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Note: Unlike AT&T and Verizon, RCN has not used pressure techniques to acquire favorable state and national franchises. Instead they compete directly with cable companies by offering improved service and infrastructure.

from: Washington Post

Taking On Telecom Goliaths
Between Verizon and Comcast, RCN Sees Room to Carve Out Its Own Niche

By Arshad Mohammed
Washington Post Staff Writer
Monday, June 5, 2006; D01

Peter D. Aquino's company is a dwarf in a land of cable TV and telephone giants, but the chief executive of RCN Corp. does not lack for confidence or aggressiveness.

Posing atop a Hummer emblazoned with the company's blue, green and white logo, he joked: "We should put Verizon and Comcast . . . underneath the tires."

Crushing Verizon Communications Inc. and Comcast Corp. -- each of which is more than 30 times RCN's size -- is an unlikely outcome, industry analysts say. Just surviving as an alternative to the communications behemoths would make a success story of the Herndon-based company with a checkered past.

RCN hopes to beat the big cable and phone companies by exploiting its experience in giving customers a bundle of voice, video and high-speed Internet service -- a "triple play" that it has offered for years but that its competitors are only now rolling out on a large scale.

Company officials say they can carve out a profitable niche by offering more-appealing packages and pricing, better service, and an alternative for consumers who don't like dealing with powerful corporations like Comcast and Verizon.

"The consumer sees both of those guys as slow incumbents and monopolies. Those are the two people they are trying to get away from," Aquino said in a recent interview. "And here we come in with new technology, great pricing, a little pizzazz, locally focused. "

RCN's fate may say much about whether upstart communications companies can survive in an era of consolidation, providing consumers with alternatives to the dominant cable and telephone providers.

A product of the 1990s tech boom, when capital poured into Internet and technology ventures, RCN spent about $3 billion building its cable network. It was one of the first companies to offer customers cable-phone-Internet bundles, and it boasted it would drive the cable and phone "dinosaurs" into extinction.

Instead, RCN went through a near-death experience, spending seven months in Chapter 11 bankruptcy protection in 2004.

The company emerged with new management, much less debt, a leaner workforce and the conviction that it could still take on the big companies.

But Verizon, the nation's second-largest telephone company, has begun building a fiber-optic network to carry television, Internet service and phone calls under the Fios brand. And Comcast, the nation's largest cable company, is rolling out Internet telephone service as an addition to its video and Internet offerings.

That only makes life harder for RCN, said Josh Bernoff, a principal analyst at Forrester Research Inc.

"I am not going to predict their demise here," he said. But, he added, "I don't expect them to grow, and I think it's going to be tough for them to hold on to the share they have."

RCN has about 46,000 customers in the Washington area, where it provides service in most of the District as well as in parts of Montgomery County and Falls Church. The company built its network here with its former partner, power company Pepco, and initially marketed service under the Starpower brand.

It has a small fraction of the subscribers held by its local cable competitors -- Comcast, which has 1.3 million customers in the region, and Cox Communications Inc., which has about 260,000 local customers. Verizon does not disclose how many customers it has, but it provides about 2.6 million phone lines in the area.

Overall, RCN had about 409,000 subscribers at the end of last year, most of them sprinkled along the Eastern Seaboard from Washington to Boston.

The company is looking to make acquisitions of residential or commercial operations to fill out its footprint in the Northeast, Aquino said. In March, it paid $32 million in cash plus about $7 million in working capital and capital expenditure adjustments to buy a fiber-optic network from Consolidated Edison Inc. that serves mostly commercial customers in and around New York City.

RCN is also a cable provider in parts of San Francisco, Los Angeles and Chicago. The company is exploring the sale of its California properties, and Aquino said he would consider selling those in Chicago at the right price.

As the company concentrates on its core Northeastern market, some Wall Street analysts are upbeat about its stock despite the economies of scale that bigger players enjoy.

"I think they are going to do pretty well," said Oppenheimer & Co. analyst Ian Zaffino, who has a "buy" rating on the stock, which closed Friday at $26.26, near its 52-week high of $27.12 on April 28. He said RCN has an major asset in its high-quality network, which, unlike many cable systems, does not require heavy spending on upgrades. "They have very, very good services, a great network and good customer service."

Zaffino and other analysts have also suggested the company could eventually be a takeover target. Asked if he might consider selling RCN, Aquino did not rule out the possibility.

"It's really hard for me to comment on that," he said. "My goal in life is to increase shareholder value. And if it makes sense to the shareholders to sell it, you know we'll cross that bridge when we get there."

John Goodman, executive director of the Broadband Service Providers Association, a trade group, said RCN was one of several dozen companies that sprang up in the 1990s era of "irrational exuberance about the opportunity for broadband Internet."

Goodman's group represents these "overbuilders" that constructed competing networks in places where cable companies already had them in place. He said many of the upstarts have since been bought out, and some have gone through Chapter 11 bankruptcy, as did RCN.

For RCN, bankruptcy court provided a way to slash its debt. The company had about $1.4 billion in debt before it went into Chapter 11 and about $330 million when it emerged. It has used asset sales to cut this further, to about $105 million.

Aquino said RCN's marketing strategy is to "hook and pull" new customers by attracting them with a single product -- phone, cable TV or Internet service -- and then gradually trying to sell them two or three products. At the end of the first quarter, the company had 67.4 percent of its customers signed up for two or more products. Its average monthly revenue per customer was $106, which analysts said was among the highest in the industry.

Economies of scale, however, remain a challenge for the company, particularly in buying TV programming. Richard Ramlall, the company's senior vice president for strategic and external affairs, said the company estimates that it pays 10 percent to 50 percent more for cable channels than its bigger rivals.

One of RCN's core bundles of phone, cable TV and Internet service is advertised at $99.99 a month on its Web site, close to similar offerings from Cox, Comcast and Verizon. But the company said customers who call in through June 30 can get a month's free service, more cable TV channels for the first three months and faster Internet speeds for a year at no extra cost.

Still, some analysts say RCN may have to devise more distinctive offerings to prosper over the long term. Yankee Group analyst Aditya Kishore said the company's best bet might be to zero in on certain segments of the market and tailor its offerings to those customers.

"They could try to go at the high end, and offer something that is substantially better and charge more for it, or go in at the low end and just undercut price-wise," said Kishore. "But . . . you've already got three or four other players in the market, and bigger, stronger players, so it's going to be hard to beat anybody at that game."