MSOs Mean Business

Like a playground bully who’s been stealing lunch money but now sees a shiny new bike to be had, the cable giants have set their sights on the telcos’ lucrative business customers.

Having taken more than 8 million residential telephone subscribers from the incumbent phone companies in recent years, cable operators see bigger-spending businesses within their footprint—particularly small to medium-size businesses (SMBs) – as a key driver of revenue growth in the quarters and years ahead. Incumbent phone companies will have lost more than 1.5 million small business phone lines to cable competitors by the end of this year alone, and will lose nearly 10 million phone lines accounting for more than $4 billion dollars in revenue over the next five years, according to a study by Insight Research Corp.

“The telephone companies find themselves in the position that the old AT&T was when it was a long-distance carrier,” notes Robert Rosenberg, president of Insight Research. “They only have one place to go, and that is downward.”

Led by Cablevision and Cox Communications—which served more than 160,000 business customers as of the end of 2006 and announced in early November that it had grown its commercial customer base nearly 28% in 2007—cable MSOs, including giants Comcast and Time Warner Cable, launched major new commercial initiatives this year aimed at tapping those billions in small-business telecom spending. For many MSOs, the business services market is a natural extension of their successful incursion into the residential phone business with their triple-play bundle; the market offers cable operators a similar opportunity to profitably undercut incumbent telcos’ pricing with bundled packages of broadband data, IP-based voice services and, to a lesser extent, video. Business customers are virgin territory for Comcast and Time Warner Cable, while veterans of the commercial market like Cablevision, Cox and Charter are seeking to expand their existing business with new services and initiatives.

“Business broadband has been a primary driver of our revenue, in terms of serving businesses,” acknowledges Kristine Faulkner, VP of product development and management at Cox Business Services. “Where we are now, as we look out over the next three to four years, a lot of our growth will come from voice.” Though it’s been selling broadband services to businesses for the better part of two decades, Cox has only fully built out its voice capability across its entire footprint over the past two years, she notes.

In addition to marketing new IP-based voice services to existing broadband customers, Cox is targeting larger businesses than those with fewer than 20 employees, which have been the core of its commercial customer base to date, Faulkner adds. Cox, which is estimated to have done about $600 million in commercial business in 2006, is on target to reach its goal of $1 billion by 2010, she said.

Cox’s most recent commercial telephone launches include Las Vegas, Cleveland, middle Georgia, central Florida, Gulf Coast, Fla., and northwest Arkansas.

Cablevision, which has offered business telecom service through its Lightpath subsidiary for nearly 20 years, has spent the last two years identifying 600,000 serviceable SMBs within its New York metro footprint that spend about $6 billion annually on telecom services. “We’re in full battle mode,” chief operating officer Tom Rutledge told analysts and investors at the Banc of America Securities media and entertainment conference earlier this year. Among other recent initiatives, the company has beefed up both its inbound and outbound business sales forces and created a separate, 24-hour-call center for business customers.

Comcast is taking similar steps to support its initial foray into the commercial marketplace, having christened its new Business Services Support Center in March. The facility in Centennial, Colo., provides nationwide support for business customers and will have more than 200 dedicated technical support reps by the end of the year.

Comcast aims to capture 20% of the small business customers within its footprint within the next five years, chairman and CEO Brian Roberts told Wall Street analysts at its quarterly earnings conference call in February of this year. “That will generate an additional potential $2.5 billion in revenues,” he said, adding that such business carries about a 50% margin and should throw off as much as $1.25 billion in operating cash flow, once it reaches the target 20% penetration. In mid-November, Comcast announced a major enhancement to its commercial offering, adding suite of Microsoft “corporate grade” software applications for email, calendaring and document sharing, called Microsoft Communication Services, delivered as a free service over its broadband Internet connections to its business customers.

Also late to the commercial game is Time Warner Cable, which is currently rolling out its Business Class Phone offering aimed at small to medium-size businesses. “Our management team believes the timing is right for this initiative,” Richard Parsons, the soon-to-be-retiring chairman and CEO of the cable giant’s parent, Time Warner, told analysts at the company’s fourth-quarter 2006 earnings conference call in January of this year.

Analysts estimate that the size of the SMB market in Time Warner Cable’s footprint is more than twice that of Cablevision’s; between $12 billion and $15 billion, according to Merrill Lynch media and cable analyst Jessica Reif Cohen. Yet it’s smaller than the $17 billion to $18 billion market that Comcast sees in its existing footprint, says William Stemper, president of Comcast Business Services, who joined the company from Cox Business Services in August 2006 and is a 25-year veteran of telco giant AT&T.

Time Warner Cable’s commercial thrust will likely lag behind Cablevision and Comcast’s, Reif Cohen cautions, as it has been devoting more resources throughout 2007 to the integration of its acquired Adelphia systems. Yet the commercial opportunity “represents significant upside for the company,” she wrote in a note to investors earlier this year.

SMALL IS BEAUTIFUL

Commercial customers, particularly small businesses with 20 or fewer employees, represent low-hanging fruit for cable MSOs, industry execs and observers agree. Cable’s local presence and tradition of serving small entities such as households, combined with its fiber-optic network infrastructure, newly upgraded to support digital TV, make SMBs an easy target.

“Comcast and other MSOs are outstanding at serving small entities, like households,” notes Stemper. “A small business is just a very large household. So it kind of fits our natural DNA.”

Comcast is initially targeting the smallest subset of the SMBs within its markets (“the ‘S’ of the SMB,” he says), which Stemper estimates spends about $13 billion annually on telecom services. “Their needs are fundamental,” he adds. “And they tend to be underserved historically by traditional suppliers.”

“The incumbents have a history of providing very high quality products, but have, at times, taken their eye off the ball when it comes to serving the local needs of the customer,” agrees Jim Patterson, VP, cable solutions, for Sprint Nextel, and acting president, cable/Sprint joint venture.