C-Tec surges ahead in phone, cable
markets
USA TODAY
September 15, 1997
NEW YORK - If you hold C-Tec’s annual report
up to a mirror and study it closely, you’ll
find a secret message from David McCourt, chief executive
of the telecommunications upstart.
Beneath the title, "The Revolution Continues,"
is a famous picture of a mob tearing down the Berlin
Wall. The wall is covered with graffiti, so it's easy
to miss three words -- written backward -that McCourt
has added: Bell Atlantic, Cablevision, and Nynex.
He equates his entrenched competitors with Communist-era
"tyrannies."
At a time when many big companies are scaling back
plans to compete in the residential local phone and
cable markets, McCourt, 40, is waging the most aggressive
challenge in the country.
C-Tec of Princeton, N.J., will spin off Commonwealth
Telephone Enterprises, Cable Michigan and RCN Communications
on Sept. 30. McCourt will run the newly independent
RCN, which had $60 million in fiscal 1997 revenue
and is building a $7 billion fiber-optic network that
will carry voice, cable television and high-speed
Internet access over the same wires to residential
customers in 24 cities from Washington to Boston.
It's already operating in New York, Boston, Washington
and the Lehigh Valley in Pennsylvania. "Someone
has to jump in the water and prove that it isn't over
everyone's head," McCourt says.
The water is turbulent, though. Phone and cable TV
companies are upgrading their networks.
“We are not about to be out-marketed by anyone,"
Cablevision spokesman Charles Schueler says.
Cablevision has 3.2 million customers in Boston,
New York and Cleveland. It's preparing to carry phone
service and high speed Internet access and it’s
offering advanced services on Long Island, N.Y.
Critics note that RCN is still reselling Bell Atlantic
service in some areas and accuse it of paying attention
only to affluent markets.
The giants of the telecommunications business have
been wading in the shallow water since the law unleashed
competition last year. Long-distance carriers AT&T,
MCI and Sprint are finding the going is slow as they
begin offering local phone service to residential
and business customers.
The regional Bell carriers have failed to invade
each other's local territory. The cable TV companies
have backed way from their threat to offer telephone
service, and the Bells have backed away from their
threat to offer TV.
Some analysts argue that competition in the local
market is unrealistic. "Congress got it wrong.
It thought the local loop is like long-distance,"
says analyst Scott Cleland of Legg Mason's Precursor
Group. The local companies have networks worth $270
billion. The long-distance networks are worth only
$40 billion.
Cleland says the local business is so expensive that
it only makes sense to build one network. And competitors
simply can't make money buying local service from
the dominant carriers and reselling it, he says.
Enter RCN. McCourt believes the Internet is stirring
demand for networks that accommodate voice, video
and data. He plans to grab the market while the big
carriers fight among themselves.
"We realized that a brand new network designed
and built around the Internet was the way to go,"
he says. He had planned to lease capacity on the network
of partner MFS Communications which was acquired by
WorldCom last year.
The leasing arrangement would have cut McCourt's
capital expenses by half. But MFS, which built a fiber-optic
system to provide local service to businesses, kept
running out of capacity. It was 1995, the Internet
was just beginning to surge in popularity and MFS
suddenly didn't have capacity to spare.
"My first reaction was to panic," McCourt
recalls. "But then I said, maybe our premise
that we couldn’t afford to build our own network
was faulty. We were lucky the MFS deal didn't work
out."
McCourt figures he can build his fiber network for
about $1,500 a customer, or half the cost of buying
an existing cable TV system. He should know. Cablevision
founder Chuck Dolan hired him years ago to build one
of the first urban systems in the nation.
Entering one market every 90 days, McCourt expects
RCN to cover 24 markets within six years. He's waging
an aggressive marketing campaign, running ads that
compare phone competition to the toppling of the Berlin
Wall. He's rolled $35 million of his own money into
the business. He believes RCN will be to the residential
market what MFS was to the business market.
Dillon Read telecommunications analyst Bruce Roberts
thinks RCN can do it. He predicts net losses will
rise until 2001, and decline until the company breaks
even in 2004.
"The smaller companies are in a better position,"
he says. Big companies will need more time to expand
their services because they have so many customers.
"AT&T has 80 million customers. How is it
going to provide them local service right away?"
It's been an eventful summer: C-Tec stock has climbed
more than 20% since last month. RCN agreed in August
to send communications over Potomac Electric Power's
350-mile fiber network in greater Washington. It plans
a high-yield debt offering with Merrill Lynch in early
October. RCN has 75,000 cable and phone customers
in Boston, New York and Washington. It expects to
add 16,000 in September.
"I think David McCourt will be running a very
profitable and very formidable residential telephone
company," says analyst Jack Grubman of Salomon
Bros.
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