A HELL OF A TOWN TO BE THE LITTLE GUY

BY MAVIS SCANLON If you live in New York City, chances are you get your cable service, and possibly your Internet service, from Time Warner Cable or Cablevision Systems, the two operators that dominate the city and surrounding suburbs. RCN Corp. wants to change that. As the 13th-largest provider of cable services, RCN serves just under half a million subscribers in some of the largest U.S. markets; almost two-thirds of those customers take some combination of voice, video and data. Not only is the Big Apple one of RCN’s largest markets, but due to its status as the media capital of the world — not to mention its proximity to RCN’s Princeton, N.J., headquarters — New York is considered one of RCN’s most important markets. It also just happens to be the one market where RCN acquired, rather than built, much of its network, through its 1996 purchase of Liberty Cable Television of New York. At first glance, the acquisition looked like a smart way to jump-start its New York City business — speed to market was a crucial part of RCN’s business plan — and gain scale. But Liberty’s wireless video network, which utilized point-to-point 18-GHz microwave technology, ended up causing RCN more than a few headaches. In the heady late 1990s, RCN focused on expansion. Laying a new fiber backbone in the streets of New York was a priority as it would enable the company to serve as many properties as possible. Converting the microwave network it acquired from Liberty to the same platform it was building was a project that simmered on the back burner. When the Internet bubble popped, RCN scaled back plans to add new buildings to its network, but that left it with a greater percentage of buildings using the wireless microwave technology. Further, it also acquired contracts Liberty had struck with various building owners. The upshot? Not every service, such as high-speed data, was available in every building. Making matters worse, since building contracts differed, customer service reps often had to look up individual contracts to answer questions. Not a great way for an impatient New Yorker to be introduced to a company. “It hindered our ability to service customers,” says RCN president Mike Adams. Getting all systems on the same platform and moving to an integrated billing system were major initiatives the company undertook throughout 2001 and 2002. During that time the company lost ground to its New York City competitors, but now it’s fighting back. In New York, RCN has had to deal with the tedious process of upgrading and building out its network to 860 MHz, a process complicated by the different platforms it had been using. The upgrade is halfway done now, and the company expects it to be completed by year-end. But, in its other markets, RCN built a state-of-the-art network that could seamlessly handle local phone, cable TV and high-speed Internet; its strategy from its inception was to bundle those three products. Individual buildings are connected to the network backbone via fiber extensions. The telephone network consists of high-speed transport equipment and fail-safe interconnections between the building and the network and also includes stand-by power and a full suite of features. Long-distance service was added last year. The video distribution plant is predominantly fiber-based, which RCN says increases the capacity, reliability and quality of service. In a stroke of luck — considering what other cable operators went through when Excite@Home went out of business — RCN built a state-of-the-art TCP/IP network for its Internet service, including all of the networking and computer equipment required for its own ISP service. RCN says its network architecture affords it extra capacity for adding new communications services. Customer service and back-office operations have been two companywide issues. Despite RCN’s $1.7 billion backing from Paul Allen, by early 2001, things started looking bleak. RCN had relied on the debt markets for capital to continue its aggressive expansion plan. Formed in the wake of the Telecom Act of 1996, RCN’s strategy was to build new fiber networks and offer a one-stop shop of voice, video and data services. It became the largest of the so-called overbuilders that sprouted during the mid-to-late 1990s with hopes of competing with cable. Investors doubted the company could execute; its stock plunged from a high of over $70 a share in early 2000 to near $5 in 2001. (Shares have been in the $2 range lately.) Hunkering down, management drastically reduced expansion plans. RCN cut its 2001 capital budget in half, and said it would focus on its big urban markets — New York City, Boston, Washington, D.C., Chicago, Los Angeles and San Francisco. RCN had enough cash to last into 2004, which gave it time to cut costs and grow its customer base. Layoffs have been significant. RCN’s workforce totaled about 3,800 in December; that’s down from over 7,000 at the end of 2000. Convergys overhauled RCN’s billing system, installing the ICOMS solution, a support system that made it easier to provision, manage and bill customers. Over the past two years, RCN has also improved its balance sheet. Since January 2001, the company cut its debt by about $1.1 billion. EVP corporate finance Tim Stoklosa says his goal is to reduce the company’s current $1.7 billion debt load to under $1 billion within a year. “We have really built up the business,” he says, noting an increase in revenue in the past couple of years. RCN reported 2002 revenue of $457 million, up from $286 million in 2000. In the second quarter of 2003, average revenue per customer hit $87, according to the company, up from about $50 in 2000. “We went through a transition,” explains RCN’s New York GM Mike Angi, referring to the operational changes the company has made. The new billing system has been a major improvement. The ICOMS system gives the company more flexibility, he adds, and more visibility into how specific marketing campaigns are working. “This gave us more detail, more reports, and allowed us to run the business better because we can look deeper.” Angi, who became GM of New York in July and has served as the company’s chief network officer for about a year, shepherded a reorganization of its separate Queens and Manhattan management teams under one umbrella, a move Angi says will enable the company to better serve the customer. “We’re more focused on what the customers want, we’re more focused on what drives the company to profitability,” he says. “And the key to the whole bundled strategy is to leverage your entire asset over the greatest customer mass that you possibly can.” RCN has spent much of this year deploying new services. In fact, if there is one thing RCN offers in abundance, it’s choice. Its top-of-the-line offering is the ResiLink Platinum package, which includes full basic and digital cable TV, all movie premium packages, two set-top boxes, two phone lines with unlimited local and regional calling plus four phone features, and RCN’s MegaModem high-speed Internet for $187 (with an option to add long distance). Four other ResiLink packages are available, and the newly added Essentials line allows customers to bundle two or more services. With the introduction of MegaModem, which allows for download speeds of up to 3 Mbps, RCN is luring Internet fans who download and send big files. Underscoring the competition for these high-end customers, Time Warner Cable last week upped its maximum download speed for its high-speed Internet customers to 3-Mbps service. But RCN apparently will continue challenging the dominant players. On Oct. 15, RCN will upgrade existing 3-Mbps customers to its MegaModem Mach 5 5-Mbps service and its 1.5-Mbps customers to 3 Mbps at no additional charge. RCN’s range of Internet speeds, including a “modem lite” to entice dial-up customers to try high-speed, gives people a peek at what higher speeds look like. Angi says RCN is not actively going after converting the dial-up market to high-speed. Nonetheless, “we are finding that is going over well,” he says. “We’re trying to capture people that might have an old computer, that only send e-mail once in awhile on a dial-up basis, all the way to maybe a small business that needs maybe 5 or 10 megabits per second.” Adds Barak Bar-Cohen, VP, New York, “Our MegaModem was born out of demand for higher speeds, demand for more bandwidth capacity. We were hearing from our customers that they needed more speed and just more on the data.” Although the company’s policy precludes disclosing market-specific numbers, management says it is pleased with adoption of new services, including high-definition TV, video-on-demand and subscription video-on-demand. “We have had a really busy year,” says Rick Rioboli, VP product management and development. “On the video side we already had digital, but the most focus this year is getting out HDTV.” In addition to the local broadcast channels (with the exception of CBS), RCN’s HDTV offering includes a $12 tier of ESPN HD, Discovery and HDNet Movies. Between 65% and 75% of customers who take HD take the tier as well, says Rioboli. Roughly 2% of digital customers have signed up for hi-def. At CBS, the HD negotiations are part of a broader negotiation that’s going on with Viacom. RCN is also planning a DVR trial later this year. Virtually all of its set-tops are Motorola, whose first DVR product is just coming out of development. Digeo’s media center, which works with Motorola technology, is another possibility for DVR capability, Rioboli says. Sony’s Passage is another option. Because of the varied service offerings, training for customer service reps and technicians is of utmost importance. “Every time we launch something new, training goes out through the whole organization,” says Angi. The two current call centers will be consolidated in Wilkes Barre, Pa. And while all general calls are currently handled at the call centers, tier two and tier three calls — those that need a higher level of support — are routed to New York. “We work incredibly hard — whether it’s the direct sales reps or the technicians putting on blue booties when they come into a customer’s home so they don’t muddy it up — to ensure it’s a local feel,” says Bar-Cohen. Some customer service reps, he adds, speak Cantonese, Russian and Spanish. And not just anybody can become a CSR at RCN. PK Ramini, SVP operations and support, oversees CSR training. Not only does RCN look for people with specific skills and those that may enjoy the rigors of a CSR position, it actually does personality testing on potential employees to see if they are a fit. “Then they sit on the [call center] floor for a while and listen to calls,” Ramini explains. “Some people don’t call back.” After a six-week course, CSRs will initially take on about half the responsibility of a seasoned rep, and over the next couple of weeks gradually increase their workload. One metric Ramini points out as the true mark of how RCN is doing on the customer service front is the CSR attrition rate, which hovers in the 36% to 40% range. “It’s not great,” he says. “But relative to this business it’s pretty good.” Overall, the company’s biggest channel for growth has been telesales. For service in Manhattan about 65% to 70% of the call center volume is inbound, Ramini says, especially following a direct mail campaign. RCN serves roughly 75% to 80% of Manhattan, along with parts of Queens and the Bronx, so the incumbent operators may still have an advantage on a pure geographic basis. But if Brad Martin had his way, every Time Warner Cable, Cablevision and Verizon customer in the New York City area would know they had a choice when it comes to choosing their cable, high-speed data and telephone companies. As director of marketing, Martin, whose experience includes seven years at direct mail powerhouse Columbia House, says “my genetic makeup is all about direct consumer promotion, direct response, targeted response rates and driving strategies that really help a company get to know the market.” In addition to cross-channel promos, RCN does a lot of direct mail. “It’s all about getting the right products and services, the right bundles, in front of the right customers.” EMPLOYEES: 331 MARKETABLE HOMES: 310,000 MILES OF PLANT: 500 PERCENT UPGRADED: 50% to 860 MHz; target is 100% by year-end CUSTOMERS TAKING TWO OR MORE SERVICES*: 60% DIGITAL CUSTOMERS W/CABLE MODEM*: 35% *COMPANYWIDE SOURCE: RCN CORP. Angi has over 30 years experience in cable, broadcasting and telecom. He is the former COO of Utilicom Networks, president of Colony Linkatel Networks and managing general partner for Linkatel Pacific. Angi has also served as chief technology officer for the Providence Journal Co. and Colony Communication. He is chief network officer for RCN Corp. Bar-Cohen joined RCN in 2000 as part of the Internet product development team. He went on to be director of strategic corporate initiatives and VP of employee services. Previously, he was at an economic consulting firm and was VP of an investment banking firm in Tel Aviv. He has a B.A. in economics from Brandeis and an M.B.A. from the Tuck School of Business. Lockwood joined RCN in 1996 out of Monmouth University, where he received a bachelor’s in accounting. After three years, he transitioned into a managerial role in corporate planning. In 2001 he joined the New York market, where he has been successful in assisting senior management in revenue enhancement and achieving optimal operating efficiency. Martin joined RCN in May. He spent six years at Columbia House, where he developed a passion for direct to consumer marketing and customer acquisition strategies. There he held a variety of positions, including director, e-CRM. He spent the three prior years with Electronics Boutique. He holds a B.S. in marketing and M.I.S. from Yeshiva University. Bixler oversees residential sales efforts. He arrived at RCN as director of sales in Philadelphia in 1999. In April of this year he was asked to lead the sales organization in New York. In addition to his four years with RCN, Bixler spent ten years in the wireless, computer hardware and software industries. Comparison of consumers in RCN’s New York service area to the top 75 market average.