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Cable upstarts challenge industry leaders

RCN and other upstart communications companies work to give large cable television operators something many of them have never had: a little competition.

RCN and other upstart communications companies are trying to give large cable television operators something many of them have never had: a little competition.

A handful of firms like RCN, Knology Holdings, and 21st Century Cable are building metropolitan networks to attract residential customers with an alternative package of voice, data, and--for the first time in some areas--video.

If successful, these aggressive companies could siphon video-programming customers directly from incumbent cable operators, which are counting on revenue from their core video business to bankroll expensive network upgrades for high-speed Net access, interactive TV, and other enhanced services.

Increased competition from players like RCN (which stands for Residential Communications Network) in the market will offer consumers more choices and could mean lower prices for communications and entertainment services.

Many consumers have a choice when it comes to their long distance or local phone service provider. But since major cable operators like AT&T, Time Warner Cable, and Comcast are often granted multi-year local franchises by city and county governments, consumers are forced to go with the cable provider for their area. Although some could opt to subscribe to satellite TV service, when it comes to cable, there often is little choice for consumers.

"It boils down to consumers want choices and an affordable alternative," said Steven Weinberg, an analyst at New Paradigm Resources Group, a telecommunications consulting firm. "I don't think people are happy with TCI charging $40 or $50 for digital cable when they can go to say 21st Century Cable and get it for less."

The plan
RCN is building a new fiber-optic network that is capable of delivering local and long distance voice service, cable television, and high-speed Internet access via a cable modem. Unlike other providers, the company has its sights set on the consumer market.

"Most other [competitive local phone companies] are going after business customers, so by targeting residential users it will lessen the competition they have to go up against," said Manuel Recarey, a telecommunications equity analyst at Auerbach, Pollak & Richardson.

RCN may have avoided stiff competition with other competitive phone companies in the business market, but it faces an uphill battle in the consumer market against telecommunications powerhouses such as AT&T, Sprint, and MCI WorldCom.

But analysts said there is plenty of room for competitors like RCN to find their own niche. And, AT&T still faces significant hurdles before successfully converting its newfound cable strategy from a grand idea into a viable revenue source, Recarey said.

RCN, one of three companies spun-off from C-TEC in September 1997, targets densely populated metropolitan areas. For example, RCN offers service along the Northeast corridor from Boston, to New York and Washington, and is building networks in California, from San Diego to as far north as San Francisco.

RCN executives believe their strategy will allow them to compete in regions that comprise as much as 40 percent of the nation's telecommunications spending, according to RCN spokesman Jim Maiella.

Analysts believe the population-based plan is sound.

"If there's more people in a smaller area, it is going to allow them to address more customers more quickly," Weinberg said.

Not alone
RCN competitors are also feverishly laying wires in selected cities around the nation. Knology offers service in several Southern states including South Carolina, Florida, Georgia, and Alabama. 21st Century Cable is primarily located in the Chicago area, Weinberg said.

Unlike other competitive local exchange carriers (CLECs) that lease access lines from the local phone company to provide alternative local voice service, the "cable overbuilders," such as RCN, Knology, and 21st Century Cable, will own their networks once they are completed. In telecommunications jargon, they are known as "facilities-based" companies.

Owning and maintaining networks obviously High speed pipe dreams? means much higher up-front costs. But, by doing so, analysts say the "cable overbuilders" could recognize significant cost savings in the future, making their low-cost services even more attractive to penny-pinching potential customers.

"They're able to control their costs a lot more efficiently ? that can ultimately decrease costs and increase revenue," New Paradigm's Weinberg said. Conversely, "the [CLEC] resellers are working off the margins they get off how cheaply they can get the access lines. The money they can bring in is fixed."

The firms also could play a limited role in the heated cable Internet access debate.

Many major ISPs want to share networks with cable companies, but without regulatory intervention, they remain shut out. Alternative cable providers could give ISPs another option for delivering high-speed Net access to consumers. Already, MindSpring Enterprises, one of the nation's largest ISPs and a leading proponent of so-called open access, has a deal with Knology to offer cable modem service in the southern United States.