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C.R cable competition not fully realized -- but stay tuned
By Rick Smith
The Gazette
Saturday, July 31, 2004, 9:29:07 PM
CEDAR RAPIDS -- Those were headier days in 1998 when McLeodUSA, the undisputed hometown telecommunications darling, launched an enterprising experiment out its front door.
Daring to divine the future, McLeodUSA decided it would build a second cable TV system in Cedar Rapids and take on the established cable system, which now is run by Mediacom Communications Corp.
Such head-to-head competition still remains a rarity nationwide.
McLeodUSA's idea centered on "bundling" services -- phone, cable and Internet. The company thought it could grab a hefty share of the local market by offering all three services and reducing the price for customers who bought it all from McLeodUSA.
The company planned, too, to extend its competing cable system to Marion and Hiawatha and to duplicate the idea in Iowa City and Coralville. And then go on from there.
The established Cedar Rapids cable player said bring it on.
Cable prices lower
Six years later, it hasn't worked out entirely as planned. At least not yet.
Along the way, the nationwide telecommunications bubble burst.
Companies laid too much fiber-optic cable for too little demand at a time when cell phones, satellite cable TV and wireless Internet all were entering the telecommunications mix.
Cedar Rapids' McLeodUSA smacked up against the reality, sending it into bankruptcy court in January 2002.
Seventy-five days later, McLeodUSA emerged from its "financial restructuring" with a close eye on the bottom line.
All but lost in that larger, oft-told story has been the company's cable TV experiment.
In short, the dream of competing cable companies scrapping for customers and putting pressure on prices has only partially been realized in Cedar Rapids.
Cable prices are lower here than in most of Iowa, but McLeodUSA cable is still only available in part of the city and so the head-to-head cable competition has not reached a significant number of homes.
In turn, Mediacom denies any shenanigans and, instead, wonders why the city of Cedar Rapids hasn't insisted that McLeodUSA invest to expand its system to all. Mediacom could do better with prices if it hadn't built a system citywide and wasn't spending to add to it and maintain it, the company says.
Ah, competition.
McLeod hits 50%-plus
Stephen Gray, president of McLeodUSA Inc., acknowledges that the company has not and is not investing in its Cedar Rapids cable operation "anywhere near the magnitude" that the company did between 1998 and 2000.
Coming out of bankruptcy in early 2002, McLeodUSA, he says, could have thrown in the towel on its Cedar Rapids cable venture, which it operates as McLeodUSA Advanced Telecommunications Service. The company unloaded a similar enterprise it had purchased in eastern South Dakota, southwestern Minnesota and far northwest Iowa.
"But we decided it was important to keep this operation a part of McLeodUSA, strategically and also because of our commitment to Cedar Rapids," he says.
Gray says the current plan is to maintain what the company has in place and to add to it incrementally.
"Whether that means we will build out the rest over the next two or three years, or over the next five to 10 years, I don't think we can answer that question at this time," he says.
Gray says the company now has cable line in place that passes 56 percent of Cedar Rapids' 51,110 households.
The 56 percent is spread pretty evenly in northwest, southwest and southeast Cedar Rapids, with less coverage in northeast Cedar Rapids as the company has concentrated its residential cable business in areas where it had existing business lines in place.
The company also serves some residential customers in Marion but none in Hiawatha; it has not moved its cable experiment to Iowa City and Coralville.
Mediacom serves 80%
One good measure of which company has what part of the Cedar Rapids marketplace is how much Mediacom and McLeodUSA pay to the city each year via a required 5 percent fee on cable revenue.
According to the City Treasurer, Mediacom paid 81 percent of the $1.124 million in franchise fees paid the city in the fiscal year ending June 30, 2003. McLeodUSA paid 19 percent. In the fiscal year ending June 30, 2004, the percentages were 82 and 18 percent, for a total of $1.129 million paid in franchise fees.
Price lower in C.R.
Next, price is a good place to look to see if competition matters.
Earlier this month, Jon Koebrick, senior director of government relations for Mediacom, reported to the Cedar Rapids City Council that the company's Cedar Rapids' cable rates were the lowest among 15 representative cities of the 300 or so Iowa cities the company serves.
Koebrick made the report, though, as Mediacom announced the company would raise the cost of its basic cable package by $1 to $10.87.
Mediacom raised rates for its more premium basic package, which it calls "family basic," by $3 to $38.95 in February.
Even so, Mediacom's family basic rate in Cedar Rapids is between $5 and $6.55 lower than monthly rates in the large markets of Des Moines, Davenport, Dubuque, Iowa City, Ames, Mason City and Fort Dodge and smaller communities like Coralville, North Liberty, Vinton and Mount Vernon, Koebrick says.
In fact, he says, Cedar Rapids' rates are lower than 95 percent to 98 percent of the 300 or so Iowa communities Mediacom serves.
Yes, he says, Cedar Rapids' rates are, in part, a function of competition from McLeodUSA.
McLeodUSA's monthly rates in Cedar Rapids are even lower.
McLeodUSA charges $8.95 for monthly basic service -- compared to Mediacom's $10.87 -- and $31.25 for its more premium basic package, which it calls "preferred service" -- compared to $38.95 for Mediacom.
McLeodUSA is quick to note, too, that it has not increased its rates since it began offering residential cable service in 1998.
Sufficiently aggressive is the Cedar Rapids competition that McLeodUSA executives wrote City Hall in March, claiming Mediacom was offering "discriminatory" lower prices in parts of the city where McLeodUSA competes but keeping prices the same elsewhere in the city where McLeodUSA was not competing.
Mediacom denied the allegation, saying the law allows the company to offer deals to win back customers from competitors.
Franchise talks started
In truth, many of the key competitive issues will be discussed between now and the end of 2006 as both Mediacom and McLeodUSA renegotiate their franchise agreements with the city. Those negotiations have begun.
Mediacom's Koebrick notes that his company has built a system citywide, maintains it and expands into new areas of the city at significant cost. That has an impact on rates, he notes.
Doesn't McLeodUSA have the same responsibility to serve the entire city, asks Koebrick, suggesting that state law requires the city to insist that McLeodUSA complete its system.
McLeodUSA's Gray notes that it costs between $1,000 and $1,800 per home to expand its cable system through Cedar Rapids.
What the company has in place makes a nice profit, he says, but adding to the system requires some caution.
"It's a pretty significant capital investment to finish this project," Gray acknowledges. "So we've got to be very conscious of the cash that the company has available and the cash to invest in this business and the cash flow that this business produces."
Technology evolving
As importantly, Gray says, technology is constantly evolving.
One day soon, for instance, it might not make sense to string cable wire to every home in the city, he says. He imagines a setup where McLeodUSA would bring the cable line to a spot in a neighborhood and, from there, the cable connection to individual homes would be wireless.
Nonetheless, Adrian Herbst, a cable and telecommunications attorney in Minneapolis who negotiates cable franchise agreements for cities, says the competitive move by McLeodUSA in Cedar Rapids -- though still a rarity nationwide -- is going to happen more and more across the country.
On average, Herbst says, cable providers nationwide have been able to secure business from 60 percent to 65 percent of the households their lines pass. In days past, competitors had little incentive to string a competing cable line to secure, perhaps, half of the TV cable business that could generate, say, $40 a month per customer.
It makes sense now, though, when the cable line promises to deliver TV, Internet and phone service into the home and may bring in $150 a month per customer, Herbst says.
"For that reason, a lot more cities are looking for competition nowadays," says Herbst, who has been hired by the city of Cedar Rapids to facilitate its cable franchise renewals.
A nearby case in point is North Liberty and Shueyville, where South Slope Cooperative Communications Co. earlier this year won cable franchise votes to compete in those two Johnson County towns against Mediacom.
Looking to the future, Koebrick sees plenty of room for competition, and the fight won't simply be over price.
He points to new digital packages and movies-on-demand as a way to land customers. He says Mediacom is concentrating, too, on providing more local programming, including sporting events, on local-cable access channels.
McLeodUSA's Gray says two items he's watching are how the regional Bell phone companies respond to the changes and whether cable service into every house will require a wire or not.
There's always the changing bigger picture.
"I think Mediacom is a good competitor," McLeodUSA's Gray says. "But you know what, they're just one of our competitors.
"We compete against Qwest and the satellite guys, and there are multiple high-speed Internet providers. There's the DISH Network, DIRECTV, AOL. ... We've got our hands full in terms of competitors."
All local content copyright © 2004 by The Gazette Company, Cedar Rapids, Iowa |
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