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What lies beneath

Thu, 05/31/2001 - 8:00pm
Angela Langowski, Associate Editor

In the past several years, cable operators have begun to broaden their customer base from residential customers to the nascent, but potentially more financially lucrative, commercial sector. Several MSOs (multiple system operators) have even formed business units within their cable operations to help serve this sector. Cox Communications created Cox Business Services, Comcast started Comcast Business Communications, Time Warner Cable formed Time Warner Telecom, Adelphia Communications debuted Adelphia Business Solutions and AT&T created AT&T Business to focus on this area.

The predominant market MSOs are going after are small- and medium-sized enterprises (SMEs) that range in size between one and 999 employees, according to Andy Bose, founder and CEO of AMI-Partners. AMI tracks the SME sector and how companies invest in and use Internet technology. Internet technology includes high-speed access and Web hosting, networking, computer hardware and software, IT service support and mobile wireless communications. In 2000, the U.S. small business market (defined as companies with one to nine employees) generated $168 billion in Internet services, says Bose. This is up from $128 million in 1998. SMEs spent $59 billion in 2000 on basic telephony service. Because of this, it's no surprise that cable operators want to get a piece of this financial pie.

The commercial market picture

While cable operators are trying to break into the SME market, they are also competing with competitive local exchange carriers (CLECs) who are also providing data and telephony services. "The customers they're trying to get are customers that would fit into the CLEC industry," says Keith Kennebeck, an analyst with the Strategis Group. Companies like Comcast Business Communications or Adelphia Business Solutions are categorized as CLECs because they've aimed their service mix at the small- or medium-sized business market, says Kennebeck. The fact that these entities have been formed as separate business units tells the market that they are CLEC offshoots of their cable TV-oriented parent companies, he says.

Figure 1: Residential equivalent of an average* small to medium business (SMB)

These system operators are attempting to leverage the fact that their networks already pass closely to many small business locations. Studies show that 25 percent of small businesses are already subscribers of cable services, says Bose. And cable companies pass more than 60 percent of small businesses, second only to phone companies, he adds.

"This is a huge number," says Bose. "If cable companies can get focused and can properly implement strategies to reach this market, they have a ready-made customer base."

Figure 2: Worldwide SMB spending on IT, Internet and telephony.

But what exactly does a cable operator have to do to make the switch from serving the residential customer to providing compelling services to the commercial sector? Is it as simple as focusing on a different customer segment?

MSOs have had a difficult time breaking into the commercial sector because they didn't really target them, and now, a lot of communications infrastructure has already been built, says Mike Paxton, senior analyst of converging markets and technologies for Cahners In-Stat (Cahners In-Stat and CED are both owned by Cahners Business Information). In addition, while small businesses may have subscribed to video service (for TV in the break room, for example), most never looked to their cable providers to offer business-class services, he says.

There is a perception problem MSOs have to overcome when it comes to providing communication services to the commercial sector, says Paxton. This perception problem includes the fact that companies usually don't think of cable operators because the cable operators have never been a serious option, and the cable HFC infrastructure hasn't been designed to target buildings where companies are located.

Figure 3: The U.S. accounts for 51 percent of IT, Internet and telecommunications

"AT&T, Cox and Comcast are trying to build out their infrastructure around smaller business parks where you have 100 people or so, where they have the opportunity to try and get on the ground floor with those people," says Paxton. "They've been putting emphasis on capturing those types of customers; but they've only been marginally successful, at best."

To get around having to reconfigure or rebuild their network to accommodate commercial businesses, cable operators are targeting new construction areas so they can go in and lay the fiber for the network the first time, says Paxton.

Paxton

Cable companies, up until now, have been focused on the consumer side of the market, agrees Bose. The commercial sector is a new market space for them, and there are new issues they have to contend with, including having to provide a higher service level agreement (SLA).

"The cost of customer acquisition can be very high when you have a large marketplace like this," says Bose. "The issues here are to determine what are cost-effective ways to acquire customers, and then to properly provide and live up to SLAs and quality of service issues. However, the payback and return on investment is huge."

Paxton echoes Bose, noting that if a cable operator can provide nothing more than data service into one building, it could generate "tens of thousands of dollars a year" in revenue versus providing the same services to one home, which may only generate hundreds of dollars.

Besides overcoming negative market perception and working on his network, another issue the cable operator has to work with in offering commercial service is customer support.

"Most people have a less than sterling opinion of the service that's been provided by their cable TV operator in their home," says Paxton. "MSOs would have to invest a lot of time, training and money to make sure they have decent service response capability."

Provisioning the commercial network

Cable operators can turn to companies like Narad Networks, Jedai Broadband Networks, Arris Inter-active and Cisco Systems to help manage and provision SME networks. Companies like these can help provide equipment, on-site service and maintenance and even help the operator set up vertical markets in order to generate more revenue.

Gupta

One of the goals of Westford, Mass.-based Narad Networks is to create a "truly broadband" network on an HFC architecture. By truly broadband, the company means it wants to create a network capable of delivering 100 Mbps (megabits per second), says Dev Gupta, president/CEO of Narad Networks. The company is also building a software infrastructure on top of a switched Ethernet network that will allow for creating, provisioning and managing of the service layer.

"The object is to create a fully automated management and back office capable network," says Gupta.

Narad calls this automated management network a "metro services delivery center," says Gupta. It is a data center that hangs on the fiber ring running between the primary and secondary headends, and this is where the company can locate products to run on the network. "We are now thinking of the kinds of vertical applications we will put on the broadband network," says Gupta.

One very important requirement of the network Narad provides, says Gupta, is that there is no "billion dollar investment" required from the MSO, and that any upgrades should be incremental. He says that after the operator builds a small back office, the very first customer shouldn't cost more than an estimated $10,000 in additional hardware and software.

Narad also wants to help the operator generate revenue from any vertical markets he sets up so that the network will grow exponentially as they identify and add high-margin, expensive applications, says Gupta.

The company didn't necessarily get into this business to specifically support the SME market, says Gupta. Narad's long-term objective was to promote true broadband, and to do this, it had to enable applications that would generate enough money to attract cable operators as customers, he says. Plus, by the time the cable operator has finished augmenting his network for commercial businesses, most of the equipment has been augmented, and the only thing that needs to be further augmented are the taps that are servicing the consumers, he says.

"For these reasons, the provisioning of broadband to be ubiquitous to businesses and consumers makes great sense," says Gupta. "This was the same strategy used to build every other network in history."

Like Narad Networks, Red Bank, N.J.-based start-up Jedai Broadband Networks is also interested in helping the operator offer value-added services (VAS). The company is developing a full product suite that will enable service providers to deploy high-value services to businesses over the existing HFC infrastructure all the way to the edge of the network.

"Because of our architecture, we feel it's important for cable operators to offer VAS," says Tony Pierson, vice president of marketing and business development for Jedai. "That's one of the values of the Jedai architecture–putting the IP intelligence where we do gives them the ability to do that."

Some of the services Jedai intends to help cable operators provide include: 1 Gbps (gigabit per second) Internet and data services; virtual private networks (VPNs); virtual LANs; and telephony services. VPN services in the U.S. alone generate $8.5 billion in revenue, according to Infonetics.

Pierson says the cable operators' current legacy network is holding them back from fully extending into the commercial sector. Now, companies like Cox are offering circuit-switched telephony and have overcome this problem, he says. The operators are building network operation centers and call centers and finally have the infrastructure in place to offer highly reliable services.

"That's why I believe the timing is now for this industry to get into this," says Pierson.

Arris Interactive executives echo Jedai's thoughts about the timing being right for cable operators to get into the commercial market now. Arris has been helping operators like Cox and Comcast with their business-to-business strategy for the past year, says Mike Horton, director of product marketing for Arris Interactive.

One thing Arris does for the operator is develop a business model that can be used to get into this market. Arris helps MSOs define revenue streams, operating expenses and capital expense. Arris also teams up with Nortel Networks to help provide equipment.

Cable operators can tap into a much larger revenue stream by targeting businesses instead of residences by providing services like Centrex and custom calling features, voice lines and data communications, says Horton. MSOs also have to decide if they want to lease or sell CPE (customer premise equipment) to businesses or offer an extended warranty, he says.

Helping an operator calculate capital expense includes considerations such as if the operator will use existing equipment and then help plan a future migration path for upgrades, says Horton. Arris helps cable operators develop a 10-year business case.

"When you look at what is required, (cable) operators have an advantage," says Horton. "When you're talking businesses, this is different than talking residential. That's critical. Not everybody understands that. Businesses demand more, desire more and will pay for more."

Cisco Systems is helping operators like Time Warner Cable (TWC) in Tampa, Fla., offer services to the commercial sector by using broadband routers, modems and CMTSs. Another important feature the company helps operators with is network security. "You're getting the right quality of signal, and now you need a special business class CPE to provide Internet security from Cisco's perspective," says Paul Yesnosky, manager of product management for Cisco's Cable Business Unit.

For example, when Time Warner built a small business network for a health care service association, Cisco helped the MSO develop a suite of "community" services, including e-mail, Internet access, and intranet connectivity to 42 employee desktop computers. The network also required static IP addresses and IP security that restricted access to its router.

Challenges to overcome

Because of the billions of dollars in revenue the SME market generates in telecommunications and voice business, this market is a logical choice for the cable operator to chase. In order to do that, though, the number-one thing the operator needs to do is make sure it can provision the network to meet business needs. Other challenges MSOs need to overcome include finding a way to compete with providers like CLECs who have already been providing service to this sector, developing a viable business case to compete in this market and developing a different mindset than the one they had for offering services to residential customers.

"The devil is in the details" when it comes to this market, says Arris' Horton.

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