Business Services: Cable’s Last Frontier?

The business sector seems ripe for cable to offer an alternative to the telcos. The return on investment is evident, but are operators being aggressive enough? By Peter Caranicas How do you ignore a $130 billion market? The answer, of course, is you don’t. Even though cable has been praising the potential of the business services sector for a few years, it has yet to capture more than a tiny sliver of it. The business case couldn’t be more compelling. Cable’s penetration of its residential customer base has nearly reached saturation and faces fierce competition from satellite, not to mention future onslaughts from new telco video offerings to consumers. And while ARPU growth remains possible, far greater potential exists in offering voice, data and even video services to businesses. This market—traditionally called commercial services but recently relabeled business services by CTAM, CableLabs and SCTE—was addressed once again at the CTAM Business Services Forum, during and after the National Show in Atlanta. "There’s incredible excitement about this part of the business," says Andre Martineau, senior director of business solutions for Advance/Newhouse Communications, who was a moderator at the Forum. "The new growth engines will be voice to residential customers and new services to businesses." Proceeds generated by "a single commercial customer are equal to 10 residential customers," says Joan Wilson, CTAM’s VP of corporate initiatives. "It’s been called the last frontier of new cable revenue." As in the past, MSO executives attending the CTAM Business Forum unanimously applauded the potential of business services, says Jim McGann, corporate VP of Charter Communications’ Charter Business unit and one of the Forum’s planners. "I can’t speak for all the MSOs, but I can tell you that Charter Business will be a growth engine for [us]," he says. "We’re held to deliver significant revenue numbers in 2006 and beyond." TELCOS’ TURF No research firm analyzing businesses’ annual expend-itures on telecommunications has come up with a number lower than $100 billion. Most are higher. Scientific-Atlanta estimates its size at a whopping $131 billion (see accompanying chart). Mark Palazzo, VP and general manager of Scientific-Atlanta’s Metro Access Business Unit, says the telcos are scooping up about 97% of that $131 billion. "The commercial customer is a cash cow for the telcos," he says. "There is effectively no competition in that space today…We see it, as do the financial community and the MSOs, as a great opportunity [for cable] in the future." To achieve that growth, cable needs to grab market share from the telcos. Yet there seems to be no industrywide strategy, with each MSO offering services of its own flavor. A quick poll of three large MSOs found three different approaches to the business market. Time Warner Cable, for example, recently dropped the Road Runner name from its business products and rebranded them as Time Warner Cable Business Class. Ken Fitzpatrick, VP of the business unit, describes the company’s offerings as "a combination of business communications tools, including broadband access using cable routers and modems, dedicated access [over our] fiber and services like Web hosting, remote data storage and managed security." Cox, long considered a leader in the commercial space, emphasizes voice services that include "everything from a single phone line to hundreds of phone lines with rich features," says Bill Stemper, VP, Cox Business Services. "On the data side it’s everything from a cable modem to fiber right into a customer’s equipment room. We have a portfolio that is competitive to what an AT&T or a BellSouth or an SBC would offer." Comcast offers business customers no voice service at present, according to Kevin O’Toole, Comcast VP of commercial services. Instead, the company markets three levels of Comcast Workplace high-speed Internet access service: Standard, for $95 per month; Lite, for $60; and Enhanced, for $160. Comcast Teleworker is targeted at large businesses with employees working at home, either full or part time. CABLE DEVELOPING SLOWLY Mike Paxton, senior analyst for multimedia and broadband at In-Stat, a market research and forecasting firm, takes a dim view of cable’s progress so far in penetrating the business services sector. "Cable operators have been talking about this market as a great opportunity for the last four years, but they’ve had a hard time penetrating business end-users," he says. "It’s an old story, but their relations are with households, not with business parks, corporate campuses [and even] strip malls. They’ve had a hard time developing those relations and pushing those services." "That’s the world I live in every day," McGann says, responding to Paxton’s complaints. "I would challenge that view. At Charter we’re given a significant chunk of capital to invest [in business services]…Our target [is to end 2006 generating] approximately 10% of Charter’s overall business." TARGETING SMALL BUSINESS McGann believes he can meet that goal because "there’s a pent-up demand in the marketplace for cable’s business offerings. Cable can differentiate itself from the Bells with a bundle. Even though the analysts will come back and say that the Bells will bundle too, there’s a significant portion of the small business community that feels it has been neglected by the phone companies." Also, cable companies have an inherent advantage over telcos because they are less anonymous, McGann says. "In our territories [executives of] most small- to medium-size businesses already use our video product and even our telephone product at their homes. They are constantly contacting us, saying, `Why can’t I get your phone service for my business?’ Soon we’ll be able to say, `You can.’" "To achieve that vision," adds McGann, "we have to do so many things right. Our priorities for 2006 include increasing overall sales rep productivity, initiating life-cycle management tactics to protect our existing customer base, developing target market segments and delivering new products and product enhancements." He acknowledges, however, that cable’s lack of physical reach is still an obstacle to providing business services on a universal scale. "Serviceability continues to be a challenge," says McGann. "Just because we serve a residential neighborhood that is behind an office park does not mean we can service that office park. The good news is that we continue to extend our network into com-mercial areas every single day." MORE INFRASTRUCTURE NEEDED "Cable companies need to build out their infrastructure," says Dr. Paul Rappoport, a professor in the economics department of Temple University who also works with research firm SBRC, which studies the small business market. "People call up and inquire if their cable company can serve a specific location, and it’s been frustrating, both on the voice and data side, for a lot of companies in the last year or so. They had to say, `No, you’re too far out of our reach.’" In addition to building physical plant to serve businesses, sales is an important component of any cable system’s strategy. Cox, says Stemper, is deploying "more than 1,300 employees who currently serve the needs of local business customers, including a dedicated sales force." THE ROI QUESTION Heavy investment could help solve some of these issues, but resources are limited. How much money should be allocated to developing business services, and what will the return on that investment be compared to alternatives like spending on services for residential customers? For Steve Santamaria, SVP and general manager of commercial services at Vyyo, a manufacturer of broadband equipment, it’s a no-brainer. "Do you want to keep fighting for the $50 and $60 residential customer, or do you want to go after business customers that are going to pay you $400 at 82% margins, and the average contract runs for three years?" he asks rhetorically. Many people interviewed for this story cited the ROI numbers disseminated by Cox. "We’ve been quoted as saying that a dollar of capital will bring in about 70 cents of new revenue in the first year," reiterates Cox’s Stemper. "We use that as an algorithm of investment. Business Services is a strategic priority [and] receives ample investment…it is growing rapidly [and is ] a good use of our capital. We’ll have the value of that 70 cents for three or four years. Within a couple of years it will pay itself back." COMCAST’S INVESTING Invest-ment continues apace at Comcast, according to O’Toole. "Our lines don’t pass every business we would like to offer service to, so we will be doing network construction," he says. O’Toole acknowledges that Comcast "does not have a substantial market share in the business arena today," but considers that to be a plus since it presents the company with "a market opportunity measured in the multiple billions of dollars. We see it as an adjacent market where we can take advantage of the fact that we’re the biggest broadband provider in America." At Time Warner Cable there are 2 million business customers that fall within a quarter of a mile of each side of its plant, according to Fitzpatrick. "Those are the easy ones. And there’s strategic building you can do to large office parks or campuses. An extension of our reach is required, but [in the business sector] there are much higher ARPUs, so this is a very high-margin business with very quick returns on the dollars spent." And, given the choice, many businesses would prefer to get voice service from their cable operator based on quality alone, says Jerry Bennington, executive consultant at CableLabs. "A voice/data bundle from a cable operator is at least as good in quality, usually better, than a telco offering," says Bennington. "And 60% of small businesses are typically within a few feet of the cable drop. There is not that much capital investment involved. It’s primarily a marketing issue." Charter’s McGann sums up operator optimism: "We’re offering business customers a real alter-native solution to the telcos, which is something they’re looking for." McGann believes Charter can increase its share of the business market "from the low single digits today to something in the double digits over the next several years." An engine of that growth would be "the deployment of VoIP, which will position us to offer a great alternative to the telcos’ bread-and-butter telephone offerings." TWO-WAY POACHING As cable advances into telco territory with its combo of capital investment and higher-profile marketing, it’s unlikely that the phone companies will simply roll over—turf valued at more than $100 billion a year is worth protecting. But sometimes the best defense is a good offense, and the telcos and cable seem to be playing that game. "Cable operators are being squeezed on the one side by telcos coming after their data customers, and on other side by DBS going after their video customers," says Vyyo’s Santamaria. "And now the telcos are getting ready to build fiber into the home in a challenge to all of cable’s business." SLOWING THE TELCOS ON VIDEO Santamaria suggests that a more aggressive push by cable into the telcos’ turf will forestall this latest telco initiative. "If you start going after their business, it’s going to stop them in their tracks," he says. "For so long the telcos have owned this marketplace," says Time Warner Cable’s Fitzpatrick. "Now there’s considerable consolidation out there, with MCI and Verizon getting together, as well as AT&T and SBC. They’re trying to figure out what they can do once everything gets integrated. This is a window of opportunity for us to go after the business customers. [The telcos] will end up fighting a two-front war. They’ve got strong competition on the residential side; look at what cable’s been able to do in high-speed data. And now we’re looking to do the same thing in their phone business." Whatever the obstacles—infrastructure investment, war with the telcos, marketing to new customers—there’s agreement in all quarters that cable has no choice but to penetrate the business sector in order to continue to expand as an industry. "There’s a great opportunity for growth there," says In-Stat’s Paxton. "As long as cable’s plant runs by a lot of these businesses, they’re not hard to hook up. It wouldn’t take a lot of investment to make this happen. It’s just a matter of marketing allowing business users to know these services exist." SLOW GOING Paxton expects a rather slow timetable. "In my opinion, over the short term, the next two or three years, it’s going to be more of the same. Over five years, it will change." But the payoff is likely to be significant. Stemper says Cox’s goal is to double its half-billion-dollar business services revenue to $1 billion a year by 2010. And Time Warner Cable’s growth in the commercial space has averaged about 50% a year for the last five years, according to Fitzpatrick. ADD SERVICES, REACH "In order to maintain that kind of growth, operators need to offer more services and bring more value to the customers they reach, and then extend the reach to bring those services to more customers," says Fitzpatrick. CableLabs’ Bennington believes it would be a mistake to think this process will be simple. "It won’t be easy to take market share away from the telcos in the business sector," he says. "However, you don’t have to be that good to take just 10%, and that’s over $10 billion." Stemper sees a time when cable will easily serve both residential and business customers: "Cable business services will be declared a success when a cable employee hears the word `customer’ and will automatically consider residential and commercial implications."