RCN Corporation

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RCN Corporation

105 Carnegie
Center Princeton, New Jersey 08540
U.S.A.

Telephone: (609) 734-3700
Toll Free: (609) 746-4726
Fax: (609) 734-6164
Web site: http://:www.rcn.com

Public Company
Incorporated: 1997
Employees: 2,537
Sales: $484.9 million (2003)
Stock Exchanges: Over the Counter
Ticker Symbol: RCNI
NAIC: 513310 Wired Telecommunications Carriers

RCN Corporation is a Princeton, New Jersey-based company known as an "overbuilder" in the cable television industry. It establishes a cable and communications network in markets already served. However, unlike previous overbuilders that simply relied on cable, RCN has attempted to succeed by adding other revenue streams such as high-speed internet, local telephone, and long distance telephone and by offering their services in an attractively priced bundle to pry customers away from their long-time cable and communications providers. RCN operates in select, densely populated markets, serving more than one million customer connections in Boston, New York, Philadelphia, Washington, D.C., Chicago, Los Angeles, and San Francisco. Once a high-flying company able to attract investments from the likes of Hicks, Muse, Furst Inc., and Paul Allen of MicroSoft fame, RCN has been derailed by the meltdown of the tech sector in 2000. With its stock selling for just pennies on an over-the-counter basis, RCN underwent a Chapter 11 bankruptcy reorganization in 2004.

Founder Starts out in Construction in the 1980s

The man behind the rise of RCN, David C. McCourt, was born in Boston. He was the youngest of seven children, and his father was a construction contractor. As a teenager, McCourt aspired to be a hockey player or a policeman. When he went to college at Georgetown University, he decided to become a social worker. After graduating in 1979, he worked for 18 months as a probation officer's aide in a tough neighborhood in Washington, D.C. Reevaluating his career options, he returned home to Boston in 1981, went to work for his father, and by the end of the year had launched his own construction business. He became interested in telecommunications by sheer chance. "I was doing a $3,000 job pumping muck out of manholes so Time Warner could pull cable through," he told Business News New Jersey in 1998, recalling how he began laying coaxial cable for Time Warner and Cablevision in the Boston area. "Thinking that pumping muck made me a cable TV contractor, I submitted a bid and got the job."

Ambitious by nature, McCourt was not content for long to be a mere contractor and soon decided to lay telephone cable for himself. His new company, Corporate Communications Network (CCN), bypassed the local telephone provider by creating small local networks aimed at high-volume business customers. His efforts caught the attention of Peter Kiewit Sons, a major Omaha-based construction company, which had similar aspirations for Boston through a venture called Metropolitan Fiber Systems, later renamed MFS Communications. Kiewit and McCourt decided to join forces, resulting in MFS buying CCN to create MFS/McCourt. McCourt then set his sights on the United Kingdom, where telephone competition was in its infancy. He worked on his own for a year, then Kiewit again teamed up with him, becoming a partner in McCourt Kiewit International. He oversaw Kiewit jobs designing and building residential telephone and cable systems in Europe. The venture was eventually sold to MFS, which in turn was acquired by WorldCom in 1996 for $14.4 billion.

Having earned a reputation as a telecommunications maverick, McCourt returned to the United States and forged his third partnership with Kiewit. In 1993, they formed a Kiewit subsidiary called RCN Corporation to invest in the residential telephone and cable television industries. In October of that year, the company closed on its first deal, the $196 million purchase of a controlling interest in C-TEC, a Wilkes-Barre, Pennsylvania-based telephone and cable-television outfit that had $257 million in revenues the prior year. McCourt was installed as C-Tec's chief executive officer and chairman, and RCN and C-Tec then formed a joint venture, Residential Communications Network Inc. to provide telecommunications services to the residential market. In August 1994, McCourt relocated the business to Princeton, New Jersey, in an effort to attract what he called "younger, more aggressive" employees.

Telecommunications Act of 1996 Offers Opportunities

The telecommunications landscape changed dramatically with the Telecommunications Act of 1996, which broke down the regulatory divisions between local telephone companies, long-distance providers, and cable television companies. As a result, a multitude of start-ups emerged to compete with the Baby Bells in offering communication services, mostly targeting business customers promising a higher-margin payoff than residential customers. Cable companies, on the other hand, were saddled with expensive one-way networks and were reluctant to invest the necessary capital to recast their infrastructure in order to enable it to accommodate two-way transmission. RCN took a different approach from that of most of the firms looking to exploit the openings provided by the change in law. It would go after residential customers, building a full-service fiber-optic network, market by market, with the plan of eventually achieving a national presence. The key to making this overbuilding approach work was to offer customers an attractively priced bundle of services: telephone, cable, and high-speed Internet.

In conjunction with the enactment of the Telecommunications Act of 1996, McCourt restructured C-Tec, splitting it into three separate public companies: Commonwealth Telephone Enterprises, which received C-Tec's Pennsylvania telephone operations; Cable Michigan, Inc., which took over all of the Michigan cable systems as well as a 62 percent stake in Mercom, operator of cable systems in Michigan and Florida; and Residential Communications Network, the communications network building entity that started out with 90,000 cable subscribers in New York and New Jersey. RCN then acquired Residential Communications Network to form the foundation for McCourt's new vehicle to take on the entrenched telecommunications industry. When the realignment was complete in October 1997, RCN lost little time in raising $575 million in junk bonds to start building its communications network. The initial focus was on a corridor that stretched from Boston to Washington, D.C., a potential market of some 25 million households. McCourt's ambitious goal was to make customers out of nine million of them. Given that it would cost from $1,200 to $1,400 to wire each household, RCN was looking at a $12 billion price tag to build the Northeast network.

RCN jump-started it expansion plan in 1996 with the acquisition of Liberty Cable, a company providing television services to New York City buildings through Multichannel Multipoint Distribution Service (MMDS) antennas. Launched in 1991, Liberty had 40,000 subscribers. RCN also gained toeholds in Boston and Washington, D.C., by forging joint ventures with Boston Edison in Boston and Potomac Electric in Washington. Because telephone and cable companies were loathe to have an upstart competitor string its network from already crowded utility poles or underground electric conduits, RCN gained right-of-way from the electric companies, sharing space on the top rung of the utility pole, reserved for electric power lines, and pulled next to power lines in underground conduits.

RCN showed early promise, due in large part to the heritage of telephone and cable companies, neither of which had developed much expertise in marketing during their days as monopolies. The cable companies were also limited financially by having piled up massive debt while acquiring other systems at inflated prices during buying sprees in the 1980s and 1990s. Furthermore, they were saddled with outmoded technology in the form of copper coaxial cable, which to upgrade would require a great deal of capital. As a result, they were hard pressed to complete with RCN in terms of both price and product. Additionally, unlike cable companies, whose franchise required that they virtually cover an entire market, RCN could be selective and cherry-pick the neighborhoods it wanted to wire, avoiding sparsely populated, high-income areas in favor of lower-income, densely populated neighborhoods that watched more television. In New York, the company was especially aggressive in building on the business Liberty Cable had established, which now gave RCN the advantage of offering both cable television and telephone service to residential developments. The company was also willing to accommodate landlords, not only in terms of service but in revenue-sharing plans that returned a percentage of gross revenues realized from a property.

Company Perspectives:

RCN's goal is to be the dominant provider of residential communications services to the most densely populated markets in the country via out own network.

In February 1998, RCN strengthened the data side of its business by acquiring a pair of Internet service providers (ISPs). It paid approximately $45 million for Virginia-based Erols Internet, Inc., serving more than 293,000 customers, and another $7.7 million for Boston-based UltraNet Communications with another 32,000 customers. Four months later, RCN added New York City-based Interport Communications at a cost of $8.5 million in cash and stock. Interport served 10,000 dial-up and 500 dedicated line Web hosting customers. Also in June 1998, RCN spent $13.4 million in cash and stock to add Springfield, Massachusetts-based JavaNet, Inc., which enjoyed success linking high schools and colleges to the Internet, boasting 30,000 dial-up and 400 dedicated line and Web hosting customers. As a result of the pickups, RCN was now the largest ISP in the northeast and one of the ten largest in the country. Also of significance in 1998, RCN won approval from the Federal Communications Commission to be an open-video system (OVS) operator in 109 Pennsylvania and 33 Northern California communities. By law, an OVS operator must lease large portions of its system channel capacity to third parties to provide cable television services. Cable companies contended that RCN misused the OVS provision to bypass local cable franchising rules and thereby gain access to a market, while in communities that offered an accommodating franchising authority, RCN was more than willing to seek a cable license. Yet despite the protestations of the competition, RCN was able to enter the markets it targeted. In Boston, Cablevision System Corporation was especially aggressive in its opposition, taking Boston Edison to court in 1998 and charging illegal competitive practices. RCN won and Cablevision's appeal to the U.S. Court of Appeals in Boston was rejected in September 1999.

RCN generated sales of $211 million in 1998, a significant improvement over 1997's $127.3 million, but the company's losses also began to mount, growing from $49.2 million in 1997 to nearly $205 million in 1998. However, given the large amount of capital required to establish a fiber optic network, losses were expected to continue. The prospects of RCN succeeding in its mission were given a boost in 1999 by the major investors it was able to attract. Dallas-based Hicks, Muse, Tate & Furst Inc. furnished $1.25 billion through loans and the purchase of stock. Later in the year, Microsoft's billionaire co-founder, Paul Allen, agreed to buy $1.65 billion in RCN stock. Thus, even as its net loss increased to $355 million in 1999, on sales of $276 million, RCN was in good financial shape, possessing ample cash to carry on.

The 1990s End on a High Note

Late in 1999, RCN spent some of its largesse to enter the Chicago market, acquiring 21st Century Telecom Group Inc. at a cost of $260 million in stock and the assumption of another $250 million in debt. Although 21st Century brought just 40,000 customers, it provided RCN with a toehold in a market that included 3.1 million homes. All told, in 1999 RCN laid more than 3,600 miles of fiber, an increase of 156 percent over the previous year. In 2000, the company was eying such new markets as Portland, Seattle, and Los Angeles. At this time, there were also rumors that RCN was likely to soon be acquired by a major cable or television company, such as Paul Allen's Charter Communications cable venture or MCI WorldCom. As a result, the price of RCN stock soared in 1999 and early 2000, but within a matter of weeks perceptions would change as the telecom sector began to falter and the price of RCN joined the downturn.

Investment money dried up and by the end of 2000 RCN, whose stock had lost more than 80 percent of its value, was forced to put on hold its plans to develop new markets. Instead, it took a step back, electing to conserve cash and focus on its existing seven markets and the one million homes its network passed, far short of the 15 million homes McCourt had originally targeted. Moreover, the customer base was not large enough to generate the kind of cash flow needed to keep up with operational expenses and interest payments. Because it was trying to drum up additional business in mature markets, RCN faced an even tougher task, compounded by management's inability to gain tighter control over costs. Investors reacted poorly to the retrenchment plan, and the company's stock was bid down even further, to less than $4 a share before it rebounded somewhat.

To better control costs, McCourt hired a pair of senior executives charged with focusing on expenses and RCN's field technicians. The company's accounting operation was also notorious for failing to bill some of its customers. To rectify this situation, RCN bought a new billing and customer management system in 2001. The company, saddled with a suffocating level of debt, also began negotiating with creditors to gain some relief. Nevertheless, while a number of short-term solutions were arranged, they merely postponed a day of reckoning.

The price of RCN stock fell below the $1 mark in 2002. To raise desperately needed cash, the company agreed in August of that year to sell its central New Jersey cable systems, a non-core asset, for $245 million. In an agreement reached with lenders, RCN could then reinvest the proceeds into the business. At the same time, the company continued in its efforts to control costs, which included laying off 3,000 employees, or half of its work force. The company's debt at this stage totaled approximately $1.7 billion, and at the end of 2002 RCN reported a net loss of $1.57 billion.

RCN continued in its efforts to build up its customer base in 2003. One bright spot was its average monthly revenue per customer, $90, a significant edge over the industry average of $55. However, the company was still burdened by the combination of a heavy debt load and poor stock price. In early 2004, RCN hired a restructuring specialist, then elected not to pay a $10 million interest payment, instead announcing that it would file for Chapter 11 bankruptcy protection. A restructuring plan negotiated with creditors called for two-thirds of its debt to be replaced with 100 percent of equity, while existing shares of stock, now worth pennies, would be "extinguished," leaving other investors out of luck. RCN filed for bankruptcy in May 2004, and by July McCourt announced he was stepping down as CEO, although he planned to remain as chairman and help in the search for a new chief executive. When the company emerged from Chapter 11 protection at the close of the year, however, McCourt was ousted as chairman as well. Whether new leadership would be able to fulfill his dream of building a national communications network was a question to be answered in the next chapter of RCN's brief but eventful history.

Principal Subsidiaries

RCN Internets Services, Inc.; RCN Telecom Services of Massachusetts, Inc.; RCN Telecom Services of Philadelphia, Inc.; RCN Telecom Services of Washington, D.C., Inc.; 21st Century Telecom Services, Inc.

Key Dates:

1993:: David McCourt and Peter Kiewit Sons form subsidiary RCN Corporation, acquires C-TEC.
1996:: The Telecommunications Act of 1996 lowers barriers in the industry.
1997:: RCN emerges from the reorganized C-TEC.
2001:: The company curtails network expansion.
2004:: RCN undergoes Chapter 11 bankruptcy reorganization.