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Revamped RCN Means Business

Light Reading
News Analysis
Light Reading
1/26/2005

Don't adjust your set: Regional cable companies are finding that they're in a good position to challenge incumbent phone companies -- and other cable providers -- for a chance to provide data and voice services to businesses and universities. Take RCN Corp. [Ed. note: Please!] The 11th largest cable company in the U.S. recently crawled out from under a massive debt load thanks to a Chapter 11 bankruptcy. In December 2004, the provider announced that it had converted $1.2 billion of unsecured obligations into new equity, and eliminated $1.8 billion in preferred share obligations. It refinanced by borrowing $330 million from Deutsche Bank AG and issuing $125 million of convertible second-lien notes to certain investors, which was used to pay off debt held by an investor group led by J.P. Morgan Chase & Co..

All that financial finagling -- and the complete restructuring of its management team -- has allowed RCN to take aim at vertical industries that many wouldn’t normally associate with a cable company.

RCN was founded in 1995 by David McCourt with the plan to dominate triple play services for the residential market. The way it planned to accomplish this was by building a fiber network designed to pass as many multi-dwelling units (MDUs) as possible in major markets. The company targeted MDUs in Boston, Chicago, New York, Philadelphia, San Francisco, and Washington, D.C.

While it grew, RCN spent more than $7 billion over several years building its network and landing deals to provide dark fiber and lateral building connections to other carriers (see RCN to Supply Cogent). By 2003, the company had lit more than 400 buildings, providing voice, phone, and data services (see RCN Brings VOIP to Chicago). Now that it has emerged from its bankruptcy, the company is offering bandwidth and voice services for educational institutions, the hospitality industry, the federal government, financial institutions, and Fortune 500 companies. “While the residential cable division has struggled to be profitable, the business division rides the coattails of the residential group driven by the tremendous network that we have the opportunity to use in each market,” says Todd Narwid, RCN’s senior VP of sales. “We’re forecasting exponential growth of $30 to $50 million over the next 18 months.”

The new-look RCN has refined its moves and looks poised to give ILECs like Verizon Communications Inc. (NYSE: VZ) a run for their money in the commercial theater, while also causing problems for cable rivals like Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Time Warner Cable. Metro access providers like Looking Glass Networks Inc. and AboveNet Inc., which compete with similar dark fiber, Gigabit Ethernet, and Sonet/SDH offerings, should also keep an eye out for RCN.

Stan Hubbard, senior analyst at Light Reading’s research arm Heavy Reading, sees RCN as a great example of what can happen when a resource-rich MSO decides to play on traditional telecom carrier turf. “Fresh from restructuring, these guys have a rich fiber asset base in key Northeast markets that they have been able to leverage for ramping Ethernet services and dark fiber sales,” Hubbard says. “They appear to be particularly well positioned to address fiber connectivity needs in the NYC market.”

One concern Hubbard sees for RCN is that the company does not appear well situated to offer Ethernet or other high-bandwidth services between cities outside the Northeast corridor. Hubbard contrasts this to competitor Verizon, which has been building up an out-of-region Ethernet services capability.

Narwid says the company is vigorously courting the commercial market with its high bandwidth and voice alternative, noting that RCN lit up 45 buildings in 2004 and plans to at least double that number in 2005. “Conservatively, we’re going to be adding 100 buildings this year; aggressively, we’ll light up 250,” he says.

RCN sees its growth coming from multiple fronts, two of the largest being the hospitality and education markets. Narwid notes that the hospitality industry is going through bandwidth upgrades, with most major hotel chains upgrading to high-definition and plasma TVs and expanded high-speed and wireless access offerings, which require upgraded fiber offerings -- the kind of thing RCN specializes in.

Narwid points to RCN’s bulk cable TV deal with the Mandarin Hotel at 10 Columbus Circle in New York as an example. “We got the cable TV deal for the Mandarin, which is home to the Time Warner Center. That was a big win for us.”

On the education front, RCN has contracts with numerous universities -- including Columbia, Georgetown, Harvard, and DePaul -- for bandwidth, telephone, and data services. “The greatest concentration of cable TVs is in universities,” Narwid says. “If you get $20 a month from 30,000 subscribers, that’s $600,000 in income, which is a nice chunk of change.”

Of course, RCN's residential business will still click along as well. Indeed, on Feb. 28, the company is upgrading its cable modem service to 10 Mbit/s, which it claims is the fastest residential speed available. ”With our newly positive financial outlook, we’re focused on delivering true landline competition that drives the cost to the end user down,” Narwid says. — Chris Somerville, Senior Editor, Next-Generation Services

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