RCN in Talks With L.A. to Build $1.4-Billion Network

Signaling new competition that could translate into lower prices for consumers, RCN Corp. is negotiating with the city of Los Angeles for the right to build a high-capacity fiber-optic network to compete against cable operators, phone companies and Internet service providers, the company said Tuesday.

The network is the most ambitious proposal yet in Southern California for duplicating cable’s residential telecommunications system--and would be a first for Los Angeles. The network would take several years to complete, and even the first areas to get service would not be ready until 2001.

But the proposition is both costly and risky, and few companies have had economic success in carrying out similar undertakings. Building a network able to serve all of Los Angeles’ nearly 1.4 million households would cost more than $1.4 billion.

The expense is one reason that Pacific Bell pulled the plug in 1996 on a similar, ambitious plan to build fiber-optic networks for video services throughout California.

The prospect of young companies such as RCN constructing competing networks--an undertaking known in the industry as over-building--is casting a shadow over the cable industry meeting this week at the annual Western Show convention in Los Angeles.

Neither the city nor RCN would elaborate on the negotiations.

The Princeton, N.J.-based upstart said it initially would target only a few of the city’s 15 cable franchises. “Would we like to cover all of L.A.? Sure,” said Scott Burnside, senior vice president of regulatory and government affairs for RCN. “But it’s expensive and takes time. The more immediate goal is to start with a few franchise areas that will fund our expansion.”

A $1.65-billion cash infusion in October from computer billionaire Paul Allen, whose Charter Communications Corp. is the dominant supplier of cable in the Los Angeles area, will give RCN the means for expanding into Southern California and is part of the company’s $4 billion in capitalization that Burnside said would fuel growth through 2002.

Sources close to the negotiations say RCN is interested in targeting several neighborhoods--such as Brentwood, Pacific Palisades, Van Nuys, Studio City and Sherman Oaks--that are served by Adelphia Communications Corp.

Adelphia purchased Century Communications Corp., which has 800,000 cable customers in the Southland, this fall. Century’s poor customer-service record, which city officials say is the worst in the region, may make it vulnerable to competition. Adelphia, however, has been aggressively working to improve service by rebuilding Century’s systems for delivery of new services and expanded channel offerings.

“Although Allen does not have his strategy fully thought out, the idea is that if you can’t buy Century, over-build them,” said a person close to Charter Communications. Allen, eager to dominate the Los Angeles market, tried to acquire Century but lost in a bidding war to Adelphia.

Sources said Charter approached Adelphia about purchasing the entire family-owned company in the last month, but was rebuffed.

Local cable regulators say they welcome RCN’s proposal because it promises lower prices for services that could be delivered over the network. These include cable television, high-speed Internet access and local phone calls.

“The record has shown that where there is more than one cable provider, there is downward pressure on prices,” said Paul Janis, acting assistant general manager for the city’s Information Technology Agency, which regulates local cable franchises. “We studied the Thousand Oaks experience, but there is also head-to-head competition in places like Chicago, Detroit and Cleveland.”

GTE Corp., the local phone provider, began over-building cable lines in the region in the last three years and now holds five franchises in Ventura County serving Thousand Oaks, Oxnard, Camarillo and nearby smaller neighborhoods. “There have been no rate increases [by other cable providers] since we came to town,” said Kevin Young, general manager of video operations for GTE, which also provides cable services in Cerritos and two other areas outside California.

RCN typically undercuts the prices of the entrenched incumbents to gain a foothold. In Waltham, Mass., customers who sign up for RCN’s package of phone service, basic cable, Home Box Office and high-speed Internet access pay about $109 a month--30% less than they would spend for the same services bundled by a competitor, according to a report by SG Cowen, the Wall Street brokerage firm.

Although local phone providers such as GTE and Ameritech have been the most aggressive of the over-builders, RCN is by far the largest independent over-builder. The company has negotiated local franchises that cover more than 11 million of the nation’s 100 million households.

“We are starting to see a lot of interest in over-building from start-ups,” said Bruce Leichtman, an analyst at Yankee Group in Boston. “It’s getting to be hot because the economics have adjusted.”

Analysts said that the value of cable franchises has skyrocketed because of the ability to use the networks to deliver lucrative new services such as high-speed Internet access and local phone calling. That means it has become easier to offset the investment costs.

RCN, which began in earnest to build its own networks two years ago, is concentrating its efforts on geographic areas with the highest-density populations--from Boston to Washington on the East Coast and from San Francisco to San Diego on the West Coast. Cities the company is targeting in California account for only 2% of the nation’s geographic area but more than 12% of the nation’s telecommunications traffic.

Cable opponents accuse RCN of unfairly skimming the cream and avoiding economically depressed areas, although Los Angeles city officials say that RCN will be required to serve every customer in a given franchise area, just as other cable companies are.

RCN began offering its first package of services in California last week in South San Francisco, in competition against AT&T;, until then that area’s only local cable provider. The company is building in several other neighborhoods in the San Francisco area, and hopes to make Los Angeles its next stop.

The company has nearly 1 million customers nationwide, and most of whom arrived through acquisitions of local Internet service providers. Even before offering services over its own networks, RCN will typically buy its way into local markets through acquisitions of local ISPs that use conventional dial-up access to the Internet. The company then tries to convince these customers to convert to high-speed connections over RCN’s network.

Burnside said RCN’s business plan calls for it to garner 30% to 35% of the customers in its markets within five years. “Every indication is that we’ll get there,” he said.

Congress envisioned these kinds of battles when it passed the Telecommunications Act of 1996, although the competition between phone and cable providers has taken longer than lawmakers and others expected to develop. AT&T;, for example, is just now entering the local phone business using cable lines it gained in its purchase of Tele-Communications Inc. Its pending acquisition of MediaOne Group will bring it even more cable lines.

Local phone giants such as Bell Atlantic and SBC Communications Corp. (owner of Pacific Bell and other local phone companies) are awaiting federal approval to enter the long-distance business.

And newcomers such as RCN are now over-building existing networks to provide a bundle of both TV and phone services.