TALES OF THE TAPE: RCN Ahead Of Giants With Bundled Service
By Craig Karmin
NEW YORK (Dow Jones)--As powerhouses like Bell Atlantic Corp. (BEL) and AT&T Corp. (T) race to become the first major telecom company to provide fully bundled services, one lesser-known competitor is already delivering the complete package.
RCN Corp. (RCNC) offers local, long-distance, cable, Internet and video services to residential customers in the Northeast and in Northern California.
The Princeton, N.J., company also has an outspoken chief executive who maintains that corporate history is on his side.
"Never when an industry is undergoing a sea change do the dominant players remain on top," said David McCourt, the CEO. "And the telecom industry is undergoing a huge sea change."
That may sound like bold talk from a company that has 90% of its network still left to build, and is offering service in only a handful of markets. But many analysts say this start-up merits attention.
"They are an interesting one to watch," said Pat Kane, an analyst with Federated Investors, "because what they're offering is unique."
Indeed, in an industry where most players are betting that customers want the convenience of buying all their telecom, cable and data services from the same provider - making "bundled" the buzzword of the year - RCN serves as a test case.
A Bundling Battle Is Brewing
But for how long can it stay ahead of the pack?
The most direct and immediate threat to RCN's business is Bell Atlantic, which expects to win regulatory approval to offer long-distance in its home territory by mid-year.
The New York Bell is then likely to pitch a bundled package that will include satellite television from Hughes Electronic Corp.'s (GMH) DirecTV as a substitute for cable.
AT&T, meanwhile, is on the verge of closing its acquisition of Tele-Communications Inc. (TCOMA) and recently announced a new alliance with Time Warner Inc. (TWX). The long-distance giant plans to begin trial runs of bundled services over TCI and Time Warner cable systems by the end of this year.
And earlier this month, SBC Communications Inc. (SBC) announced it will offer a full menu of telecom and data services over the fiber-optic network of Williams Cos. (WMB) once the Bell wins long-distance
approval.
Analysts maintain that RCN's fiber-optic network is superior to the older systems employed by the Bells and AT&T. But some also wonder how effectively RCN can compete once the giants, with their financial resources and national brand recognition, offer the same menu of services.
"Start-ups can get by for a while on vision, but sooner or later execution is what counts," said Robert Donahue, an analyst with Salomon Brothers Asset Management. "RCN has an interesting market opportunity. But they will have to post numbers."
RCN Underpricing Time Warner, Bells
So far, says Prudential Securities Inc. analyst Guy Woodlief, the early numbers have been encouraging.
Led by McCourt - a former director at MFS Communications Corp., now a unit of MCI WorldCom Inc. (WCOM) - RCN successfully targeted 300,000 homes passed on its network in 1998, and expects to pass an additional 400,000 in 1999.
Analysts also say that RCN's state-of-the-art fiber-optic network, which is being constructed to serve buildings in the metropolitan areas of New York, Boston, Washington, D.C., and San Francisco, gives
the company an advantage over its larger competitors.
After the first six to 12 months in a new building, the company reports an impressive 20% to 30% penetration rate, and RCN recently surpassed the half-million mark for Internet subscribers.
"We believe RCN will be able to differentiate itself from the incumbent cable operators based on the superior quality of the network it is constructing," Michael Renegar, a NationsBanc Montgomery Securities Inc. analyst, wrote in a recent report.
Renegar has a $40 price target on RCN, which was trading at 26 Wednesday afternoon. That level is about three times its 52-week low of 8 3/4 in October and approaching the 52-week high of 30 5/8 from last March.
RCN's network can also deliver data at speeds up to 10 times faster than the initial asymmetric digital subscriber line service, known as ADSL light, some of the Bells are planning to roll out, according to
Prudential's Woodlief.
And as new technologies develop, the RCN network can be more easily upgraded than the older phone networks still used by the Bell operators.
RCN Sees Empire-Toppling As Its Mission
Chief Executive McCourt says he can beat back competition from the industry's 800-pound gorillas through discounts alone. By targeting only densely populated residential markets, and by constructing a network that can be upgraded cheaply, RCN is able to slash costs and underprice the majors when offering bundled services.
Already RCN offers a fully bundled package of cable, Internet, local phone and long-distance service that averages about $100 a month. McCourt says that represents a monthly savings of at least $20 compared with buying the same services separately from Time Warner and Bell Atlantic.
"They'll never be able to match my price," McCourt boasts.
McCourt likes to portray his battle with the ruling powers of telecom as the overthrowing of an evil empire that gave consumers little choice - a scene brought to life in cheeky RCN advertisements depicting freedom-hungry Eastern Europeans toppling a statue of Lenin.
RCN estimates that of the 27 million homes from Boston to Washington, D.C., nine million can be reached cost effectively. That amounts to an $8 billion telecom opportunity and a $3 billion cable opportunity, according to NationsBanc Montgomery Securities Inc.
Although McCourt expects to return to the high-yield or equity market sometime this year, RCN has around $1 billion cash on hand that will go toward completing the first phase of its network buildout in the Northeast.
RCN also recently announced an agreement with Level 3 Communications (LVLT) to share the costs of building Level 3's fiber-optic network in the Northeast and across the U.S. RCN will use that network to connect its East Coast markets with its California market.
Level 3, in fact, owns 41% of RCN though a partnership with McCourt. His relationship with Level 3 Chief Executive James Crowe goes back to their days as directors at MFS Communications Corp.
- Craig Karmin; 201-938-2020
craig.karmin@cor.dowjones.com |
