operators now than before precisely because they're easy to overlook. Slipping into targeted markets under the radar screen, they are seeking to use the lure of "triple-play" bundles, advanced new services and discounted prices to steal away cable subscribers while MSOs focus on their two big telco rivals.

In March, for instance, Knology launched a new converged service, caller ID on TV, for residential customers who already take both its voice and video products. The West Point, Ga.-based overbuilder is now introducing the service to its phone and digital cable subscribers in at least 10 Southeastern markets, including such metro areas as Montgomery, Ala., Knoxville, Tenn. and Charleston, S.C.

The new "TV Caller ID" service flashes the name and telephone number of each caller automatically on the subscriber's TV screen before the phone even rings. Relying on TV remote control devices, subscribers can also turn off their phone ringers, view lists of incoming calls, monitor children's phone calls and change the duration of the Caller ID display on their screen. The product supports up to three separate phone lines per home.

The move puts Knology, which serves 178,000 video subscribers in five Southeastern states, ahead of nearly all large U.S. MSOs. Only Time Warner, the cable industry's biggest VoIP player, has also launched a caller ID on TV service in multiple markets so far.

In addition, cable overbuilders may pose renewed threats to MSOs because they're poised to take advantage of the state and federal video franchising law changes that AT&T and Verizon are now heavily promoting around the nation, much to the cable industry's chagrin. Hoping to loosen the cities' and counties' tight grip on franchising rights, the phone giants have been strenuously lobbying for statewide and even nationwide franchises so that they can start offering video service faster and with far fewer regulatory restrictions. (See related story in this issue)

In Texas, for example, Grande has been quietly pursuing state-issued franchises since the fall to expand its cable-like video service to more communities. Getting in line right behind Verizon, Grande has won the right to offer service in about another two dozen towns. The overbuilder already serves such major Texas cities as Austin, Corpus Christi, Dallas, San Antonio and Waco.

Plus, cable overbuilders are resurfacing as serious cable rivals because, after limping along under tight financial constraints for several years due to a dried-up capital market, they have begun to recover their strength and attract fresh cash from investors again. In some cases, they're doing so with the backing of new corporate owners blessed with big pockets and their own grand ambitions.

In December, for instance, private equity firm Avista Capital Partners agreed to shell out an estimated $800 million to $850 million for WOW. The nation's second largest overbuilder, which has about 357,000 subscribers in Columbus, Chicago, Cleveland and Detroit, passes about 1.4 million homes in these four markets. Avista reportedly beat out two other interested parties -- RCN and private equity firm Diamond Castle Partners -- for the prize.

At that price, WOW's new owners are paying at least 9.0 times the company's annual cash flow of about $90 million, a very healthy valuation indeed for a firm that competes against conventional cable systems operated by such industry powerhouses as Comcast and Time Warner Cable. Indeed, some publicly owned MSOs trade for as little as 6.5 times annual cash flow on the stock market.

Finally, the remaining cable overbuilders bear watching these days because, as smaller, nimbler firms than the two telco giants, they tend to be bolder and more innovative in launching new products and services.

A classic case is RCN, which emerged from Chapter 11 bankruptcy protection 16 months ago in much stronger financial shape after shedding a big chunk of its hefty debt. As the biggest cable overbuilder and the 12th largest MSO in the U.S., RCN now boasts about 409,000 overall customers in its large urban markets, which include Boston, New York City, Philadelphia, Washington, D.C., Chicago, San Francisco and Los Angeles.

Stepping up its system upgrades and service launches, RCN wrapped up a digital simulcast overlay in Chicago last fall and began similar overlays in Boston and New York. It plans to complete the overlays in the latter two markets this month, laying the ground work for digital simulcasting rollouts. The company already offers full digital cable packages with video-on-demand (VOD), high-definition TV (HDTV) and digital video recorders (DVRs).

On the broadband side, RCN, which has always prided itself as a speed leader, has started rolling out its "MegaModem Mach 20" cable modem offering in several markets. The new data product, which offers download speeds as high as 20 Mbps and upload speeds as high as 2 Mbps, is faster than what nearly every cable operator now offers. RCN, which launched the product in the Boson and Washington suburbs in March, plans to extend the service to other markets.

Finally, RCN is boosting its already strong emphasis on "triple-play" bundles. A pioneer in promoting triple-play packages, the company boasted in its fourth quarter earnings report that 68% of its customers have now signed up for at least two products, up from 67% at the end of September and 63% at the close of 2004. In fact, its customers now take an average of 2.2 products apiece, up from 2.1 products a year earlier.

Thanks to this emphasis, RCN's average monthly revenue per customer hit an industry-leading $103 in Q4, up from $102 in Q3 and $97 in the last quarter of 2004. For the year, the company's average monthly revenue per customer climbed 6% to $102.

Hoping to boost its bundling totals further, RCN has introduced two new triple-play packages this year. The first package offers 80 basic cable channels, local calls and slower broadband service (768 kbps) for $82.99 a month, down about 12% from the cost of its standard triple-play package. The second new bundle offers basic cable, local dialing and the new MegaModem Mach 20 service for $129.99 a month.

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