Sunday, August 3, 2003

New leader knows Bell well

Amid broadband debacle, Cassidy built phone side

By Mike Boyer
The Cincinnati Enquirer

John F. "Jack" Cassidy
The new guy in charge of Cincinnati Bell Inc. is no stranger to the 130-year-old phone company.

New CEO John F. "Jack'' Cassidy, 49, has worked for Cincinnati Bell for only seven years since joining the company from Cantel, Canada's largest wireless provider.

But he's spent much of his time building Bell's wireless and long distance businesses and getting to know its traditional telephone operations from the service garages to the executive suite. He did that while much of the company's focus was on its Austin, Texas-based national broadband business.

Tim Donoghue, president of Communications Workers of America Local 4400, which represents about 1,000 of Cincinnati Bell's 3,000 employees, says Cassidy is a good choice to lead the phone company.

"Everybody's been pretty skeptical after what we've been through," he said. But Cassidy "comes out to the garages and talks to people face to face. I think most employees are happy he got the job."

CWA members also are pleased that the company's focus is back on its telephone operations, he said.

The broadband business, Broadwing Communications, was acquired with great fanfare in 1999 for $3 billion. It's now gone, sold in June to a private venture firm C III Communications for about $100 million. Cincinnati Bell dropped the Broadwing Inc. moniker and embraced its old name as part of the divestiture.

The company is left with $2.5 billion in debt, after completing a stock-for-debt exchange later this summer, and figuring out how to build on its local telecommunications business that has won six J.D. Power awards for customer satisfaction over the last three years.

For Cassidy, who has developed a high profile as a community leader and chief salesman for Cincinnati Bell, the choice is clear:

"You either grow, or you don't grow," he said last week from his office in Atrium One, overlooking Great American Ball Park.

The company expects to generate about $200 million annually in cash flow and reduce its debt. The company also has about $2 billion in operating losses on its books which will allow it to avoid paying income taxes for years, money that can be used to pay down debt.

Predisposed to grow things

While the reborn Cincinnati Bell's first priority will be reducing its debt, Cassidy said the company won't totally abandon growth plans.

"I'm predisposed to want to grow things," he said.

That growth will come by continuing to expand its already dominant share of the local telephone business. And it also will look for incremental opportunities to expand its service into places such as Dayton, Ohio, or north and south along the Interstate 71 corridor, he said.

Lost in all the attention over losses by the broadband business over the last couple years is the fact that Cincinnati Bell's operations have grown and continue to generate some of the highest profit margins in the industry, Cassidy said.

"We're in a situation here where our revenues have risen 60 percent over the last five years, and we've nearly tripled" cash flow, he said. "That's come about because we've invested in our wireless business, and our long distance business has about 70 percent of the Cincinnati (residential) market."

The conventional wisdom is that Cincinnati Bell, a relatively small-market telecom with only about a million access lines, can't compete with the likes of MCI, AT&T and the regional Bell operating companies.

Cassidy agrees - in part.

"I can't compete against Sprint or AT&T or Nextel, head-to-head. They can crush me on price," he said. "I can't compete in long-distance against AT&T. Their scope and scale is too great. Where I can compete is being all things to all people."

What Cassidy calls Cincinnati Bell's "right to win" is its bundled offerings of local, wireless and long-distance service.

Combining those services in bundles priced at discounts allows Cincinnati Bell to be competitive.

He says Cincinnati Bell's monthly revenue per household in Cincinnati, including long-distance and wireless products, is about $74, compared with about $21 five years ago.

The company's Complete Connections service allows customers to pick from a bundle of different telephone services for one monthly price. It has more than 300,000 subscribers, or about 42 percent of total residential access lines.

On Custom Connections, customers can bundle local service, long distance, wireless and the company's Zoomtown high-speed Internet service on one bill. It has attracted 28,000 customers since its launch earlier this year, including 8,700 added in the second quarter.

Renewed local focus

In announcing second-quarter earnings last week of $270 million, or $1.18 a share, including non-cash gains on the sale of the broadband business, Cassidy told investors growth in Zoomtown access lines has more than offset losses of basic phone lines.

Zoomtown, with about 87,000 subscribers, has about the same number as Time Warner Cable's Road Runner high-speed service.

After being preoccupied with the money-losing broadband business for much of the last two years, Cincinnati Bell's board of directors, under new chairman Phil Cox, is again focusing on the company's local options.

While he wouldn't comment on specific plans, Cassidy said the board spent part of its meeting last week discussing strategy.

And in October, he said, "the board will spend the better part of a week in strategy meetings discussing what the future will look like and where do we go."

Many investors, who saw the company's stock plunge from a peak of $40 a share in early 2000 to just over a dollar last year, blamed the company's board of directors and management for the debacle.

But Cassidy said no one in the industry foresaw the telecom industry's meltdown, which undercut the company's broadband business. Cincinnati Bell's stock has been trading in the $5 to $6 range lately, almost triple the price of a year ago.

Cassidy, who is the third CEO at Cincinnati Bell in the last year, defends his predecessors Rick Ellenberger, who resigned in September, and Kevin Mooney, who guided the company's financial restructuring.

"It's easy to sit back three and five years later and disrespect people," he said. "It was a totally different time.''

What happened to the telecommunications industry in the last three years is similar to what happened to the railroads in the 19th century and the auto industry in the 20th century, Cassidy said.

"The demand curve grew so fast that the market got overbuilt,'' he said. That led to an oversupply and falling prices, which doomed Broadwing and other national network providers.

"But to suggest that board and management watched the market crash and didn't do anything is ludicrous,'' he said.

Both Ellenberger and Mooney made sure the company continued to invest in services such as wireless, Zoomtown and long distance which are the foundations for its future, Cassidy said.

Cincinnati Bell is continuing to invest about $120 million in capital expenditures annually, despite its need to pay down debt.

Upgrading wireless system

About $30 million this year is for equipment to upgrade its wireless network to offer new technology called Global System for Mobile (GSM). That's an international wireless system that will let Cincinnati Bell customers use their handsets anywhere in the world and increase capabilities for data access.

Cincinnati Bell plans to begin a "soft" rollout of the system to some customers in October but won't begin a major marketing push for the system, which requires new phones, until next year.

Cassidy said the company won't drop its existing technology for customers who want to continue using the old system.

Cassidy is also reassuring Bell employees that they won't face big job cuts.

Through attrition and consolidating functions, Cincinnati Bell has cut its total employee number by about 15 percent in the last three years, he said.

Those moves have allowed the company to take about $35 million annually in operating expenses out of the business, further improving what Cassidy said are industry-leading profit margins.

Turning to the company's headquarters, Cassidy said the company is still talking with Convergys Corp., which is acquiring Atrium One as part of its tax-incentive deal to remain downtown.

Although plans are incomplete, he said, Cincinnati Bell expects to vacate the 11 floors it now occupies in Atrium One in 2005.

Some of its corporate and administrative functions, representing a couple of hundred jobs, will move to six floors in Atrium Two.

But Cassidy said Bell still needs to find space for about 600 to 900 employees in its Atrium One call center and sales administration functions.

He said the company is looking at its options but hasn't made any decisions.

"My preference would be to stay where we are,'' he said. "We are called Cincinnati Bell for a reason."


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