Vulcan Ventures deeper into broadband 10/7/99
redherring.com
Vulcan ventures deeper into
broadband
By Gracian Mack
Redherring.com
October 7, 1999
Vulcan Ventures's $1.65 billion investment in
telecommunications company RCN (Nasdaq: RCNC)
will help transform the television set from a one-way
receiver into an interactive device for traversing the
Web, according to William Savoy, Vulcan's president.
"There will be [television] screens everywhere," said
Mr. Savoy, during a conference call on Monday about
Vulcan's new deals.
"The Internet is a communications
paradigm shift," said Mr. Savoy.
"You have to think, 'If only the
functionality that is available on
your PC was available on the
television.'"
Vulcan Ventures, the investment
vehicle for Microsoft (Nasdaq:
MSFT) cofounder and Vulcan
majority shareholder Paul Allen,
announced Monday that it would invest $1.65 billion in
RCN. Based in Princeton, New Jersey, RCN
develops advanced fiber-optic networks to provide a
wide range of telecommunications services such as
local and long-distance telephone, video programming
and data services.
That investment buys Vulcan a
stellar opportunity to pair RCN
with other Vulcan-affiliated
companies, advancing Mr. Allen's
vision of a wired world.
WEB SPACE CONVERGENCE
On Monday Vulcan also
announced it was forming
Broadband Partners, a joint
venture with other companies
backed by Mr. Allen, including Charter
Communications, RCN, Go2Net (Nasdaq: GNET),
and High Speed Access (Nasdaq: HSAC).
Broadband Partners will provide portals optimized for
broadband connections to customers of Charter and
RCN who receive high-speed Internet services
through TV set-top boxes.
Charter, based in St. Louis, is the fourth largest cable
television system in the country. Vulcan Ventures owns
93 percent of Charter and now owns 21 percent of
RCN (up from the 4.9 percent previously held). The
investment concept is to allow Charter's cable
customers to enjoy the benefit of RCN's telephone
technology, and for RCN to enjoy a wider customer
base.
High Speed Access will contribute the swift Internet
connections. Go2Net will provide the portal to the rest
of the Web, as well as to other Vulcan investments
such as Asymetrix Learning Systems (Nasdaq:
ASYM), Egghead.com (Nasdaq: EGGS), Liquid
Audio (Nasdaq: LQID), Fatbrain.com (Nasdaq:
FATB), Stamps.com (Nasdaq: STMP), Tivo
(Nasdaq: TIVO), and others.
Mr. Allen's cash infusion gives RCN the capital it
needs to build out its planned network by 2003, said
David McCourt, RCN chairman and CEO. The
company's current client base is clustered in two
coastal corridors: Boston to Washington, and San
Francisco to San Diego. The company believes that
these are the most dense markets in the country --
optimal places in which to launch its ambitious phone,
cable, and high-speed Internet services to residential
customers.
"Forty percent of the telecommunications activity
comes out of the regional areas that RCN has focused
on. We estimate that they have about a 6 percent
market penetration in those markets," says Michael
Renegar, senior analyst with BancAmerica Securities.
INTRUDER ALERT
These deals raised eyebrows, as it makes Paul Allen's
wired world a serious competitor to other broadband
moguls in the making, including the team of AT&T
(NYSE: T) and Excite@Home (Nasdaq: ATHM).
"RCN is a smaller and more nimble company than
AT&T is," says Mr. Renegar. "So, it becomes a
question of which is more efficient, to upgrade old
networks or build from scratch. Build from scratch
seems to be the answer."
According to Mr. McCourt, RCN lays fiber-optic
cable to within 900 feet of a customer's doorstep. "So
far we are about 10 percent of where we want to be,"
said Mr. McCourt.
Building out a telecommunications network is a
capital-intensive endeavor, notes Mr. Renegar. Having
the cash to continue its build-out eliminates huge
hurdles in a company's business cycle, he says.
As evidence of how huge a hurdle it can be: for the
quarter ended June 30, 1999, RCN reported an
earnings before interest, taxes, depreciation, and
amortization (EBITDA) loss of $25 million, up from
$21 million the previous quarter. Telecommunications
companies focus on EBITDA because of the
mountainous infrastructure costs associated with
building a network. However, according to its balance
sheet, RCN has deftly kept assets ahead of liabilities.
Last quarter it had $1.89 billion in total debt and $2.86
billion in total assets (the bulk of which was in cash and
short-term investments).
WHERE NO ONE HAS GONE BEFORE
"We could stop building any time we wanted to if we
wanted to be a profitable, positive-cash-flow
company," Mr. McCourt said. "The point is we want
to keep on building. This broadband model is
something you've never seen before ... we're trying to
build something around the capacity we know exists.
This is not a retrofit."
RCN expects to be cash-flow positive for the full year
2001 and have "very significant" positive cash-flow by
2003, CFO Bruce Godfrey said during the conference
call. Mr. Godfrey added that, according to its current
rollout schedule, RCN expects to achieve positive
EBITDA for the full year 2001.
In the meantime, RCN also reported that for the
quarter ended June 30, 1999, revenue increased 49
percent to $134 million, up from approximately $90
million reported in the year-ago period. Mr. McCourt
said that higher revenues were due in part to higher
average service connections and to other strategic
partnerships, such as ones the company has with Level
3 Communications (Nasdaq: LVLT), Qwest
Communications (Nasdaq: QWST), and Potomac
Electric Power.
RCN stock gained 25 percent by its Wednesday close
at $49.25. Other Vulcan-backed companies have
fared well in the market: following an $8 initial public
offering in April, Go2Net closed Wednesday at
$62.88 and High Speed Access has run from its $13
IPO price in June to Wednesday's close of $25.44.
Mr. Allen has another stock opportunity coming early
next month. In November, Charter Communications is
expected to issue an initial public offering of 170
million shares at between $17 and $19 per share
through underwriters led by Goldman Sachs (NYSE:
GS).
RCN
Charter Communications
Go2Net
High Speed Access
AT&T
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