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RCNs high-wire act

Overbuilder's attack depends on fixing customer service missteps 5/07/2000 08:00:00 PM Eastern

Last Monday was a lousy day in Manhattan for Michael Eisner, Jerry Levin and Regis Philbin. But it was a good one for Mike Adams. ABC may have gone dark in the homes of 1.1 million New York cable subscribers, but the lights went on at the call center of RCN, the upstart overbuilder that is trying to compete against Time Warner Cable in the Big Apple and against other cable operators elsewhere.

Adams, COO of RCN, saw calls from Time Warner's annoyed subscribers triple in volume on his sales lines.

RCN executives smiled. "It has had an impact," said Adams. "People know us out there."

But RCN ducked an opportunity to leverage the situation even further. ABC cut a special deal with DBS service DirecTV, saying that it would pay the $200 cost of a dish for any Time Warner New York subscriber who switched over. Disney executives sought to get RCN officials in on a similar deal, but the company balked.

They contend that they want to build the company's image based on strong service, not potshots in the middle of a messy dispute. "We didn't want to get stuck in the middle of that," Adams said.

Perhaps. But there's another compelling reason: RCN isn't in much shape to handle a huge surge of new orders. Tripling daily incoming sales volume in New York means all of 300 calls. Further, RCN has been wrestling with substantial customer service headaches, such as poor reception, installation, billing, and glitchy Internet service.

For all of RCN's slams against cable operators-old ads depicted them as a statue of Lenin being toppled, for example-customers interviewed report the same frustrations heard for years from customers of Time Warner, Cox, Comcast or any other operator.

Jeff Katzif, a Waltham, Mass., engineer for a software-imaging company, said that his RCN cable reception has been poor and his high-speed Internet connection has been spotty, using cable modems he calls "junk" that had to be replaced. He calls the cable company for customer service and gets put on hold for 20 minutes at a time.

Other subscribers reported no significant problems, and even those with complaints generally said their problems were with RCN's customer service, not with the company's products.

Mistakes, they've made a few

Still, RCN executives are not shy about acknowledging snafus. But they say they've made big changes in their operations to smooth installation and customer service. One of those is to slow the pace of connecting new customers, so at least the ones they do turn on get the job done right.

"We're finding there's an overwhelming desire for the product," said RCN Chairman David McCourt. "The struggle is hiring enough people, deploying enough technicians, getting the relationship with Bell Atlantic down [to switch phone customers]."

But McCourt's thrilled with the company's four-year transformation from a small, conventional cable operator-C-TEC-into an aggressive overbuilder of his former MSO colleagues.

"We know what we're doing," McCourt said. "I think people saw we've done it before with corporate communications network. We know how to design and build a network. Has it been easy? No, it's a ball breaker."

There's a good reason only a handful of U.S. cities have more than one cable operator or residential phone company. Pulling a piece of copper down every street of a city requires immense amounts of capital. Even if a rival can afford to build it, it will have to settle for a minority piece of the market for years and years, leaving a much smaller customer base over which to spread the capital costs of building the network.

But McCourt insists that the communications revolution has changed the overbuilding equation. Previous overbuilders relied on just one business: cable. Today, RCN's network can cover the costs of building its network with four revenue streams: cable, high-speed Internet, local phone and long distance.

Cable operators believe they can generate enough revenue out of advanced cable systems to justify paying $4,000 to $5,500 per subscriber for systems in the kinds of markets RCN is looking to serve.

RCN says building the network costs $900 per home passed. It is targeting penetration of 30% of those homes with at least one service. That would put the network at $3,000 per customer. Actually connecting a customer costs $300 per service.

One way of looking at it is that a cable, Internet and phone customer costs $3,900 per subscriber. McCourt prefers looking at the cost per service, which would be just $1,300 for a three-service customer.

Why overbuild?

Others are far more skeptical. Jonathan Goldsmith, a Los Angeles-based PricewaterhouseCoopers consultant who has studied overbuilders, said that RCN's chief asset is the amount of cash McCourt was able to raise when the market loved telecommunications and Internet stories.

"It's a second wave of capital," Goldsmith said. "The telcos thought they could saw this piece of wood four to five years ago. They've dulled their saws, and now somebody else has come in and decided, Here we go again.'"

One former cable executive, armed with hundreds of millions of dollars from selling his company, said he has considered investing in overbuilders but balked. "It's not out of any sense of loyalty. It's that dividing the market is an unattractive proposition," the executive said. Two overbuild situations he studied "go cash-flow positive within 10 years, but you don't get any return. You assume a very big buyout price."

Princeton, N.J.-based RCN is three years into an ambitious plan to take on established cable and telephone companies, wiring the largest U.S. markets with a network that will offer video, voice and data service together, hoping to move faster and smarter than the incumbents. The company is in the midst of wiring markets including New York; Boston; Washington, D.C.; Philadelphia; Chicago; San Francisco; and Los Angeles.

Of the areas of Manhattan, Brooklyn and Queens RCN is targeting, the company's network is about 10% complete. Boston and its suburbs are about 50% built. Chicago and Washington are 15% complete. The company is just starting in Philadelphia, Los Angeles, San Francisco and northern New Jersey, where it's just 1% to 5% built.

The company has a combination of financial resources that has startled its rivals with a star lineup of telecommunications backers and a huge war chest, $3.4 billion in cash and credit lines, ready to attack MSOs and telcos.

The team behind RCN is the same that built MFS Communications, an early competitive local exchange carrier (CLEC) that successfully attacked Baby Bells in the business telephone sector. Walter Scott, the chairman emeritus of Peter Kiewitt Sons, who pushed the construction company into communications, sold MFS for $14 billion in 1996 to what is now MCI WorldCom. Scott's Level 3 Communications owns 32% of RCN.

The other huge supporter is Microsoft Corp. co-founder Paul Allen, whose brilliance operators heralded when he started a $20 billion, two-year cable system spending spree through Charter Communications Inc.

They quieted when he sank $1.65 billion in RCN last year, holding the equivalent of 27% of RCN's equity.

Growing pains

Today, RCN ranks as the 13th-largest cable operator. Half of its 292,000 subs are from leftover C-TEC cable systems, including one in hometown Princeton, and an outmoded New York City wireless cable system. About 140,000 are connected to RCN's new multiple-service network, called "On-Net." About 19% of homes passed by the advanced network have taken cable. About 9%-many of them also cable customers-are taking telephone service, while 3% are taking high-speed Internet service.

The company has territory containing 2.5 million homes in its sights. RCN has commenced construction in 62 towns and suburbs, up from 20 at this time last year. Homes passed by the network have doubled, as has the number of homes marketed.

But that growth creates growing pains. Rob and Paula Moore were so upset over the installation process at their Framingham, Mass., home in March that they posted a sign for all passersby to see: "RCN Failed Our Install. Day 2 Without Service."

Rob Moore, an engineer with Internet messaging company Critical Path, said that his wife was home with their daughter the day of the installation, coincidentally waiting for a call about the results of medical tests.

Unfortunately, after four hours, the RCN installer couldn't get the Moores' phone working. "At noon, we didn't have any service," Moore said. Repeated calls to customer service were routed to a distant Dallas, Pa., call facility, then to Princeton.

Moore canceled the RCN install, but telco Bell Atlantic had already disconnected the line, and RCN couldn't get the dial tone back up. "We were all night without phone service. By 10 a.m., my wife was ballistic. She put up the sign."

An RCN manager came to the house, pulled strings with Bell Atlantic contacts and had service restored the second day. "If they said the phone was free, we wouldn't switch. It's a reliability issue."

RCN executives acknowledged that there have been problems. The most severe ones come from the difficulty in coordinating hand-offs with the local telephone company, whose customer RCN is stealing.

But COO Adams said some of the wounds were self-inflicted by the speed at which RCN has been trying to deploy service.

"Hindsight's 20-20," Adams said. "We spent so much time on the regulatory network construction process, we didn't really focus on customer service."

Train faster, sell slower

One of McCourt's solutions was moving Adams in January from supervising construction of RCN's networks to overseeing all operations. His first decision was to slow the sales process down. In past months, RCN would pre-sell residents the service through telemarketing and door-to-door sales, just as it started extending its network out to a new neighborhood. But if construction was delayed even a few days that meant missed installation appointments and cascading backlogs.

That's stopped. "What we were doing was marketing ahead of the availability," Adams said. "Now we're building ahead of it, then selling. I don't want to have bad customer experience."

The complexity of RCN's product is another snag. The company had been emphasizing cable service to get into potential subscribers' doors, then offering phone and Internet as an add-on. But it has found better penetration by bundling all services in a single package called Resi-Link. Before the average subscriber was buying 2.2 services. That has grown to 3.3 services, with long-distance as the fourth.

But installing cable, phone and Internet generally requires three separate crews, each trained in a different product. That multiplies the difficulty, cost and customer inconvenience of scheduling installations.

So McCourt is accelerating training. Right now, installers are trained at a Queens facility used by New York City partner Consolidated Edison. Soon, RCN will open its own "Cable Camp" in New Jersey. Here's the problem, and the goal: Only 20% of RCN's crews and subcontractors are able to install all three products. McCourt wants to boost that to 80% by year-end. To underscore the importance of training, every employee, not just installers, will be required to attend "Cable Camp."

Tough competitors

Cable operators say they're not worried about RCN's incursion.

"There's a lot of different types of competition," said Barry Rosenblum, president of Time Warner Cable's New York operation, who has faced RCN for four years. "The most important thing is, our business is still growing. The cable side shows 2% basic growth, and between digital things like Road Runner, we're gaining."

Comcast Cable President Steve Burke is starting to face RCN in his core system in Philadelphia. "We take every potential competitor seriously; we take RCN seriously," he said. "They're certainly well-funded." He contends that, by completing system upgrades and deploying new products, Comcast will be fine.

"We can't find a reasonable economic model where overbuilding works," Burke observed. "Even if you have three revenue sources, you could have three bad businesses."

Still, he's not above counterattacks. Just as RCN is entering Philadelphia, Comcast is suddenly exploring an overbuild of its own in Princeton, coincidentally one of the handful of RCN's conventional cable systems.

Operators counterattack on all sorts of fronts.

In the streets, Comcast Marketing Vice President Kim Ketchell said that when RCN starts to build a new Philly neighborhood, Comcast sales people sweep in and try to sign up existing customers to new 12- to 18-month contracts. In some cities, crews follow RCN's door-to-door sales people and remove any door-hangers left behind.

Washington, D.C., writer and researcher Phillip Matera said that a few days after he dropped AT & T's District Cablevision for RCN, someone severed the cable drop at the side of his house.

Time Warner offers bulk discounts to New York apartment buildings in which as few as 60% of residents sign up. It used to be 90% to 100%.

But the big question about RCN is whether the company is truly a long-run player. The company's stock has plunged 50%, along with that of many other telecom start-ups. The company is planning to spend $3.6 billion through 2001 constructing networks and has the cash in hand. Many Wall Street and cable executives believe, though, that, like the many RCN imitators sprouting up, McCourt is building only enough critical mass to entice buyers. He'll let them wrestle with the problem of operating it profitably.

"We're not in this for the short term," McCourt insisted. "Some of the RCN lookalikes are just trying to build a shell of a company to sell. That's not us."


RCN's PROGRESS As RCN has tried to moderate its installation pace to promote quality, cable penetration has slipped.

12/98 3/99 6/99 9/99 12/99 12-mth
change

On-net connections

Voice

30,868

40,215

49,539

56,209

62,733

103%

Video

86,349

99,098

110,565

120,353

138,577

60%

Data

6,167

9,922

13,024

17,985

21,654

251%

Total

123,393

149,235

173,128

194,547

222,964

81%

On-net homes passed

304,505

350,733

427,843

550,771

713,823

134%

Marketable homes

270,406

301,546

361,015

440,112

551,006

104%

Penetration of homes passed

28.4%

28.3%

25.8%

21.9%

19.4%

-9%

Penetration of marketable homes

31.9%

32.9%

30.6%

27.3%

25.1%

-7%

Source: Company reports. Data counts only advanced "on-net" homes

 

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