Copyright 2003 The Chronicle Publishing Co.
The San Francisco Chronicle
NOVEMBER 22, 2003, SATURDAY, FINAL EDITION
RCN, the upstart cable provider that offers service in more than a half-dozen cities on the Peninsula, is running perilously low on cash and could be forced to file for bankruptcy protection in the next few months, analysts said.
In a public filing with securities regulators this month, RCN warned that it could be forced to default on its loans by the second quarter of next year, unless its business significantly improves or it takes other major steps to lower its staggering $1.8 billion in debt.
In October, RCN, based in Princeton, N.J., hired Merrill Lynch to explore its financial options, which include selling some of its assets, raising additional cash from investors or restructuring its loans. APS Financial analyst Brent Brewer said RCN also could elect to file for bankruptcy protection as part of its restructuring efforts.
“Our financial advisers and senior executives are working to fix the … situation,” a RCN spokesman said in a prepared statement. “In the meantime, we continue to deliver for our customers in San Francisco and our other markets.”
RCN, which has tens of thousands of local customers and 436,000 nationwide, made a splash a few years ago by building a new fiber-optic cable network in the Bay Area and other parts of the country that offered a wide selection of television channels, high-speed Internet and cable telephony as part of one package. Seren Innovations, also known as Astound, started a similar service in parts of Contra Costa County.
By offering all three services in one package, RCN has managed to attract a lucrative group of customers that is the envy of the industry. RCN subscribers pay an average of $90 per month, compared with the low $60s for traditional cable providers.
To boost its revenue, Comcast Corp., the region’s dominant cable TV provider, has aggressively tried to upgrade its network to offer high-speed Internet and a wider array of cable TV channels in most parts of the Bay Area by the end of 2004. But it offers telephone service only in a limited part of its territory.
SBC Communications, meanwhile, has upgraded its telephone network in most of the Bay Area to offer speedy Net service along with its traditional telephone service. Starting early next year, it will also start selling Hughes Electronics’ DirecTV satellite service as part of a package that includes telephone and Internet service.
But analysts said that RCN hasn’t been able to attract enough subscribers from traditional cable and phone providers to recoup the staggering cost of building a new cable network. “They simply need more customers,” said Brewer, the APS analyst. “The business is still maturing, but not fast enough” given RCN’s costs.
In part, RCN may have underestimated customers’ willingness to defect from established cable providers, like Comcast and SBC Communications, despite surveys that show many people are dissatisfied with their cable and phone companies, said Bruce Leichtman, president and principal analyst for Leichtman Research Group in Durham, N.H. “It was all based on the idea that people hate their current provider,” Leichtman said.
Despite all their grousing, many customers never made the switch. Or they went with an alternative, such as satellite TV. At the same time, SBC’s and Comcast’s efforts to expand their menu of services have cut into RCN’s edge.
“It epitomizes the challenge for the overbuilder,” Leichtman said, referring to upstarts like RCN, which spent billions of dollars building new cable networks to compete with entrenched providers.
Still, many RCN customers rave about its service. “RCN provides good value for the dollar, and it’s much more customer-focused and community-focused than Comcast or SBC,” said John deCastro, a RCN customer in San Francisco’s Potrero Hill neighborhood.
DeCastro said he isn’t concerned about RCN’s financial problems, noting: “The whole telecom industry is not in the greatest shape.”
But Mireille McKee, an RCN customer in San Mateo, was alarmed when she heard about the company’s cash squeeze. “I’m very concerned,” McKee said. “I have been very happy (with the service), and I don’t want to switch.”
Even if RCN is forced to file for Chapter 11 bankruptcy protection, it would not necessarily lead to an interruption in service. Covad Communications, an Internet service provider in Santa Clara, filed for bankruptcy two years ago as part of a deal with creditors to lower its debt, and never switched off the service. It has since emerged from bankruptcy in stronger financial shape.
But there are no guarantees. ExciteAtHome, a cable Internet service, wound up abruptly cutting off 850,000 customers after it filed for bankruptcy in late 2001.
RCN serves portions of San Francisco, South San Francisco, Daly City, San Mateo, Redwood City and Burlingame. To conserve cash, RCN scrapped or postponed most of its plans last year to expand its cable network.
Even with the cutbacks, however, RCN went through $68 million in cash in the most recent quarter, which ended Sept. 30, and had just $47 million in unrestricted cash remaining. The company’s stock closed at 97 cents, up 2 cents, Friday, giving it a market value of $108 million.
Some local RCN employees, apparently spooked by rumors that a bankruptcy filing could be imminent, called rival Comcast this week to ask about job openings, said a person close to the cable giant. RCN has 105 employees in the Bay Area.
The company wouldn’t say exactly how many customers it has in the area, but the neighborhoods it has wired include more than 90,000 homes. RCN typically signs up about 30 percent of customers in its potential markets.