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MDU Competition Forces MSOs To Shift Strategies

The battle for the hearts, minds and cable subscribers in
apartment buildings is heating up and forcing some wired and wireless cable operators to
make changes to keep up.

Analysts and operators said consolidation in the
private-cable industry is creating some potent new players that are eager to cut deals
with multiple-dwelling-unit (MDU) owners to gain market share and to keep capital flowing
their way.

Companies little known outside of the industry --
Dallas-based OpTel Inc., Chicago-based OnePoint Communications and Bellevue, Wash.-based
Cable Plus -- are putting pressure on incumbent operators that are worried about losing
their share of the estimated 20 million people who live in MDU complexes.

The MDU market is appealing because it gives operators a
chance to bundle video, telephone and data services in a single package, relatively free
from competition because of contract exclusivity, Paul Kagan Associates Inc. analyst John
Mansell said.

Strategic shifts in addressing the MDU market are maybe
most evident among multichannel multipoint distribution service (wireless cable)
operators. As MMDS companies have fallen on hard times, some have chosen to get out of the
MDU business altogether to conserve capital for a last-ditch shift to digital services.

People's Choice TV Corp. falls into that category and,
according to sources, so does CAI Wireless Systems Inc. Both have sold or have offered up
for sale contracts to serve thousands of MDU units, and private-cable outfits are snapping
them up.

'I once expected the wireless cable guys to come in
and consolidate the private-cable industry,' Mansell said. 'Now it looks like it
could be the other way around, because the capital seems to be flowing more freely these
days to the private-cable operators.'

Late last year, PCTV closed a deal to sell some 4,300 MDU
customers in 9,800 apartments in St. Louis to ResNet Communications LLC for $3.8 million.
That's the first step in a planned sale of 270 MDU properties with 59,000 individual
units and 21,500 customers in Houston, St. Louis, Phoenix and Chicago.

Those interested in bidding on the PCTV trove include
CablePlus, which is backed by billionaire Craig McCaw, and cable MSOs Time Warner Cable
and Cox Communications Inc., sources involved with the process said.

Michael Whalen, PCTV's vice president of acquisitions
and finance, said the stiff competition for MDU contracts and the high market value for
those contracts were factors in opting to sell them off.

CAI, meanwhile, is quietly shopping MDU units clustered in
Washington, D.C., Philadelphia and New York. OnePoint is considered a leading candidate to
end up with the D.C. units. CAI chief financial officer James Ashman said last week that
the company has confirmed that it is considering whether to sell its MDU contracts in
order to raise much-needed cash.

Other wireless cable MSOs have cut deals with DirecTv Inc.
to combine its digital direct-broadcast satellite offering with their local off-air
signals. One such DirecTv partner, Wireless One Inc., is focusing primarily on the MDU
market in the Southeast. MDU densities enable it to keep capital costs down, and the
DirecTv partnership gives it a more competitive product, Wireless One chairman Henry
Burkhalter has said.

Bob Berger, senior vice president at Communications Equity
Associates Inc. and a broker who has handled many private-cable deals, said the industry
consolidation is fueling much of the activity. As companies like OpTel and ResNet have
grown, they've managed to get to a size that attracts capital.

Now, some of those companies are rushing to build up enough
heft to go public with initial stock offerings.

'I think all of the big ones are angling in that
direction,' Mansell said.

None of this is lost on big MSOs such as
Tele-Communications Inc., which are seeing 'a lot of creativity' in the kinds of
financial and service offerings that their rivals are putting in front of MDU
decision-makers, according to Chris Coles, TCI's senior vice president of business
sales and marketing.

Those offerings include a combination of financial
inducements -- such as upfront commissions and back-end revenue sharing -- and service
combinations that throw in digital video and high-speed data.

TCI, which estimates that 30 percent of its market is in
MDU units, is fighting back with its own digital video service and @Home Network
high-speed-data service. The missing piece -- facilities-based telephone service -- may be
addressed soon. Coles said TCI is experimenting with providing phone service through
Teleport Communications Group, of which TCI is a part owner, in a San Francisco Bay-area
location, and the company is likely to announce an expanded phone offering within the next
30 days.

So far, the lack of phone service hasn't been much of
a competitive disadvantage, Coles said, because MDU managers know that there's always
a local phone incumbent available.

Coles said TCI also points to its long history in the
business when competing for MDU business. Many MDU managers have seen private-cable
companies offer the sun and moon, only to fold before ever wiring a unit.

Brian Adamik, who follows the MDU marketplace at Cambridge,
Mass.-based market-research firm The Yankee Group, agreed that the failures of some of
those firms have helped cable. MDU managers 'are looking for a brand name, for a
credible brand in the marketplace,' he said.

The flip side is the fact that other behemoths, including
electric utilities and regional Bell operating companies, are also turning their attention
to dense residential complexes.

Adamik noted in a recent report: 'There is little
distinction between a business and a residential apartment building in terms of its
ability to generate large quantities of voice, video and data traffic.' He thinks
that apartment-dwellers will be the first to benefit from multiple-service offerings,
forecasting that 50 percent of consumers in MDUs will have a choice of local phone
providers by the year 2000.