Chicago Overbuild Prospects Looking Up

Cable's competitive situation in Chicago took a dramatic turn when WideOpenWest LLC announced its $300 million acquisition of Ameritech New Media.

WOW's purchase of SBC Communications Inc.'s Americast-branded cable operation could prompt AT&T Broadband to rethink its decision to delay upgrading almost half of its systems in the Chicago suburbs for three to five years.

Otherwise, experts said, thousands of high-speed-Internet-starved suburbanites in 23 communities will eagerly switch service providers in order to take advantage of WOW's plans for immediately offering cable-modem service.

"I have clients who are just waiting for WideOpenWest to show up so they can start extending welcomes," said Stuart Chapman, a Chicago area consultant for more than 60 suburban municipalities.

The cities served by ANM haven't been wired for cable-based high-speed Internet access because Ameritech Corp. did not want to roll out a service that would compete with its own digital subscriber line (DSL) offering.

The deal, therefore, was a natural for both companies. WOW transformed itself into the nation's 11th largest MSO, and will have ANM's estimated $150 million a year in revenue to finance its planned overbuilds in Denver and Dallas. SBC, in turn, sheds the unwanted cable properties it inherited through its acquisition of Ameritech Corp. It also avoids introducing a potential competitor to the local phone market, because WOW presently provides only long-distance service.

But WOW will not be immediately expanding its reach beyond the local Americast systems it's acquiring, said president Mark Haverkate.

"We have plenty to do," Haverkate said. "We have to take care of the customers that we have."

WOW will continue to make the rollout of Internet access its "priority," he added.

The overbuilder last week was readying transfer requests for 116 franchising authorities in three states. If WOW can obtain the franchises by the fourth quarter, the company is prepared to launch Internet access in the Chicago suburbs early next year.

That spells trouble for AT&T Broadband.

The incumbent MSO will be fighting a war on several fronts, said Bob Lane, telecommunications analyst with The Yankee Group, a Boston research firm.

AT&T already competes with RCN Corp. in the largest of its five franchised areas within the Chicago city limits. Now, if it delays deploying cable modems in the suburbs, it risks letting WOW pirate away existing customers from outside the city, Lane said.

"They [WOW] won't face any competition [for Internet customers], because AT&T will not be able to respond," Lane said. "This certainly changes how those Ameritech properties are valued.

"AT&T cannot concede too many advantages to these overbuilders," he added. "It must respond."

One local expert familiar with the Ameritech systems — and the municipalities they serve — said WOW can expect a warm welcome.

"The general perception is that AT&T isn't much of an improvement over [predecessor] Tele-Communications Inc.," said the source. "It's the same-old same old. The service is still below par, and the arrogance is still there.

"WOW could make great headway in the region if it moves on Internet access and digital, in that order," the source added. "If WOW markets aggressively and is a bit more creative in pricing and packaging, it will do very well."

Whether WideOpenWest can convince more than two dozen local governments to put its transfer requests on the fast track may be another issue, however.

"It's a stretch to think they'll get all those franchises transferred by next fall," said the Chicago-area based market expert. "Just like everything else, cities tend to slow their overall process in the summer."

AT&T officials insist that they won't let the arrival of a new competitor dictate the MSO's future plans.

Spokeswoman Pat Andrews Keenan said the operator will continue to focus its attention on marketing new services to customers living in areas that have been upgraded.

Keenan said approximately half of the AT&T systems, which pass 3.4 million area homes, had been already been improved when the MSO announced it would delay the remaining upgrades, citing a tight capital market.

Still, the completed upgrades will allow AT&T to offer telephone-over-cable service to 757,000 households; Internet access to 1.3 million households; and digital cable to all 3.4 million households in its local franchised areas, Keenan said.

"We have to market what we have, so we can get a return on our investment, which will feed the upgrades," she said.

Naperville, Ill., spokesman Gary Karafiat — whose suburb is the region's second-largest, with 135,000 residents — said it was hard to imagine that AT&T would sit on its hands while WOW fed off the MSO's existing subscriber base.

"You're talking about a high-growth area, with high-tech residents who are champing at the bit to get this [Internet] service," he said. "The supply-and-demand formula is going to be at work here. If AT&T sits on its hands, and WOW supplies the service, AT&T risks a significant decline in its market share."

AT&T has even managed to catch a few breaks along the way.

First, RCN has asked Chicago for a "brief delay" in its plans to build out its four remaining franchise areas.

"But this is still a highly important market," said RCN spokesman Scott Burnside. "In terms of density, Internet usage and cable penetration, it has all the things that make a market attractive."

Second, ANM's performance in the area will likely spare the MSO from having area regulators asking the Federal Communications Commission for the right to reregulate basic rates.

Under the 1992 Cable Act, an incumbent operator's rates were deregulated once a competitor had siphoned off 15 percent of the local cable market. But the 1996 Telecommunications Act eliminated that threshold and immediately deregulated rates if the competitor was either a telephone company or a telco subsidiary.

When SBC's Chicago area franchises pass to WOW, they will no longer be owned by a phone company. That has raised the spector of possible reregulation of basic rates, if local governments petitioned the FCC for that authority.

Such a scenario is unlikely, Haverkate said, because most ANM systems in the area easily surpass the 15-percent reregulation threshold in the 1992 act.

But AT&T may still find itself in the same position TCI did when competition first came to Chicago. Even though its rebuilds are still incomplete, competition has driven cable rates to $8 below the national average, said Chicago city cable administrator Joyce Gallagher.

Customer service began to improve as soon as competitive franchises were approved, Gallagher added.

TCI, which had a terrible reputation for service, began changing its ways as soon as 21st Century Cable arrived on the scene. Competition coincided with an effort by TCI to upgrade its call center and training. The combined factors resulted in a decline of two-thirds in the company's overall complaint rate.

"People no longer call us when they can't get through [to the company]," Gallagher said. "Awareness that there is another game in town goes a long way toward empowering citizens."

Gallagher said she's most excited about the possibility of competition in the Windy City's many high-rise buildings. Illinois has an "equal-access" statute that prevents building owners from striking monopoly agreements with any one telecommunications provider.

If just one tenant requests an alternate service provider, the landlord is obliged by law to permit access. But building owners remain generally hesitant to change their infrastructure, so Gallagher has taken to the speaker's circuit to preach the gospel of competition and remind landlords about the law.

At a speech last month before a condominium managers' association, Gallagher saw some building representatives "rolling their eyes" at her message.

"But the concept gets more attractive when they understand it's not overwiring I'm talking about," she said. Nowadays, buildings are more often prepared for competition, she added.

The city stops short of a citizen-targeted information campaign on equal access, though.

"We're not trying to keep it quiet, but it's not the role of government to advocate that way," she said. As complaints come in from consumers, the city urges building attorneys and rental associations to make the latter parties aware of the "tremendous deals" offered by the competing companies.

So far, the work of multiple overbuilders has not caused construction traffic jams, Gallagher noted. The work is coordinated by the Chicago Board of Underground, which promotes co-location when possible. That effort has also worked to the city's benefit.

As RCN installs its civic network, it is also laying the infrastructure for Chicago's street lights, Gallagher said.