Kingston: Tiny Telecom, Terrific Results

It now wants to take the niche approach national

Recipe for success as a privatized telecom company trying to cut it in the New Economy: First, ignore the global market. Second, stay small and maintain your base in a remote, downtrodden district with few high-end telecom users--it's the little man you're after. Keep your service out of major metropolitan areas. Do not bid on new mobile-telephone licenses. Make no acquisitions, and seek no mergers. Follow the formula, and you're in like Flynn.

What universe is this, you ask? Good question. It's the one Steve Maine created when he quit as head of British Telecommunications PLC's cable and satellite operations to run a local telephone company in Hull, a former fishing port on England's northeastern coast. Friends thought Maine was committing corporate suicide when he became CEO at Kingston Communications (Hull) PLC three years ago. Instead, the 47-year-old Maine has turned a local phone company into an innovative player in Britain's New Economy. Now, he hopes to compete nationally in the latest broadband services.

CHEAP RATES. Maine's strategy is strictly contrarian. While BT focuses on wireless assets, mergers, and big customers in London, KC offers innovative services in areas BT underserves. Kingston's business network, Torch Telecom, which sells Internet services to small and midsize businesses, is expanding in areas such as Bristol and the Thames Valley that are low priorities for BT and cable operators. "If we focus on things that BT or the big cable companies aren't," Maine says, "we stand an opportunity to do quite well."

Indeed, by offering cheaper rates for tailored services, Torch raised revenues by more than 50%, to $99 million, in the year ended Mar. 31. Its customer base, at 1,500, increased 70%. KC's more mature local network now serves more than 185,000 residential and business customers in East Yorkshire.

None of this is lost on investors. Since KC went public a year ago, market cap has tripled, to $3.8 billion. At this point, the shares are trading at $9 a share, and analysts expect it to join the FTSE 100 stock index when it starts trading consistently at 12. Pretax earnings were $13 million last year, on sales of $281 million.

Staying independent has also allowed KC to develop new technologies. It was the first in Europe to offer cable services such as digital television over phone lines. It's now exploiting asymmetric digital subscriber lines, or ADSLs, which use copper phone lines to transmit data through the TV. Last December, Maine launched Kingston Interactive Television (KIT), a broadband portal through which subscribers receive 60 TV channels, fast Net access, local news and shopping, and video-on-demand, something British cable companies don't offer. The service will go to 30,000 East Yorkshire homes by September.

PAPER PROFITS. Kingston has long been an anomaly. In 1906, when Britain turned a patchwork of regional carriers into a national utility, Hull was too small and isolated to join the club. Then in 1984, when a $6 billion privatization created BT, Hull decided to keep going it alone. Three years later, Hull turned what had been a city department into a private company.

KC has given locals more than new technology since Maine came to town. A third of Hull's 160,000 households own the stock. And for those who bought the maximum $8,000 allotment at the initial offering, the paper profit so far is $63,000. The city council, with a 43% stake, plans to build a sports stadium and upgrade schools and roads, which have deteriorated since Hull lost its fishing industry in the 1970s.

Maine has plans, too. Having played the regional card, his first challenge is to take KC's niche services national. When BT opens its networks to rivals later this year, as regulators require, Maine will offer Britain the same broadband services now available only in greater Hull. The biggest opportunity, he says, is in new media, where Kingston has blown away competitors.

Maine admits that size will soon matter. And he concedes that some small acquisitions are likely. In February, KIT formed a joint venture with News Corp.'s BSkyB to develop TV content and distribute Kingston's service. For now, though, Maine rules out a merger or takeover. "There will still be opportunities for growth," Maine says. "But they may not be where the global behemoths have made their nest." As the locals in Hull have learned, you never know where you'll find a golden egg.

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