Whether competitive cablecos have a place in the broadband services
market is a question that can only be answered on a region-by-region basis

In the midst of the telecommunications boom, a few cable TV visionaries saw an opportunity to ride the venture capital crest by securing funding to compete head-to-head with the industry's incumbent establishment. Lofty business plans in hand, new "overbuilders" promised VC funders the heads of their MSO competition…in exchange for a brand new, built-from-scratch, robust, fiber-rich, IP-based, state-of-the-art hybrid fiber/coax network that would deliver their brand of differentiated services. Their portfolios were to include IP voice, tiered digital data service and hundreds of channels of digital cable television.

And oh yeah, they'd have revenues totaling hundreds of dollars per month–from a residential customer–with new services like video-on-demand, interactive TV, and business class video conferencing…services enabled by these new state-of-the-art networks.

Obviously, things have changed. The money just isn't there to keep the overbuilders building. And except for a few regional plays, nowhere is the overbuild business model living up to the early hype. Only a handful of companies classified as overbuilders can actually claim revenue-generating subscribers of any real size or shape, and even the mild success stories certainly cannot claim to have the incumbent MSOs shaking in their sizable boots.

Unfortunately for the new competitors, now a couple of years later, incumbent cable's competition has proven skybound. Today, MSOs are looking over their shoulders at the 17.7 million satellite subscribers eating away at their portion of the multi-billion dollar pay TV market, and their overbuild competition appears dispatched and a distant third in most of the markets where they've tried to set up shop.

"They've always had a very difficult course to follow. Best case scenario is that they're going to be the third provider into a market, behind the incumbent and DBS (satellite provider)," says Michael Goodman, a cable industry analyst with Boston researcher The Yankee Group. "You couple that with an extremely capital intensive business, and the fact that the capital markets have dried up, and their road is a rough one."

Other analysts concur, and go even farther in questioning the viability of the overbuilder model in general.

"It's not just a question of financing. From what I've seen, you need to get about 20 percent of the people in an area to be able to be anywhere close to viable. To win 20 percent of the consumers away from their incumbent cable operators is a pretty tall order," explains Josh Bernoff, a principal analyst with Forrester Research. "The idea was that this was going to be a heck of a great business, and it certainly has not turned out to be that, and it's proving impossible in some places to even make some headway."

But that isn't to say that a certain amount of headway isn't possible. Success stories exist–they're just hard to find. One needs to look closely on a market-by-market basis to see who has flourished, and who has floundered.

Perhaps the most viable of the original overbuilders is Princeton, N.J.-based RCN Corp., a provider competing head-to-head in the nation's largest metropolitan markets. Its service bundle–the typical package of phone, cable television and high-speed Internet service–is offered to customers in Boston, New York, Philadelphia, Chicago, San Francisco and Washington D.C. No other competitive cableco can claim this kind of market presence, and RCN has spent a lot per potential customer to get its fiber-rich network up and running.

What has RCN done right to stick around so long, relatively speaking? After a capital intensive initial build out, RCN managed to generate revenue from customers to reach the critical "breakeven" point in three of its major metro markets. It has since slowed network construction, and it has diversified by offering commercial services, like fiber ring leasing, leaving it with a healthier bottom line with which to operate and draw from.

"Like everyone else, (RCN) is at a point where it has to self-fund," explains Goodman, referencing RCN's early funding in the VC heyday. "You're just not going to get $3.2 billion like Paul Allen invested a few years ago."

If you're talking about real customers and actual revenue (something some of the fledgling overbuilders seem loathe to do), we should mention West Point, Ga.-based Knology as another of the companies making headway in terms of customers and revenue, its footprint being select cities in the deep South. Knology is busy building out a new network in Knoxville, Tenn., which it has been able to fund because of success in other southern markets where it has been generating revenue. Knology's up and running in cities like Charleston, S.C.; Augusta and Columbus, Ga.; Montgomery and Huntsville, Ala.; Panama City, Fla.; as well as smaller markets along the border of Georgia and Alabama, offering the traditional voice-video-data bundle, as well as a commercial business component in each of the markets.

"The nice part about our business model is it's very modular. We don't have to go to another city until we create the funding for that city," explains Rodger Johnson, Knology's president and CEO. "We don't want to get started in a market, and not be able to create a sufficiently large base in that market to generate positive operating cash flow. What we don't want to do is go in, get semi-started, and run out of money. We end up with stranded capital and (the city) ends up with a market that's not built out."

Knology is close to reaching that all-important level of self-funding, coveted so dearly by overbuilders and their investors alike. In the third quarter of last year, it went EBITDA positive, nearing a point where it is starting to fund its own operation. As of Q3 of 2001, Knology claimed more than 101,000 video subscribers, a total of 55,000 on-net telephone subscribers, and more than 14,000 customers signing up for high-speed data.

Ahhh, to be self-funded!

While companies like RCN and Knology have found a way to complete most of their core construction while fending off the constricting capital markets, other overbuilders are fighting tooth-and-nail to make it through the turbulent times.

The overbuilder market is seeing its first real casualty with the recent Chapter 11 bankruptcy filing of Denver-based WINfirst. Before the company moved into Chapter 11, WINfirst had ambitious plans to build out franchises in Houston, Dallas, San Antonio, Austin, San Diego, Los Angeles and Seattle.

Prior to the bankruptcy filing, though, the company had already trimmed its sails, focusing solely on the Sacramento market, where construction had already begun on an expensive, deep-fiber network. Faced with a $500 million price tag to build out Sacramento, and the disappearance of available venture capital, WINfirst was forced to rely on subscriber revenue to fund construction. In fact, many potential "subscribers" caught wind of WINfirst's financial troubles, and were part of a wicked local consumer backlash to keep the company from completing its build out. WINfirst's deal with construction giant Bechtel Corp. dissolved, and Sacramento municipal authorities called a halt to any new licenses for additional network build out until WINfirst could pay its bills.

With WINfirst now filing for Chapter 11, the question that remains and will likely play out over the next year is who will end up with its stranded network assets.

Another ambitious overbuilder facing tough market pressure is Castle Rock, Colo.-based WideOpenWest, a company with about 2,000 bundled service subscribers in a few suburban pockets of Denver. WOW offers Denver area customers the voice-video-data troika, and has had some success differentiating from the local incumbent in areas where it is active.

But recent news that WOW would have to halt its construction into other Colorado franchises leads market watchers to wonder exactly how far away from self-funding the company really is. While WOW has said it'll continue to market "within its footprint," the construction stoppage may forebode an even tighter financial future.

However, in WideOpenWest's case, it may truly be a case of reorganization of the assets it already has. Last year, the company acquired from SBC-owned Ameritech 310,000 americast branded households in the Midwest markets of Chicago, Detroit, Columbus and Cleveland. Where WOW has had to back away from expansion in its Colorado overbuild markets, it perhaps is looking to boost data service revenue from these new americast customers by focusing on the services in those systems. Whether it'll be able to generate enough revenue from those acquired customers to fund its overbuild business is also a question that will likely be answered over the course of this year.

Moving beyond the doom-and-gloom, some small, regional players are still active and meeting with some level of success. Across the country, there are a handful of regional players with just enough funding to build out a select number of local markets, with the hope that revenue generated from those select cities will further fund expansion down the road.

In the area between Austin and San Antonio, Texas–dubbed the central Texas corridor–there are close to one million homes that upstart overbuilder Grande Communications aims to serve with its brand of voice-video-data. The young company passes just 50,000 homes at this point, but has completed construction of more than 300 miles of backbone fiber throughout the Austin-San Antonio corridor.

And according to Grande CEO Bill Morrow, the company has raised $278 million of equity, and was generating funding as early as last October, when it raised another $90 million in perhaps the worst venture capital market on record. Morrow attributes its funding success to being "project finance focused"–or in other words, having a smaller-scale plan and sticking to it.

"Unlike most companies that tried to do 10 or 15 cities across five states, Grande focused in on the central Texas cluster, and has been building there," Morrow says. "We will raise additional money (to expand into) Houston later this year, obviously as market conditions dictate."

In the huge Los Angeles market, competition in the cable sphere would seem a natural fit. Geographically, the population is spread over a wide area, and the market for cable TV is boulderized with several MSOs splitting the L.A. pay TV pie. Los Angeles is one of the few big urban markets that has not coalesced, which is why start-up Altrio Communications believes it can compete in markets across the L.A. metro area.

To date, Altrio has finished construction of a master L.A. headend to serve three areas initially–Pasadena, Arcadia and Monrovia, Calif.–but the infrastructure Altrio has already built could potentially serve more than 2 million homes.

With an estimated $180 million in funding to work with, Altrio's network is being built with an eye toward a future where bandwidth-rich services are in real demand, from residential and commercial customers alike. That's why it's building a robust HFC network that can scale in order to evolve into fiber-to-the-curb and eventually fiber-to-the-home, according to Altrio CTO David Large.

"You have to be able to respond to expanding markets, expanding penetration, expanding usage, and different services economically," says Large. "So it's a requirement to provide an initial capability, but also be able to economically expand your bandwidth per subscriber." He adds, "We're not scaling to be a little tiny company."

One of the best examples of a smaller-scale regional overbuilder tasting some success is Minnesota-based Seren Innovations, also notable as it is a subsidiary of utility company Xcel Energy. In the central Minnesota cities around St. Cloud, Seren has completed 99 percent of its network build out, and is offering voice, video and data under the Astound brand name. In the time that Astound was launched in December 1998, Seren can claim a more than 40 percent take rate in its Minnesota markets. "(We've) blown the doors off of our own expectations," says Seren Marketing Director Janey Palmer.

Seren also is beginning to offer competitive service in the East Bay area of northern California, launching node-by-node in the cities of Concord and Walnut Creek, Calif. But major expansion into multiple California markets isn't necessarily part of Seren's strategy.

"We are concentrating on what we have going right now," Palmer explains. "Like a lot of other overbuilders, we have scaled back our expectations for our own growth. To open up the possibilities and expand in the future, we need to do what we're doing today very, very well."

As it stands, much of the rest of the overbuilder community would be well advised to take that advice to heart. Today, the most successful fledgling competitive companies seem to have their eyes on a more regional, locally focused prize. Whether that success translates into real year-over-year growth is a question only the market, with its inevitable successes and failures, will be able to answer over time.


Differentiate or die!

For overbuilders to survive, much less thrive, against their cement-footed MSO competition, it's becoming abundantly clear that an upstart company must present a compelling alternative to the local provider. Beyond a bundled package of voice/video/data services, the most successful overbuild companies (relatively speaking, of course) are branching out into new advanced services, and most now have a commercial services component to boost their bottom line.

Look no further than the most successful of the competitive crowd, RCN Corp. RCN's major metro market play is relying more and more heavily on the commercial services enabled through all of the excess capacity built into its primarily residential network. RCN recently announced a deal with video transporter Qmedia to provide fiber capacity over rings in New York and Washington D.C., and is working on other deals to utilize more of its unused network capacity. It's also in the middle of rolling out advanced video-on-demand services to customers in select portions of Philadelphia as a way to differentiate itself from the competition.

New technology might be able to help some of the other upstart HFC operators break into the commercial services business as well, by branching out into high-speed commercial data services.

"(Overbuilders) have to differentiate themselves from the incumbent somehow to beat them," explains vendor Narad Networks' Vice President of Strategic Marketing Ahmet Ozalp. Narad technology uses the spectrum of existing HFC plant over 860 MHz to offer tiers of very high speed symmetrical bandwidth at speeds to 100 Mbps, ideally for commercial or enterprise customers. As overbuilders build out new HFC networks, getting Narad technology into their network designs could enable them to get into the commercial services game at a reasonable price point.

"We believe that we offer a very compelling differentiating solution for an overbuilder," Ozalp says. "If you're going to go and build a network from scratch, there still is going to be a coax component at the end. For an incremental additional cost, they can actually create a network which is truly broadband."