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Who is RCN, anyway?
The Princeton, New Jersey, company stepped into the spotlight last week with a US$110.5 million purchase of two East Coast Internet service providers: Erol's Internet of Virginia and UltraNet Communications of Massachusetts. The deal gives RCN Corp. (which stands for Residential Communications Network) a subscriber base of 325,000 - making it by far the largest regional ISP in the Northeast.
Almost as soon as the deal was announced last Wednesday, questions began to surface about this little-known player. Where did the company come from, and how would its plans for expansion affect consumers in the Northeast?
RCN is a wanna-be überprovider run by David McCourt, a low-profile but successful telecom empire-builder. He started the fiber optic network that grew into MFS Communications, pocketing $30 million when MFS was later sold to WorldCom. His strategy for RCN: milk the 1996 Telecommunications Act for all it's worth, offering consumers one-stop shopping for local phone service, long-distance, cable TV, and Internet access. Some observers have compared McCourt's blueprints for RCN to Bernard Ebbers' work at WorldCom.
McCourt clearly enjoys casting RCN as the nimble entrepreneurial start-up that's battling telecom biggies like Bell Atlantic and cable TV monoliths like MediaOne. RCN's first major ad campaign mimics Communist-era propaganda posters, poking fun at its entrenched rivals with lines like, "Sooner or later, all tyrannies crumble," accompanied by images of angry mobs dismantling statues of Lenin. A banner on the company's homepage reads, "Welcome to RCN Revolution Headquarters."
To back up the boasting, RCN is building a cutting-edge fiber optic network that "everybody else in the business wishes they had," according to Bruce Roberts, an analyst at SBC Warburg Dillon Read, who follows RCN's stock. The company will spend $750 million on the network by the end of 1999, burying fiber at the rate of about 15 miles a day.
But where will RCN find the early-adopters who'll ante up for the package of services it wants to offer?
That's where last week's ISP spending spree comes in. RCN gets 325,000 tech-savvy consumers to whom it can market phone and cable TV services. "The key thing in this deal was that they bought customers," says Joe Bartlett, an analyst at the Yankee Group in Boston. "Now, let the cross-selling begin."
But while RCN is betting that consumers will be tickled to be able to consolidate their Internet access, cable, and phone with one provider, some independent ISPs think differently.
The Internet Access Company, known as TIAC, a Bedford, Massachusetts, ISP that was one of the Northeast's biggest before RCN's binge, wasted no time in launching an aggressive marketing campaign aimed at RCN's new customers.
"TIAC won't try to shove new cable service or long distance plans at you," read a message on the company's Web site, which also offered a special introductory deal for former Erol's and UltraNet subscribers.
"We're extremely excited this happened," says Joe Golemme, TIAC's chief financial officer, who says that RCN had made an offer for his 70,000 subscriber company late last year. "There's confusion in the marketplace. We want the world to know that we're here to offer Internet services. You can't get cable TV from us. We won't try to sell you other stuff that you don't want."
Bartlett at the Yankee Group says that there's some danger that a portion of RCN's 325,000 new subscribers will defect during the transition, but he believes the company will be able to keep a lid on the attrition. "It's a risk they need to be aware of and handle properly," he says.
Another risk to RCN is having key employees poached by its competitors. Analysts say that RCN had very little in-house expertise about Internet access prior to the deal. Indeed, the company will retain Erol's chairman and CEO Dennis Spina as head of its Internet division, and has arranged to keep UltraNet CEO Geoff Schultz as vice president of engineering, to help build its access business.
But though RCN insists that it will not lay off any employees at the two ISPs in the wake of the purchase, rivals are trying to sow uncertainty about that guarantee. Top dogs at several competing regional ISPs have posted to the ne.internet.services newsgroup, making open job offers to former Erol�s and UltraNet staffers.
UltraNet CEO Geoff Schultz insisted that his company is in fact "hiring people in all departments," rather than cutting back, and has just leased 15,000 square feet of extra office space for expansion.
At Erol�s, questions aren't focused so much on personnel as on finances. The company had filed for an initial public offering prior to RCN's purchase, disclosing in SEC documents that it has lost $40 million over the last two-and-a-half years. But despite that dismal figure, Bartlett at Yankee Group says Erol's was a good buy because of its low turnover rate. "They have half the industry-average churn rate," he says. "That's what makes them attractive," despite the fact that the company spent an estimated $60 to acquire each customer, at monthly prices as low as $10.95.
And RCN, by amortizing the sales, marketing, and customer service costs across its local, long-distance, Net, and cable services, could well make money where Erol's has been bleeding red ink. The company has already shown marketing savvy, matching its edgy ads ("No Empire Lasts Forever - Especially One That Keeps You Waiting 5 Hours for a Repairman") against Bell Atlantic's dopey Maurice Sendak spots. And it has opened what it calls "Product Showcase Centers" in midtown Manhattan and Boston - glitzy retail outlets where customers can sample RCN's services.
Unfortunately, consumers can't actually sign up for RCN's services everywhere in the Northeast just yet. The company's still getting up to speed, says spokesperson Jim Maiella. Pockets of Manhattan; Boston; and Allentown, Pennsylvania, are already online; and areas of Washington will be later this year.
One factor slowing the company's progress are barriers left over after the Telecommunications Act supposedly opened up competition. "[RCN] originally went into the market thinking that all this stuff would be resolved by now, and every year, another level of delay gets factored in," says David Cooperstein, an analyst with Forrester Research. "Those battles aren't going to go away tomorrow."
When they do, though, it's likely that at first customers will still have to deal with multiple wires poking into their homes - one for telephone, one for the Net, and another for cable. In the short-term, for example, RCN's Internet access customers will be using the same copper wire-based, dial-up services that Erol's and UltraNet offered.
But ultimately, RCN hopes to move to high-speed cable modems, according to newly minted engineering vp Schultz. "The goal is one pipe - ubiquitous service," he says. "Cable will be what we use for the Net, telephony, and television."
That utopian view seems to resonate with both RCN's analysts and the stock market, which has rewarded the company for last week's purchases. The day of the announcement, the share price jumped 3 1/2 to 39 3/4, and closed Monday at 40 1/4. But there are caveats.
"It's not a riskless story," says Roberts at SBC Warburg Dillon Read. "They're going to put billions of dollars into the ground, and the investment will only be repaid if the customers come. This is a high-risk, high-reward play."
