San Marcos, Texas-based communications firm faces off against telecom giants

Grande Communications Holdings Inc. showed up six years ago with an ambitious plan to shake up the telecom market by building a $1 billion fiber-optic network that would let it sell bundled phone, Internet and video service across San Antonio and Austin.

But a telecom industry meltdown led San Marcos-based Grande to scale back those ambitions. While it once said it would serve 100 percent of those markets by the end of 2005, it now reaches just 20 percent of each.

And now, the company -- once the area's only "triple play" bundler -- finds itself the underdog as giant AT&T Inc. and Time Warner Cable square off here with the same mix of products.

Is there room for Grande as the Alamo City shapes up to be the telecom titans' first full-fledged battleground?

Grande CEO Roy Chestnutt thinks so -- as long as his company can outshine its much-larger rivals on service.

"We've got to create a superior customer experience," said Chestnutt, who took over in January after Grande's board shook up its executive ranks. "We obviously can't out-advertise these guys, we obviously can't outspend them. We've got to out-service them." Since taking the helm, Chestnutt has slowed Grande's network expansion and focused on cutting customer turnover and reaching deeper into the neighborhoods it already serves. That means giving more consistent and responsive service, strengthening training for the company's nearly 900 employees, and working aggressively to "save" customers mulling a switch to another provider.

"It's not about getting customers, it's about keeping them," Chestnutt said.

And for the first time, Grande -- which also serves Waco and Corpus Christi -- is aggressively marketing service to small and midsized businesses, a market that's traditionally belonged to incumbent phone companies such as AT&T.

Though analysts said the moves make sense, the company's larger rivals are no competitive slouches themselves.

AT&T, the nation's biggest phone company, is spending $4 billion to launch its U-verse video service, with its San Antonio headquarters as its first market. And Time Warner Cable, a unit of the New York-based media giant, recently signed up its 100,000th phone customer here.

Meanwhile, Grande has just 137,000 customers and has yet to turn a profit. Its $28 million capital budget this year is a little more than half the $48.2 million it spent last year.

What's more, Grande relies on guerilla marketing via neighborhood sales calls and community event sponsorships. Its deep-pocketed rivals' TV and billboard ads make their brands virtually ubiquitous.

"I wouldn't say it's impossible for a company like this, but it's an uphill task," said Piyush Arora, a Frost & Sullivan telecom analyst. "They are trying to compete against the big boys."

But Chestnutt, a former sales vice president for cellular company Nextel before its sale to industry behemoth Sprint, said his experience at the wireless underdog prepared him for fighting bigger, better-capitalized foes.

"Nextel never had more than 15 percent market share, but we managed to have a viable business," Chestnutt said. "You can do a hell of a lot with 15 percent market share." Indeed, competitive providers like Grande can thrive with a small share of the market, said Frank Perazzini, director of J.D. Power & Associates' telecom group, provided they keep customers happy and buying services.

As proof, Perazzini points to RCN Corp., a Virginia-based cable and phone company with about 365,000 customers. Like Grande, RCN struggled in the wake of the telecom meltdown -- it even filed for bankruptcy reorganization in 2004 -- but it's since built a stable business and scored highly in J.D. Power's most recent cable customer satisfaction survey.

"You don't necessarily need millions of customers to be successful," he said. "Even if you're a relatively small company, if you can deliver against your service promises, you can be viable in this market." Chestnutt said his company is ready for the challenge, having recently won an additional $32 million in financing from Goldman Sachs. Despite its ongoing losses, the company finished the quarter ended June 30 with $49.2 million in cash, up from $35.1 million a year earlier.

AT&T and Time Warner talking up service bundles, Chestnutt added, shows that Grande's business plan was right all along.

"People are satisfied with the product," Chestnutt said. "The biggest complaint we get right now is, 'When are you coming to my neighborhood?'"