Seizing the Phone Giants' Turf

Upstart RCN Digs in Despite Industry's Turmoil

Monday, April 9, 2001
The New York Times
By Seth Schiesel

David C. McCourt, the RCN Corporation's chairman and chief executive, says he did not set out to become a pioneer, at least not in the telecommunications industry.

When Mr. McCourt returned to Boston two decades ago after graduating from Georgetown and working for 18 months as a probation officer's aide in Washington's hardscrabble Anacostia neighborhood, he just thought he was going home.

"When you grow up in New England," he said, "you just expect that you're going to return."

Mr. McCourt, now 44 was not simply going home. He was returning to his father's trade: construction. In 1981, Mr. McCourt found himself digging trenches all around Boston for entrepreneurs who wanted to deliver a then-novel service called cable television.

Twenty years later, Mr. McCourt is still laying cables and building networks, though he and RCN are now based in Princeton, N.J. ("In the 200 years since my family moved over from Ireland, I'm the only male McCourt to leave Boston; I still have to explain myself at Christmas," he says.) And he is also building a special place for himself in the telecommunications industry.

That is because 5 years after the Telecommunications Act of 1996, which promised to open broad vistas of competition in formerly cloistered markets, RCN is the only company of significant size that is focused on giving consumers an alternative to the local telephone and cable television monopolies for a combination of local phone, cable TV and high-speed Internet services. AT&T, WorldCom and a few cable companies have made efforts to give consumers an alternative source of local phone service, but no other significant company is competing against local incumbents with RCN's breadth of services.

After the telecommunications act, hundreds if not thousands of new companies sprang up to deliver local communications services in competition against old local phone giants like Bell Atlantic and Southwestern Bell. But most of those companies look for business customers. And logically so: a midsize business, after all, might spend tens of thousands of dollars a month on communications.

Then there was RCN, quixotically building networks in residential neighborhoods, hoping to sign up households that might spend $100 a month on phone, cable and Internet service. By the end of last year, RCN sold at least one of those services to about 985,000 homes, mostly in New York City and other parts of the Northeast, but also in Chicago and along the California coast.

"The vision has always been to build a new network for the residential environment that's capable of selling all of today's services - voice, video and data - with plenty of capacity for tomorrow's services," Mr. McCourt said in an interview last week.

These can be tough times for telecommunications visionaries. May of the local communications start-ups are starved for capital, their very existence now in question. A year ago, for instance, shares of Teligent were trading as high as $55.50. On Friday, Teligent's shares closed at 37.5 cents. Lasts week, Winstar Communications, whose shares touched $56 around this time last year, announced that it would cut 2,000 jobs. On Friday, Winstar's shares closed at 40.6 cents.

And there amid the carnage stands RCN. Mr. McCourt is not happy that his stock closed on Friday at $3.97, down from a 52-week high of $55. Nor is he happy that RCN, to conserve cash, has had to scale back its plans to enter new markets.

In addition, a fair number of analysts think that RCN's sales, general and administrative costs are far too high, a problem that Mr. McCourt has at least tacitly acknowledged and is moving to fix. Mr. McCourt openly admits that RCN's so-called "back office" systems, the computers that keep track of customers and bills, installation requests and service problems, need a lot of work.

But RCN might just have a vital ally as it tries to tighten its budget: time. At the end of last year, RCN had $1.7 billion in cash on hand and another $500 million available in a line of credit. Most analysts appear to believe that the company is in no danger of going under any time soon.

"I'm a big believer in the long-term outlook for this company; our model does indicate that the company's scaled-back business plan is indeed fully funded," said Mark Kastan, an analyst at Credit Suisse First Boston. He added, however, that he thought the company's cash reserve would eventually hit a low of only about $150 million, rather than the $500 million that RCN had predicted.

The fact that RCN does not appear to be in danger of going out of business any time soon is surely a comforting through to its employees, investors and customers. Bur RCN's mere existence carries a larger significance: It is possible for a small start-up company to challenge the local telephone behemoths and cable television incumbents and give residential consumers a choice of provider for both basic communications services and fast Internet access.

According to the Federal Communications Commission, big businesses and institutions had about 46.5 million phone lines at the end of last June. Of those, 17.5 percent were served b competitive carries (not the dominant local telephone companies). For corporate customers, competition clearly is taking hold.

But at the same time, homes and small business had about 145.1 million phone lines and of those, only 4.6 million, or about 3.2 percent, were served by new carriers. Competition is obviously coming much more slowly to consumers that it is to business customers (which may be why, relative to inflation, local phone service is generally no cheaper now than it was 15 years ago).

One of the challenges in competing with the dominant local phone companies is that in order to generate sustainable profits in the telecommunications, a company usually has to own substantial network assets of its own: fiber optic lines, switches and other equipment. The Telecommunications Act required big incumbent local phone companies to sell access to pieces of their networks - like the copper lines that run into almost every home and business - to other carriers. But each part of a network that is leased by a new carrier rather than built and owned reduces that new carrier's chances for profitability.

"You need to own your own network to have a viable business pan," Mr. Kastan said. "And to do that you need to raise a huge amount of capital."

That voracious appetite for capital is one reason so many competitive local carriers are in trouble. In the current economy and stock market, the capital markets are essentially closed to them, making it difficult to raise money for network construction and for weathering the up-front losses the new networks incur.

One key reason many analysts expect RCN to survive the downturn is that Mr. McCourt raised billions of dollars when the getting was good. Having parlayed his cable ditch-digging skills into small communications companies - one in Boston, a second in London - that he nurtured and then sold, Mr. McCourt used his proceeds in 1993 to start a partnership with the Peter Kiewit construction empire, to take control of a small communications company in Pennsylvania called C-Tec. After a series of spinoffs, Mr. McCourt kept the company that is now called RCN - the name was derived from "residential communications network" - which he moved to Princeton.

In 1999, Paul G. Allen's Vulcan Ventures agreed to invest $1.7 billion in RCN and still owns about 27 percent of the company. That year, RCN also secured a $250 million investment from Hicks, Muse, Tate & Furst, the investment firm, which still owns almost 8 percent of the company. In addition, RCN made secondary stock offerings in both 1998 and 1999.

Another key to RCN's viability has been the relatively efficient way that the company has built its networks. Part of that is simply the operational know-how from Mr. McCourt's long construction experience. But the company has also marshaled its resources by concentrating on relatively densely populated areas, often with many apartment buildings, rather than trying to string together single-family homes.

But while deep pockets and careful construction are necessary for a new local carrier, there is also the complicated business of running a communications carrier. The mundane but crucial tasks include scheduling and dispatching installation technicians efficiently and making sure that customers are being billed every month (and cutting off customers who don't pay). Many a start-up has stumbled on such basic steps, and so far RCN's record on these matters has been mixed.

"The issues right now are expense control and upgrades of the back-office systems," Mr. Kastan said. "They have the right strategy, but this company will have to demonstrate a lot more on the expense control and the system-upgrade sides before they really get out of the woods. I'm a big believer in McCourt. But they need to show better execution."

Mr. McCourt acknowledges the need for RCN to tighten up its operation. This year, he recruited two senior executives to ride herd on expenses and the company's field technicians. And last week, the company announced it would buy a new billing and customer management systems from the Convergys Corporation.

The billing system is of particular concern because many of RCN's customers who use the company for multiple services now receive multiple bills each month. Unified billing would probably please customers and would also give the company more flexibility in offering promotions and lower prices for people who subscribe to a package of phone, cable and Internet services. It might also enable the company to sign up more customers more efficiently.

"We kept getting phone and cable on separate bills and over all, it did seem more expensive than what people in other building were paying," recalled Ashley Quigley, 24, an executive conference planner in Manhattan. Until last fall, she lived in an apartment building on the Upper East Side served by RCN. Despite the billing issues, "I was impressed that the service people I dealt with were actually intelligent and efficient human beings," she said. "The service people were really good."

Mr. McCourt, who is married with two children, says he has no intention of leaving RCN. But he concedes that the day may come when he is no longer the right person for day-to-day management.

He said he expected his eventual successor to come from within the company. RCN's senior management team includes Michael A. Adams, Mr. McCourt's longtime business partner, who is now president of RCN's wholesale and strategic development group; Robert J. Currey, RCN's vice chairman and former chief executive of 21st Century Telecom Group, a small local carrier in Chicago that was acquired by RCN last year; and Jeffrey M. White, president of RCN's customer and field operations group, who was the former chief financial officer and No. 2 executive at Telecom New Zealand.

"It takes a different skill set to come up with an idea and start a company than it does to run it and maybe take it to the next level," Mr. McCourt said. "Might I be chairman at some point and someone else is C.E.O.? maybe. But I will see RCN's dream become a reality. I'm not going to sell out. I think I'm qualified to finish that dream."

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