Skip to main content

Fast-Growing Knology Scares Cable

While RCN Corp. has been grabbing headlines with its
bundled-telecommunications forays into big Northeastern markets, another company has been
quietly following a similar approach in smaller Southeastern cities.

Even if Knology Holdings Inc. is far from a household name,
its pedigree and connections are hard to dismiss. As one cable broker who has kept tabs on
it said recently, "These guys are scary."

The West Point, Ga.-based firm is easily overlooked. It
ended the first quarter with just 42,000 subscribers, in systems that Knology acquired in
Montgomery, Ala.; Columbus, Ga.; and Panama City Beach, Fla., for which it paid a total of
$14.7 million, according to securities filings.

Knology -- according to its Web site (, the name comes from
"combining knowledge with technology" -- is branching out from that initial
base. It has targeted Southeastern cities with population bases of more than 100,000 for
new digital overbuilds.

On May 29, it won a cable franchise in Charleston, S.C.,
where it plans to overbuild Comcast Corp.'s system with a 150-channel, 750-megahertz,
two-way system, upgradable to 1,000 MHz.

Charleston is its biggest franchise territory, to date,
with 140,000 homes. A North Charleston franchise followed that award, and others in that
area are in the works.

Earlier this year, Knology won franchises for new builds in
Augusta, Ga., with 138,000 homes, and Panama City, with 79,000 homes. In those markets and
in Charleston, Knology has begun building two-way networks at up to $50 million per

Other offerings in Knology's bundle -- local and
long-distance phone service and Internet access -- have attracted even fewer customers. As
of Feb. 28, Knology had 880 subscribers combined in Columbus and Montgomery taking those
nonvideo services.

But the phone and data offerings are in their infancy. The
company first offered data service in September, and its phone services were launched late
last year.

What's more, the list of other companies in which Knology's
original backer, ITC Holding Co. Inc., owns equity indicates a track record in data and

They include MindSpring Enterprises Inc., an
Internet-service provider with about 340,000 subscribers; DeltaCom Inc., a long-distance
reseller now in 14 Southeast markets; Interstate/Valley Telephone Co., a local telephone
company in parts of Georgia and Alabama; and PowerTel Inc., a wireless phone operator in
25 Southeast markets.

ITC still owned 42 percent of Knology as of Jan. 31.

Knology's sister companies provide it with a variety of
services. According to securities filings, Knology uses DeltaCom's fiber network to
provide long-distance service and an Internet link, and Knology and DeltaCom jointly run a
network-operations center in West Point.

Also, MindSpring provides Internet content and customer
support to Knology.

Where it's offered to Knology cable customers, "The
Bundle" of services comes with a 10 percent discount on their "Olotel"
phone service and $10 off the usual $49.95 "Olobahn" cable-modem monthly charge.

Knology officials declined to be interviewed for this

Incumbents are aware of Knology. At least partly as a
pre-emptive strike, Jones Intercable Inc. announced last week that it plans to introduce
digital-cable service in Augusta, starting with a trial early next year, followed by a
full launch to its 90,000 area customers sometime in the first quarter.

Jones' digital-TV service has been limited so far to a test
in Pima County, Ariz.

"I think that it was a factor," said James
Carlson, Jones' vice president of corporate communications, when asked whether Jones
targeted Augusta for digital to blunt Knology's approach. Augusta seems to have the right
demographics to support digital service, he added, and the system was in need of a
rebuild, anyway.

Knology already competes against Tele-Communications Inc.
in Montgomery, and it has sought a franchise in nearby Prattville, Ala., as well.

Local TCI general manager W. Jack Gilbert said TCI has
watched as Knology "spent a lot of money" installing new plant and retrofitting
to make sure that its 80-channel system had fiber throughout its Montgomery turf.

Knology bought the Montgomery Cablevision and Entertainment
Inc. system in 1995, and it has increased the subscriber count to some 22,000 from about
8,500 then. Gilbert said Knology made a lot of headway last year, when TCI was losing
subscribers across the country due to marketing cutbacks and channel changes.

Since then, Gilbert said, TCI has been getting subscribers
back from Knology. And TCI recently launched its digital-cable service in Montgomery, as

Gilbert said that in his opinion, Knology is basically a
telco, and it will probably rise or fall depending on how well it can compete against a
really tough incumbent: BellSouth Corp. Meanwhile, as a cable operator, Knology's telco
cash "can cover a lot of mistakes," he added.

Knology has shown an ability to raise cash. In October, a
junk-bond sale took in $242 million, which Knology supplemented with a $32 million
private-equity placement.

Knology directors such as Campbell Lanier have a history in
telecommunications finance. Lanier helped to found Telecom USA Inc., which grew to become
the fourth-largest long-distance provider until it was bought by MCI Communications Corp.
in 1990 for $1.2 billion.

They plowed that cash into ITC, which begot MindSpring,
Interstate/Valley, PowerTel, Knology and others.

Like RCN, which has forged links with electric utilities in
several markets, Knology reached a strategic partnership with South Carolina utility Scana
Communications Inc., which owns 7 percent of Knology. Scana's aid in Charleston includes
help with "government relations, franchise approval, marketing efforts and access to
sites for its equipment, which is an important part of network construction," Knology

Other Knology equity-holders include AT&T Corp. -- its
AT&T Venture Funds owns 14 percent of Knology.