News

Overbuilder Sounds Confident, but Wary

2/04/2001 7:00 PM Eastern

NEW YORK-Charter Communications Inc. president Jerald Kent declared last week that anyone looking to take customers away from his company better get ready for war.

Given the relative financial strength of MSOs and overbuilders these days, Kent has plenty of reason to feel secure on those particular front lines.

Kent, part of a panel session at an industry conference Waller Capital Corp. sponsored last week, responded quickly to a comment from Mark Haverkate, president of Denver-based Wide Open West LLC, who said he was not overly concerned about competition from incumbent cable companies.

Wide Open West is slated to begin offering service in its first market-AT&T Broadband territory in metropolitan Denver-in about six weeks.

Asked about AT&T's possible response, Haverkate said, "They do a lot of advertising and they are progressing along with their rebuild, but the war hasn't started yet."

Wide Open West has franchises for several metropolitan areas, including Fort Worth, Texas, and St. Louis. Though WOW would compete against Charter in Fort Worth, St. Louis-Charter's hometown-is AT&T territory.

Kent made it clear that the overbuilder threat would be met swiftly and forcefully, no matter where it arises.

"If someone wants to come and take us on, get ready for a war, because that's what it will be, a war," he said. "We are prepared. If Mark or somebody else wants to come into our home market, God bless him."

But Kent may not have to worry about WOW for a while. Haverkate said his company would focus on developing the Denver market before expanding elsewhere.

That's a big departure from last year, when WOW and other overbuilders-they prefer to be called broadband-access providers-planned aggressive rollouts in a handful of markets. WOW alone had initially planned to roll out in Denver, Portland, Ore., and Fort Worth last year.

That aggressive stance has been tempered considerably as the capital markets have dried up for overbuilders like WOW, Western Integrated Networks LLC and Digital Access. Haverkate said his company has secured funding to build out in Denver-it raised about $53 million in 1999-but will hold off on its expansion plans.

Haverkate said WOW had built about 20 miles of plant in Denver already.

"When it's proven economically, then we'll go out for additional capital," Haverkate said.

In a separate panel discussion, a group of bankers said that the high-yield debt and private equity markets were not expected to open up for overbuilders and new telecom companies anytime soon.

Though the bond market has been receptive to deals by Charter, Adelphia Communications Corp. and smaller cable operators like Mediacom Communications Corp., overbuilders and telecom companies without proven track records will not be embraced by the market, CIBC World Markets managing director Wally McLallen said.

"There is a flight to quality," McLallen said. "Seventy percent of the telecom paper issued last year was to repeat issuers. I see that continuing in the new year."

The private equity markets, which had been so receptive to overbuilders in the past, are also beginning to close up.

Although Wide Open West will likely tap the private equity markets in the future, it doesn't need additional capital now. And the company expects to reap big dollars in metro Denver.

The metro Denver market, Haverkate said, is a high-growth area, with about 30,000 new homes built each year. Internet penetration, he said, is about 50 percent.

"It's the longtime headquarters of the cable industry," Haverkate said. "We thought it would be a good place to start a company.

But cable operators are not sitting around. Kent said Charter-which hit the 1 million digital-subscriber mark in December-has completed about 80 percent of its rebuild in St. Louis and has totally rebuilt Fort Worth to 860 megahertz. Charter also is offering video-on-demand service and plans to trial telephony and interactive television in the future.

That push is not just in response to possible competitive pressures from overbuilders, but also from the existing direct-broadcast satellite threat.

But Kent said overbuilders pose a bigger problem for operators than DBS. He cited DirecTV's 455,000 subscriber-growth figure from the third quarter, which works out to be a 1.8 percent increase given its national footprint. Charter had about 2.3 percent third-quarter subscriber growth.

Kent added that new services, like VOD and interactive television, will be cable-exclusive-at least for the short-term.

"In three or four years, there will be no reason that anyone should own a dish," Kent said. "Overbuilders are more of a rifle shot. But we've done well against them."

Kent said that when Charter was acquired by Microsoft Corp. co-founder Paul Allen, Allen's old Marcus Cable system faced an overbuild threat from Knology Inc. in Georgia.

"We went in and made the employees understand that it is a war," Kent said. "We've doubled cash flow [at that operation] since we took over."

September