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BusinessWeek: January 10, 2000 |
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News: Analysis & Commentary: Telecommunications
RCN: The Juiciest Morsel in Cable? Its affluent urban markets make it takeover bait
McCourt is no longer a kid. But the 43-year-old entrepreneur is still challenging the communications establishment. His cable upstart, RCN Corp., is building a $12 billion fiber-optic network to compete with the nation's cable TV and local-phone giants. And by carefully drawing his network in the most desirable urban neighborhoods, he is creating something the big guys covet: high-speed connections to deliver TV, telephone, and Internet service to the best customers. Although RCN has only 800,000 customers, they are concentrated in places such as Manhattan and Boston. While the average cable operator reaches 38 homes per mile of cable line, RCN can reach up to 150 homes (table). And although RCN's networks, scheduled for completion in eight years, will cover just 6% of the country, they'll compete for 44% of its telecommunications traffic. "I have more product where people spend more money," says McCourt. Still, RCN may wind up needing the big guys more than they need him. Analysts say he can break even if 20% of the homes RCN passes take one or more of its services. But few cable rivals have ever snagged more than 10%. So McCourt may find it easier--and more lucrative--to join with one of the giants he aims to compete with than try to beat them. Some analysts are betting that RCN, with $355 million in revenue expected for the year ended Dec. 31 and a $3.5 billion market cap, will soon be swallowed by a cable giant or a phone company such as AT&T or Bell Atlantic. Not surprisingly, RCN stock is up 161% for the year at 46 1/4. Among the most likely bidders: Charter Communications, the fast-growing cable empire of Paul G. Allen. In October, the Microsoft co-founder's Vulcan Ventures plowed $1.65 billion into RCN, raising its stake to 27.4%. from 4.5% and raising eyebrows among cable operators who face competition from RCN. Now, sources close to RCN say both Allen and AT&T Corp. (now the nation's largest cable operator) have expressed interest in buying the company. "NATURAL FIT." If Charter winds up with RCN, that could spark another, bigger deal, predicts Blair Kirby, a vice-president at telecom consultancy Renaissance Worldwide Inc. He figures that MCI WorldCom Inc. could be interested in buying a combined Charter-RCN to add to its menu of long-distance, Internet, and--if its acquisition of Sprint Corp. goes through untouched--wireless offerings. "MCI WorldCom and RCN seem like a natural fit," says Kirby. AT&T, MCI, Vulcan, and Charter declined to comment. A source familiar with the contacts between Allen and RCN says the billionaire would like to complete a deal in the next 18 to 24 months. In the meantime, McCourt has been busy doing smaller deals of his own. On Dec. 13, RCN agreed to buy 21st Century Telecom Group in Chicago for $250 million, giving it a bigger foothold in that market. And it is negotiating with the City of Los Angeles to provide a combination of video, voice, and data to residents in wealthy neighborhoods such as Sherman Oaks and Brentwood. RCN has also expanded its network through deals with utilities in Boston and Washington, and more such alliances are likely. What McCourt may still need as the race to sign up broadband customers intensifies is the resources to fight the marketing battle. The four-year-old business has racked up losses now approaching $617 million. And Merrill Lynch & Co. doesn't expect RCN to produce its first net profit until 2005. That's another reason why investors are betting that the feisty upstart won't be independent for long. Return to top | |
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 TABLE The Last Mile By focusing on well-to-do city dwellers, RCN gets more revenue per mile of
wire
CABLE LOCAL
OPERATORS PHONE COMPANIES RCN
AVERAGE NO. OF RESIDENCES PER NETWORK MILE
38 26 150
AVERAGE MONTHLY BILL
$39 $35 $134
POTENTIAL REVENUE PER MILE
$17,784 $10,920 $241,000
DATA: YANKEE GROUP
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