A parent company of Starpower Communications LLC, a large local provider of cable television, telephone and Internet service, is preparing to file for protection from its creditors soon, fueling new concerns about the future of an innovative upstart that attempted to challenge the region's cable and telephone giants.
RCN Corp. created Starpower through a joint venture with a subsidiary of Pepco Holdings Inc. The partnership took advantage of the electric utility's rights of way to build a state-of-the-art telecommunications network that was one of the first in the region to offer big discounts to customers who signed up for a package of services.
Starpower's offer attracted tens of thousands of customers -- 40,000 subscribed to its cable TV service alone -- but the growth could not keep pace with the expense taken on to build the fiber-optic network. Pepco announced in January that it planned to sell its 50 percent stake in Starpower, but so far it has not found a buyer. The utility took a $67 million charge related to its investment last year.
RCN has warned that service in the Washington area could be jeopardized once Pepco sells it stake.
"While the Company will attempt to ensure the continued operation of Starpower without adverse impact to customers or overall financial results of the joint venture, it can provide no assurances that a suitable buyer, willing to continue to operate the joint venture on a comparable level will be identified," RCN wrote in its annual report.
An RCN representative said company press officers and executives were traveling yesterday and were unavailable for comment.
Pepco spokesman Robert Dobkin said local customers will not be affected by RCN's pending bankruptcy.
RCN is just one of dozens of telecommunications companies that have failed in the past three years after launching ambitious plans to compete directly with the telephone and cable goliaths. RCN stood out largely because of its attempt to build its own network rather than leasing network lines from established players.
Although tiny compared to the likes of Verizon Communications Inc. and Comcast Corp., RCN was one of first companies in the nation to offer aggressive discounts to customers willing to sign up for more than one service. It also consistently raised the stakes on the speed of its Internet connections, promising download times 60 percent faster than Comcast's.
But RCN has been signaling to investors for several months that it is struggling financially. The company attempted to restructure its debt in a bid to stay out of Chapter 11 proceedings before bringing in AlixPartners LLC, a corporate restructuring and turnaround firm. John S. Dubel, an AlixPartners executive, was appointed president and chief operating officer of RCN in February. Dubel held a similar position at WorldCom Inc. after it filed for protection from its creditors in 2002. WorldCom emerged from bankruptcy proceedings as MCI Inc. earlier this year.
In a Wall Street Journal opinion piece published yesterday, RCN chief executive David C. McCourt blamed his company's collapse in part on the cable industry's monopolistic control of the market. McCourt said cable companies rarely face competition from a company such as RCN, which attempted to establish a rival wired network in a strategy known as overbuilding.
"By contrast, the major cable companies still divide-and-rule territory. When one [cable] company buys close to another, the rivals simply exchange geographic service areas, so that each side can expand their local fiefdoms -- the same business model championed by Tony Soprano," wrote McCourt, referring the suburban mob boss featured on HBO's hit series "The Sopranos."
RCN has complained that it has had difficulty overcoming the political power of cable companies when seeking permission to build competing systems in several areas. In 2001, RCN dropped its application to provide service in Philadelphia, saying it could not match Comcast's influence. Comcast, now the nation's largest cable company, is based in Philadelphia.
Starpower has also skirmished with Comcast in the Washington area. Each company has accused the other of tampering with equipment in ways that allegedly led to disruptions of service for some customers.
"We compete vigorously against two national satellite providers and several local overbuilders and succeed by delivering value to our customers," said Comcast spokeswoman Jenni Moyer.
RCN's troubles are no surprise to Wall Street, where the stock has fallen to less than 50 cents during the past year. Shares of RCN closed at 14 cents, down 5 cents or 24 percent.
During 2003, RCN reported revenue of $484.9 million, an increase of almost 12 percent from the previous year. However, RCN continues to hemorrhage cash. In 2003, the company lost $499.1 million or $4.50 per share. Still, that was an improvement on the previous year, when the company lost $1.57 billion ($14.78 per share) in 2002.
During the first three months of this year, RCN reported a 3 percent increase in revenue, to $121.3 million from $117.6 million in the same period last year.
Consumer advocates said RCN's apparent collapse shows the futility of trying to take on established telecommunications giants given the government's rules for governing competition. "It costs too much to do that, and the few companies that tried are going belly up," said Gene Kimmelman, co-director of the Washington office of Consumers Union.