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If You Overbuild It

This article is more than 10 years old.

Cable competition was supposed to be a dream come true for consumers. It's turned into a nightmare for the companies providing it.

For anyone who'd cursed out their cable company, the Telecommunications Act of 1996 promised salvation by allowing competitors to "overbuild" on top of entrenched local cable companies.

"Multiple pipes is no pipe dream," swooned former FCC chairman William Kennard.

But despite billions of dollars of investment, most consumers who haven't already switched to satellite are still stuck with the same monopoly-like cable company they've always had.

"I thought we'd have a lot more competition by now," sighs former Virginia congressman Thomas Bliley Thomas Bliley , one of the architects of the 1996 legislation.

It's not for lack of trying. Several telephone companies and electric utilities formed units to build new cable systems, while entrepreneurs clamored to get in on the action. Microsoft billionaire

Paul Allen Paul Allen upped the ante in 1999 with a $1.7 billion stake in RCN , the brash Princeton, N.J. outfit that grandly compared its mission with the fall of communism.

Today RCN is limping along, albeit no less cocky, in the handful of cities in which the company remains. Most phone companies have abandoned their cable efforts, while the few entrepreneurs who survive have lowered their ambitions.

"At the end of the day, I keep telling myself that we're really a victim of capital market conditions that were beyond our control," says Joseph Cece Joseph Cece , chief executive officer of Digital Access , a Bala Cynwyd, Pa.-based cable overbuilder that's closed its doors.

Like many well-meaning efforts at deregulation, this one was half-baked from the start. The portion of the 1996 act that permits cable overbuilds was targeted toward big regional phone companies that wanted to compete against encroaching cable outfits.

But at the same time Congress created a disincentive by preserving the telcos' monopoly on local phone service, giving them little reason to dive into new and expensive ventures.

"The Bell CEOs testified before Congress that if the restrictions prohibiting them from getting into long distance and cable were lifted, that would give them the incentive to build broadband networks and offer competitive cable," complains Representative Edward Markey Edward Markey (D–Mass.), whose telecommunications subcommittee of the Committee on Energy & Commerce wrote the act.

"They didn't fulfill that promise."

So entrepreneurs jumped in to fill the vacuum. But it's now clear that without further deregulation of the cable industry, many companies that got into the business are unprepared for the huge undertaking, which can cost $900 and up per home passed.

The result: The status quo remains, says Lehman Brothers cable analyst Lara Warner. A year ago in Seattle, for instance, locals were thrilled when three upstart cable outfits vied for a license to compete against incumbent AT&T Broadband. But two of the companies have since dropped out. The survivor, Western Integrated Networks , is staffed with cable veterans and financed by $888 million in equity but has yet to complete any systems.

Of all the upstarts RCN, one of the Seattle dropouts, seemed to have the best shot at success. Led by the fast-talking David McCourt David McCourt , RCN (as in Residential Communications Network) once bragged it would wire up 9 million cable, phone and Internet users among 25 million homes mostly in the northeastern corridor.

As of now, RCN, which has bled $1.4 billion since its inception, has 1 million total connections, the majority of which have come from entrenched local cable systems it acquired. "We're going to pleasantly surprise some people," insists Robert Currey Robert Currey , RCN's vice chairman.

But it won't be easy. In Philadelphia the company displayed surprising naiveté—or arrogance—when it came to navigating the minefield of municipal cable politics, especially in its dismissive remarks to local politicians about Comcast's cable monopoly.

"When RCN went in to talk to the Rendell Administration, the mayor said, ‘Fat chance,'" recalls Councilman James Kenney. "‘Comcast is a good corporate citizen here. Where are you guys from? You're not getting anything.'" Neither, for that matter, did consumers.