C-Tec surges ahead in phone, cable markets

USA TODAY
September 15, 1997

NEW YORK - If you hold C-Tec’s annual report up to a mirror and study it closely, you’ll find a secret message from David McCourt, chief executive of the telecommunications upstart.

Beneath the title, "The Revolution Continues," is a famous picture of a mob tearing down the Berlin Wall. The wall is covered with graffiti, so it's easy to miss three words -- written backward -that McCourt has added: Bell Atlantic, Cablevision, and Nynex. He equates his entrenched competitors with Communist-era "tyrannies."

At a time when many big companies are scaling back plans to compete in the residential local phone and cable markets, McCourt, 40, is waging the most aggressive challenge in the country.

C-Tec of Princeton, N.J., will spin off Commonwealth Telephone Enterprises, Cable Michigan and RCN Communications on Sept. 30. McCourt will run the newly independent RCN, which had $60 million in fiscal 1997 revenue and is building a $7 billion fiber-optic network that will carry voice, cable television and high-speed Internet access over the same wires to residential customers in 24 cities from Washington to Boston.

It's already operating in New York, Boston, Washington and the Lehigh Valley in Pennsylvania. "Someone has to jump in the water and prove that it isn't over everyone's head," McCourt says.

The water is turbulent, though. Phone and cable TV companies are upgrading their networks.

“We are not about to be out-marketed by anyone," Cablevision spokesman Charles Schueler says.

Cablevision has 3.2 million customers in Boston, New York and Cleveland. It's preparing to carry phone service and high speed Internet access and it’s offering advanced services on Long Island, N.Y.

Critics note that RCN is still reselling Bell Atlantic service in some areas and accuse it of paying attention only to affluent markets.

The giants of the telecommunications business have been wading in the shallow water since the law unleashed competition last year. Long-distance carriers AT&T, MCI and Sprint are finding the going is slow as they begin offering local phone service to residential and business customers.

The regional Bell carriers have failed to invade each other's local territory. The cable TV companies have backed way from their threat to offer telephone service, and the Bells have backed away from their threat to offer TV.

Some analysts argue that competition in the local market is unrealistic. "Congress got it wrong. It thought the local loop is like long-distance," says analyst Scott Cleland of Legg Mason's Precursor Group. The local companies have networks worth $270 billion. The long-distance networks are worth only $40 billion.

Cleland says the local business is so expensive that it only makes sense to build one network. And competitors simply can't make money buying local service from the dominant carriers and reselling it, he says.

Enter RCN. McCourt believes the Internet is stirring demand for networks that accommodate voice, video and data. He plans to grab the market while the big carriers fight among themselves.

"We realized that a brand new network designed and built around the Internet was the way to go," he says. He had planned to lease capacity on the network of partner MFS Communications which was acquired by WorldCom last year.

The leasing arrangement would have cut McCourt's capital expenses by half. But MFS, which built a fiber-optic system to provide local service to businesses, kept running out of capacity. It was 1995, the Internet was just beginning to surge in popularity and MFS suddenly didn't have capacity to spare.

"My first reaction was to panic," McCourt recalls. "But then I said, maybe our premise that we couldn’t afford to build our own network was faulty. We were lucky the MFS deal didn't work out."

McCourt figures he can build his fiber network for about $1,500 a customer, or half the cost of buying an existing cable TV system. He should know. Cablevision founder Chuck Dolan hired him years ago to build one of the first urban systems in the nation.

Entering one market every 90 days, McCourt expects RCN to cover 24 markets within six years. He's waging an aggressive marketing campaign, running ads that compare phone competition to the toppling of the Berlin Wall. He's rolled $35 million of his own money into the business. He believes RCN will be to the residential market what MFS was to the business market.

Dillon Read telecommunications analyst Bruce Roberts thinks RCN can do it. He predicts net losses will rise until 2001, and decline until the company breaks even in 2004.

"The smaller companies are in a better position," he says. Big companies will need more time to expand their services because they have so many customers. "AT&T has 80 million customers. How is it going to provide them local service right away?"

It's been an eventful summer: C-Tec stock has climbed more than 20% since last month. RCN agreed in August to send communications over Potomac Electric Power's 350-mile fiber network in greater Washington. It plans a high-yield debt offering with Merrill Lynch in early October. RCN has 75,000 cable and phone customers in Boston, New York and Washington. It expects to add 16,000 in September.

"I think David McCourt will be running a very profitable and very formidable residential telephone company," says analyst Jack Grubman of Salomon Bros.

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