Paul Allen's "wired world" moved to embrace
competitive local-exchange carriers with Vulcan Ventures Inc.'s deal last week to buy
a $1.65 billion stake in RCN Corp.
Vulcan gets 22.9 percent of Princeton, N.J.-based RCN, a
former MSO offshoot that now competes against incumbent operators in New York, Boston and
several other cities.
Vulcan already owned 4.5 percent of RCN, bringing its total
stake to 27.4 percent after the deal closes.
RCN gets much-needed capital to continue its costly
build-out of fiber networks in the Boston-to-Washington, D.C., and San Francisco-to-San
RCN chairman David McCourt said the deal would bankroll RCN
until 2003, eliminating the need to raise more capital in 2001.
McCourt has proven skilled in raising money --
Vulcan's investment means RCN has raised about $4.6 billion over four years.
McCourt said RCN has about 10 percent of its network built
out already, and the company expects to have one-third of it completed by 2003.
The deal apparently indicates that Allen's Charter
Communications will offer switched telephony on its own -- the way Cox Communications
Inc., Cablevision Systems Corp. and Adelphia Communications Corp. have -- instead of
striking a telephony deal with AT&T Corp.
Charter also said RCN would provide telephony services to
Charter's Los Angeles system. That system, with about 500,000 subscribers, could be a
testing ground for other telephony launches in Charter systems.
"We think L.A. is a perfect market to bring a set of
functions to the customer first," Vulcan president William Savoy said during in a
conference call with reporters. "It's going to take a lot of work to actively
put the customer on the plant."
But Savoy added that the RCN investment allows Charter to
set its own telephony destiny. "We've put ourselves in a position where we alone
determine our success or failure," he said, "We are not relying on anyone else
to deliver to us. We are doing this for our own benefit."
On the content side, Vulcan also formed Broadband Partners
-- a group made up of RCN, Charter and other Vulcan investments, including ones in High
Speed Access Corp. and Internet portal Go2Net Inc.
Vulcan said Broadband Partners will focus on developing
broadband-portal applications for high-speed Internet services.
Savoy said Vulcan wants to bring high-speed Internet
connectivity to the television set, and not necessarily the PC, adding that although
whatever works on the TV would also work on the PC, the latter is not a top priority.
"There are three revenue streams that drive
cable's revenue: new services, video and telephony," Savoy said. "This
announcement should bring into focus how those three streams can be exploited. We're
focusing on TV as the point of deployment, as opposed to the PC. Through the relationship
with RCN, now we have telephony experience in our portfolio."
CIBC Oppenheimer Corp. cable and telecommunications analyst
Aryeh Bourkoff said the deal was a good one for RCN, but the benefits are less apparent
for Allen and Charter.
"Clearly, this is a positive for RCN, which now has
secured sufficient funding through the extent of its business plan," Bourkoff said.
"It eliminates the financial risk for its buildout. For Paul Allen, this is a
considerably more risky strategy. It does give him a foothold in major strategic markets
like New York and Boston, but it is an overbuild strategy. RCN is the second or third
[cable operator] in those markets."
Bourkoff believes Vulcan's investment in RCN has
little to do with telephony -- a segment Allen has largely ignored in his cable
operations. What is driving the deal is the opportunity to expand Charter's cable
footprint and its Internet-access offerings, he added.
"I don't think this secures a telephony strategy
for Paul Allen at all," Bourkoff said. "He is almost too late to the game. This
is very much a way to get into strategic markets quickly. And I don't think this is
the final piece."
SG Cowen Securities Corp. cable analyst Gary Farber said
that while it is unusual for a cable company to get into bed with an overbuilder, he
doesn't see that strategy translating over to Charter.
"If you think about it, [RCN] is not that much
different than some of the markets AT&T is in," he said.
Farber added that RCN's video markets will do more to
create economies of scale for programming and other costs related to both companies'
However, Farber does believe that RCN's telephony
offerings could one day be available in Charter cable markets.
"If the RCN strategy works, there are probably
economies going both ways for both companies," Farber said. "[RCN is] further
ahead on telephony, and then you have the cable side with new services. They have similar
views of the world."
Weekly digest of streaming and OTT industry news
Thank you for signing up to Multichannel News. You will receive a verification email shortly.
There was a problem. Please refresh the page and try again.