RCN Says It Will Use Edison Lines for Net

RCN Corp., which is building a fiber-optic network to compete with phone companies, cable operators and Internet service providers, said Wednesday that it has entered into a deal to use Southern California Edison’s existing fiber-optic lines to speed its entry into Southern California.

The deal, following news last month that the company was negotiating with the city of Los Angeles for a local cable franchise, is a shot across the bow for cable providers, which have viewed the construction of duplicate networks challenging their monopolies as years away from posing a serious threat.

RCN’s plan to build its own network in the region means that the service would not begin until perhaps late 2001. But RCN, which is known in the industry as an “over-builder,” said that by capitalizing on Edison’s existing network--which stretches over Los Angeles, Orange and Ventura counties--it could start selling its services to 1.5 million Southern California customers by the end of the year.

“This agreement advances our schedule by nearly a year to begin providing homes in the greater Los Angeles area with RCN’s advanced telecommunications services,” said David McCourt, the firm’s chairman and chief executive.

A swift entrance for RCN, which is based in Princeton, N.J., could also signal a consolidation of cable services in Los Angeles, where the firm is negotiating for rights to build within city borders, targeting the Adelphia Communications Corp. franchise in Brentwood and Pacific Palisades.

A major RCN backer is computer billionaire Paul Allen, who invested $1.65 billion in the company in October and has designs on dominating the Los Angeles market through his cable supplier, Charter Communications Inc. Charter already serves communities such as Burbank, Glendale, Pasadena and Long Beach and has a deal, yet to be announced, to acquire the MediaOne holdings in Los Angeles from AT&T; Corp., although the telecommunications giant is now reconsidering.

Even with a quicker arrival in Los Angeles, RCN faces some hurdles. The company has yet to secure approval from City Hall. And if it does, as expected, it must battle for customers against entrenched cable rivals and win a 30% market share to be profitable--which is nearly unheard of.

Under the deal, Southern California Edison will lease capacity in its growing fiber-optic network, which now spans about 1,800 miles. RCN introduced its services in Boston and Washington through similar deals with utilities.

At the same time, Edison will build for RCN a minimum 750-mile fiber network in the utility’s service area this year, using its own rights of way. As part of a six-year construction pact, the utility could build more.

Edison officials declined to estimate how much the deal could cost, saying it depended on how large RCN’s network would be. The utility described RCN as an “anchor customer” for its new telecommunications unit.

Utilities generally built these networks for internal communications and are now leasing them to outsiders such as RCN. Utilities such as Edison are under pressure to find new uses for their networks. “The utilities had no choice but to find new businesses,” said Sharon Armbrust, an analyst at Paul Kagan Associates. “They are the last bastion of a monopoly, but with deregulation, energy will become a commodity.”

Local cable regulators have said they would welcome RCN’s entry to Los Angeles because it promises lower prices to consumers for services delivered over its network.

In fact, analysts say RCN undercuts the prices of its competitors in entrenched markets to break in. In Waltham, Mass., customers who sign up for its package of phone, basic cable, Home Box Office and high-speed Internet access pay about $109 per month--30% less than the cost of the same services if they were bundled by a competitor, according to a recent report by Wall Street brokerage SG Cowen.

Critics, including rival cable providers, contend that RCN would unfairly pluck the richest customers from the market and avoid economically depressed areas. Los Angeles city officials insist the firm would be required to serve every customer in a franchise district, just as other cable firms are.

Tim Stoklosa, RCN’s senior vice president for finance, said the firm hadn’t decided which parts of Los Angeles to target first, but “our main driving force is density.”

Traditionally, over-builders have fared poorly in the complex economics of cable, in no small part because of the immense investment required to construct new networks. But the ability of fiber networks to deliver a wealth of new services has made it easier to earn a profit, analysts say.

RCN shares fell $2.63 to close at $48.75 on Nasdaq. Shares of Southern California Edison’s parent, Rosemead-based Edison International, rose $1.63 to close at $26.94 on the New York Stock Exchange.