Sign of Times: $1B Overbuild Pact
Overbuilders took giant steps forward last week in Louisville, Ky., and Indianapolis, while a third company cut a billion-dollar deal with Bechtel to build recently awarded franchises.
A cloud remains over the Louisville deal, where an 8-3 majority of aldermen approved a 15-year franchise for Georgia-based Knology Inc. The vote came after eight months of negotiations, which included incumbent Insight Communications Co. Inc. during the past few weeks.
Insight lawyers are examining the final franchise agreement to determine whether the competitor's deal violates Insight's franchise agreement, which requires that any operator that follows Insight into town be held to "substantially similar" franchise terms.
A lawsuit could stop Knology before it ever lays a strand. The incumbent's franchise agreement specifies that filing a lawsuit is the same as gaining an injunction to stop the challenged activity pending resolution by the courts.
Insight officials at city meetings-attended by CEO Michael Willner-said they embraced competition but opposed the terms that were approved for Knology. The competitor received a 15-year franchise, while Insight has been refranchised for 12 years.
Further, when Insight embarked on a rebuild, city officials set a 15-month deadline. Knology has five years to build a system. Also, franchise faults committed by Insight must be cured within 60 days. Knology will have 18 months to cure faults under the recently approved agreement.
Willner said Insight would decide soon whether to sue.
Knology argued that its franchise is comparable to terms Insight's predecessor enjoyed as a new build. As for Insight's short build-out schedule, Knology vice president of business development Felix Boccucci compared Insight's project to a reroofing job versus Knology's whole-house construction.
Knology recently got franchises in Knoxville, Tenn., and Nashville suburbs with similar build-out schedules, he said. Knology now has 41 franchises in seven markets, five of which have completed build-outs.
In Indianapolis, meanwhile, the unified city and county council authorized 15-year franchises that pit Digital Access Corp. and Totalink of Indiana against Time Warner Cable and Comcast Corp.
The deal was Digital Access's largest to date, covering 350,000 households. It now has franchises covering 460,000 households in four states.
Totalink is a partnership between Boston-based Utilicom Networks and Vectren Corp., a subsidiary of Indiana Gas Co. The two companies already offer telecommunications services in Evansville, Ind.
Time Warner currently serves consumers within the Indianapolis limits, while Comcast controls 118,000 customers in outlying areas.
Rick Maultra, director of the city's cable communications agency, said it had become apparent that the two had no intentions of "encroaching on each other's territory."
"The broadband networks the two newcomers will build are different from what the incumbents are offering," Maultra said. "They will also offer telephony, which means competition for Ameritech [Corp.]."
Digital Access spokesman Tom Gailey was not dismayed that wherever the company builds its network in Indianapolis-its franchise calls for a system covering both the city and the county-it will be one of three providers.
"We're going to find out if the market will support three competitors," he said. "We still think Indianapolis is an attractive market. It's just a matter of doing what we do faster and better."
Also last week, Texas-based Western Integrated Networks LLC's $1 billion construction deal with Bechtel gave near-term credibility to the overbuild craze, an analyst said.
But while it may be a "wake-up call" encouraging cable operators to keep upgrading their networks, some observers questioned any overbuilder's long-term prospects.
"In the near term, [an overbuild] is detrimental to the cable guys because it results in negative subscriber growth," SG Cowen Securities Corp. cable analyst Gary Farber said. "But you also have to wonder what the exit strategy is for Western Integrated, since no one has ever been able to make a business of these things."
WIN vice president Bill Mahon argued that unlike earlier overbuilds, networks coming online in the next few years can rely on more sources of revenue than just cable.
"There are new revenue streams in today's market that can be captured only by producing a full array of services in a bundled format," Mahon said.
WIN recently announced that Bechtel would build its broadband networks in Dallas, San Antonio and Austin, Texas, and Sacramento and San Diego, Calif.
Although Bechtel will build all five markets simultaneously, the emphasis will be on bringing Sacramento and Dallas online as soon as possible, Mahon said.
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