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Capital Constraints Cripple WINfirst, Too

3/10/2002 7:00 PM Eastern

Another overbuilder has found the capital markets to be a bigger threat to long-term viability than incumbent cable companies.

The president of Western Integrated Networks, which does business as WINfirst, has confirmed that the company has stopped construction in its sole build in Sacramento, Calif., and is in "capital preservation mode."

About 200 of WIN's 690 system employees have been terminated, said president Frank Casazza. All were involved with construction. WINfirst's Sacramento system competes with AT&T Broadband.

"We decided to look at our capital and pace ourselves so we're still around when the markets rebound," Casazza said.

The inability to continue raising large sums for telecom-network buildouts has killed or crippled many once-hot start-up "broadband service providers" over the last couple of years.

American Broadband Inc. of Rhode Island and Digital Access Inc., which had plans to build in five states, scrapped their overbuilds entirely. And the likes of Carolina Broadband Inc., TotaLINK LLC and even the well-established RCN Corp. have scaled back their construction plans.

As of last July — when WINfirst was seeking its most recent franchise in Los Angeles — the privately held company reported $890 million in private-equity financing from sources including J.P. Morgan Chase & Co., First Union Capital, Columbia Capital and Providence Equity, according to information provided to regulators.

WINfirst had budgeted $500 million for the Sacramento build, which was to entail 4,000 miles of plant. Sixty percent of that plant was to be aerial, with the rest underground.

There are 500,000 serviceable addresses in Sacramento, where AT&T Broadband serves 300,000 of those homes. WINfirst planned to fund the balance of its expenses through revenue from its initial customers.

Critics predicted the overbuilder would run short of cash. The unconventional build — which would deliver video and cable-modem service by coaxial lines, and telephony using fiber-to-the-home (FTTH) — gobbles up funds quickly.

WINfirst's per-home construction costs have ranged from $1,000 to $1,500 per home, the company has said, compared with $600 per home for the typical fiber-to-the-curb build. Competitors say WINfirst's per-home costs must be higher, as business plans submitted to cities did not include a bundled-services marketing budget.

FRANCHISE COSTS

WINfirst has also spent heavily to earn its franchises. It also won the right to build in Seattle; Dallas; San Diego; Austin, Texas; Houston; and San Antonio.

Because WINfirst is the second (or third) operator in each market, local regulators agreed to accept cash payments to support local-access channels, instead of requiring WINfirst to build studios that would duplicate facilities built by incumbents. Most cities asked for an up-front payment on that access commitment.

Because of the its decision to scale back, WINfirst has ended its strategic partnership with builder Bechtel Group Inc.'s telecommunications division, Casazza confirmed.

"Bechtel is a great company, one of the world's largest," he said. "But with the scale-back, there will be no simultaneous construction in multiple markets. The level of construction activity didn't justify keeping them."

Sacramento-area press reports indicated that WINfirst was so strapped, it had fallen into arrears on permit payments to the local utility, the Sacramento Metropolitan Utility District. But a SMUD spokesman said all of WINfirst's payments are up to date.

Seattle is to be next on WINfirst's schedule. The company's contract with the city requires WINfirst to pre-pay $90,000 in access support by year-end and to begin construction by next March. Failing that, the agreement calls for $10,000 a month in penalties.

"We're in the process of setting up meetings in various communities," Casazza added, noting that franchise extensions are a consideration.

The future of the unbuilt franchises will depend on the needs of the local franchising authorities and whether the capital markets recover, Casazza said.

Casazza is running the leaner WINfirst operation. CEO James Vaughn, who helped found the company with proceeds he earned from selling off FrontierVision Partners LLC, has taken a "non-participating" chairman's role, Casazza said.

WINfirst will focus on its present customers in Sacramento and make more connections from the homes it already passes as it waits for the market to turn around, Casazza executive said. For competitive reasons, he would not disclose how many subscribers the company has now.

WINfirst is in compliance with its buildout schedule, said Sacramento Metropolitan Cable Commission director Rich Esposto. (As it happens, Esposto worked for WINfirst for a short time and rejoined the city-county agency three weeks ago.)

"They've had a difficult learning curve, but they've been doing relatively OK," he said. Regulators will be meeting with WINfirst officials, he said.

September