By Mitch Shapiro

As cable operators and tele communications carriers vie for dominance in the delivery of broadband services in the United States, a new generation of network operators is emerging to challenge the leadership claims of both incumbents.

Armed with fiber-deep networks, strong financing, experienced management teams, and bundled-service business models, these next-generation broadband "overbuilders"-so named because they have deployed their new wired broadband network in a community already served by a cable operator and perhaps also by telco digital subscriber line (DSL)-aim to deliver more capacity and better service than either incumbent can match. To the extent they follow through on their increasingly ambitious plans, these new players pose a serious threat to cable and telco business models-especially so for the cable industry, a good portion of which has changed hands at valuations that assume very strong positions in future broadband markets.

A fundamental premise of these new companies' business models is that cable's hybrid fiber/coaxial cable (HFC) upgrades and telecommunications' DSL deployments cannot cost-effectively realize the promise of broadband-an integrated bundle of voice, video, and data services, plus a range of new bandwidth-hungry multimedia applications, all available to every customer on a dedicated multimegabit pipe.

While incumbents might dispute the extent to which this argument is true, there seems little doubt that the new architectures being deployed will be able to deliver much greater dedicated bandwidth than either DSL or "traditional" HFC networks. Two questions remain, however: How will the latent capacity of these new networks be used and what will be the compelling reason for incumbents' premium customers to switch to these new kids on the block?

Put simply, the mathematics of a broadband overbuilder go something like this: With a superior network and product offerings, a new operator could be expected over time to achieve 15% to 20% or greater penetration of video, high-speed data, and local and long-distance voice services markets. Assuming each of these four services generates about the same per-customer revenue, that is the equivalent of 60% to 80% penetration of a single service-roughly the range cable operators have historically experienced as video-only providers.

If you add to this penetration revenues from new services such as video on demand, e-commerce, targeted advertising, energy management, security, videoconferencing, distance-learning, and telemedicine, plus a strong market share in the largely untapped small-to-medium business market, the overbuilder business case begins to look even more attractive. And if the overbuilder's network provides more capacity than the incumbents', it will likely gain increasing competitive advantage over time, as new bandwidth-hungry services are brought to market.

Pioneer targets top-tier markets

The "old-timer" in this new business is RCN, which has been at it since 1996, when it acquired Liberty Cable to enter the New York City market and formed joint ventures with utilities Boston Edison and Potomac Electric to build networks in the Boston and Washington, DC, areas.

As the Figure shows, RCN's focus has been on the nation's largest, densest markets. In the Northeast, the company is active in the four largest metro areas: New York City, Philadelphia, Washington, DC, and Boston. Along the West Coast, it has begun offering service in several communities in the San Francisco area. In January, RCN announced an agreement with Southern California Edison (SCE) to use the utility's fiber backbone and construction expertise to expedite its entry into the Los Angeles market. In February, RCN received regulatory approval to operate in Portland, OR, Seattle, and surrounding communities.

The company is also acquiring 21st Century Telecom Group, a bundled-service overbuilder that has laid nearly 250 mi of fiber along Chicago's affluent lakefront. For further expansion in the Chicago metro area, RCN has won approval to expand into more than 20 additional communities within Cook County.

As of early April, RCN was rumored to be negotiating to acquire Ameritech's overbuild networks, which serve more than 200,000 customers in over 80 cities and towns in the Detroit, Chicago, Cleveland, and Columbus, OH, areas. Presumably, RCN would retrofit these "video-only" networks to also provide tele phone service and thus become a direct competitor to Am er i tech, which last October became a part of SBC Communications. SBC's sale of Ameritech's HFC operations continues that carrier's strategy of shutting down the overbuild operations of the local-exchange carriers (LECs) it acquires. SBC took similar steps after acquiring Pacific Bell and SNET.

RCN is targeting high-density areas with at least 150 homes per mile. According to the company, these target markets account for 44% of the homes in the United States but only 6% of its geography. The company's Megaband Network employs Synchronous Optical Network (SONET) ring backbones with fiber nodes serving 150 homes. Typically, the fiber reaches to within 900 ft of customer premises, then feeds 860-MHz coaxial cable plant. At a minimum, 12 fibers connect each node, although only two are currently used. The other 10 fibers will remain dark until needed for services or further node splitting.

On the marketing front, RCN has introduced flat-rate "ResiLink" bundled service packages aimed at boosting penetration and revenue. Six months after ResiLink was introduced in its first test market-Waltham, MA-penetration rates had reached 35% for local voice, 28% for cable TV, and 11.5% for Internet service. After 12 weeks of expanding the ResiLink trial to 21,000 homes, the average ResiLink customer was generating approximately $125 in revenue per month, including long-distance and terminating-access revenues.

Others target smaller markets

In contrast to RCN's tier-one market focus, the other broadband overbuilders already in operation have initially targeted smaller markets, in most cases on a regional basis.

For example, Knology (West Point, GA) has launched service on an HFC platform in a number of mid-sized and small markets in Georgia, Alabama, South Carolina, and northern Florida (see Figure). More recently, the company was granted a franchise in Knoxville, TN, and applied for one in Nashville, TN. For these larger markets, Knology is believed to be considering architectures that take fiber even closer to the home and deliver more dedicated bandwidth.

ClearSource (Austin), which shares some common investors with Knology, has also targeted mostly smaller cities. Its geographic focus is Texas, where it has begun providing service in Waco and is building networks in Corpus Christi and the Midland-Odessa market. In late March, ClearSource was awarded a franchise to operate in Amarillo, TX. According to Bear Poth, the company's president, ClearSource plans to spend between $30 million and $60 million per market for its network build-out.

Like Knology and ClearSource, Seren Innovations (Minneapolis) also started with a smaller market-launching first in an area in and around St. Cloud, MN, which accounts for less than 40,000 homes. St. Cloud is roughly 50 mi northwest of Minneapolis, where Seren's parent Northern States Power Co. is headquartered. Northern States supplies electricity and gas to portions of Minnesota and other midwestern states.

Having gotten its feet wet with a $40-million build in a small "hometown" market, Seren has since expanded its horizons. With franchises in two communities and others pending, it has begun building an HFC network that will eventually deliver bundled services to roughly 280,000 residents and businesses in Contra Costa County in the East Bay area of San Francisco. Seren has also filed for a cable franchise in Longmont, CO, with plans to eventually serve more than 250,000 homes and businesses in the Northern Front Range area north of Denver, which also includes the cities of Boulder, Greeley, and Fort Collins. Both the California and Colorado build-outs are expected to cost about $150 million each. Seren's current architecture employs 860-MHz electronics and deploys fiber to nodes that service 250 to 375 homes and businesses.

New crop of competitors

The latest wave of broadband overbuilders includes Western Integrated Networks (WIN), WideOpenWest (WOW), Grande Communications, and Digital Access. Whereas Digital Access has targeted several markets in the Midwest, the other three companies-as the company names suggest-are focused mainly in the western part of the country and most heavily in Texas.

Although WIN, WOW, and Grande are all well into the process of obtaining franchises and engineering their networks, it remains to be seen how far each will pursue its planned build-outs since to a large extent these companies are targeting the same markets (see "Texas-style overbuilding" on page 56). As the Figure illustrates, all three overbuilders are targeting Austin and San Antonio, TX; WIN and WOW will also compete in Houston, Dallas, and Sacramento, CA.

While a strong case can arguably be made for a single successful broadband overbuild per market, few would argue that there is room for three-or even two-new broadband operators. Therefore, it might expected that one or more companies will drop out or join forces in some of these market areas. Until then, the current phase of franchising and early network design will resemble a game of "chicken," with all companies expressing a strong commitment to build-out their networks in all of their target cities.

Becoming a facilities-based provider takes a lot of time and money, typically requiring an investment of $500 or more per home passed and four to five years to build-out each market. WIN, for example, has pegged the cost of its Austin, TX, and Dallas buildouts at more than $500 million each, with San Diego targeted at over $600 million. Though funds appear to be flowing readily into these new ventures, their backers will ultimately demand a solid return on their investment.

High-powered platforms

Helping these new overbuilders gain competitive advantage are technology companies developing advanced access platforms. For example, Marconi, which during the past few years has acquired Reltec and FORE Systems, will be supplying Grande with its DISC*S fiber-deep access platform. The Marconi platform delivers analog and digital video, high-speed data, and full carrier-class telephony coverage over a single-fiber infrastructure. In the Grande deployment, fiber-fed optical-network units will serve as few as 24 homes.

Advent Networks, based in the overbuild-hotbed of Austin, is also targeting this "third-network" market. The company's patent-pending Ultraband platform uses proprietary technology to deliver 10-40 Mbits/sec and more of dedicated capacity to each customer.

According to David Fruhling, co-founder and chief operating officer, the main value Advent brings to the new network builder is the ability to offer a truly compelling reason for a consumer to switch away from an incumbent. In a bundle of video, voice, and data, he says, data is the most powerful driver of that bundle. Delivering the "killer apps" that customers want and that legacy broadband technologies can't deliver is critical to these new network builders, Fruhling contends. Armed with a set of uniquely compelling UltraBand products, he suggests, these new operators will be able to achieve higher penetration rates, capture more high-value customers, and reduce churn.

Advent also brings the utility card to the overbuild table. In March it received an 11% equity investment from Southern Union Co., a utility that serves more than 1.2 million customers in Texas, Missouri, Pennsylvania, Florida, and Mexico. This summer, Southern Union will close on the acquisition of utilities in Rhode Island and likely continue to add to its customer count. Utilities, with their rights of way, existing fiber networks, construction expertise, billing systems, and strong customer relationships are potentially key players in the overbuild arena, whether they build their own networks or-as in the case of RCN's joint ventures-form partnerships with communications firms.

Historically, cable overbuilds have been derided as losing propositions in all but the rarest of cases. In this era of bundled services and insatiable bandwidth appetites, however, the door is wide open to innovative overbuild technologies and business models. Though they remain the new kids on the broadband block, the new generation of overbuilders is positioned to leverage best-of-breed technologies to carve a leading role-and a significant market share-in the digital future. Incumbents take heed, or risk losing a painfully large share of future growth potential.