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Pickers' Dilemma

Sat, 08/31/2002 - 8:00pm
Duffy Hayes, Senior Editor

It's been a common refrain in the cable world for years. The tempting apple that represents the lucrative commercial services marketplace doesn't fall far from a cable operator's residential network tree, common wisdom dictates.

Vendors have promised it. MSOs have projected it. Analysts have predicted future business models around it. But today, in the midst of an industry-wide capital crunch, and in the shadow of a complete meltdown of the telecom sector, the question becomes, "Is it harvest time, yet?"

It's hardly debatable that there's a serious disconnect between demand for business Internet connectivity, voice and other commercial services, and the communications companies set up to meet that demand. Businesses, both small to large, today rely on (gulp!) expensive dedicated access from incumbent local telcos for Internet connectivity–a process that regularly takes months to get hooked up to a few T-1 lines. Competitive providers saw a chance to set up shop to meet the demand, which helped propel the Internet boom. But with a poof! and a plume of smoke, they've gone nearly as fast as they came.

Which ostensibly brings the opportunity back to cable MSOs, who in a way caught the commercial services bug during the Big Bubble, but have since struggled to make a real go of it once the bubble burst. Back in the glorious heyday of the great fiber build out (when "land grab" was more than a catch phrase, it was the centerpiece of business models), a select number of leading MSOs took the bait and joined the fray by spinning off whole companies to go after perceived easy money from commercial services. Others took a more measured approach, opting to stay within their network footprint and keeping much of their commercial processes tied to traditional residential resources.

Today, things admittedly have cratered. Reality has set in, and for some of the MSO commercial divisions, retrenchment is the name of the game. But, as it was before all of this hype and craziness came and went, commercial business is still ripe for the picking. There just aren't many pickers to climb the ladder and start plucking.

As for the fruit itself, much of the commercial business comes in four distinct varieties, and MSOs have eyes for one or more of each. On the lower end, there are the small- and medium-sized businesses, including the growing number of work-at-home customers. Up a notch are the large corporate customers, and above that is the market for connecting government, military and educational sites in intra-campus architectures. The final bucket is wholesale business, where dark fiber and backbone capacity are leased to other carriers. This last bucket hasn't yielded much profit as of late.

But it's fiber–specifically where and when to drop it–which is at the heart of where the MSO mindset is today. It was fiber that played a central role in many of the initial efforts to spin off businesses specifically aimed at capturing commercial accounts.

A couple of years ago, Wall Street was smiling on new companies that were rising up to compete with incumbent telecommunications providers. For a time, CLECs (competitive local exchange carriers) were market darlings, and the more fiber they were building, the more money investors were pumping into their company to keep the expansion going.

A few MSOs jumped into the fracas and spun off CLEC-type businesses, building and leasing fiber at a furious pace, even building outside the footprint of their residential network.

Now, the CLEC model has proven a colossal failure, and today, the MSOs who experimented are struggling to stay viable. Count Cablevision's Lightpath initiative, Comcast Business Communications and Adelphia Business Solutions as the most notable members of this motley group.

As for Time Warner, it may have benefited from being a decentralized network of systems, and no clear initiative in the past into commercial services. But today, there's more of a focus on a national strategy at Time Warner for delivering at least basic commercial services. Much of the effort has been pulled under one group, and the company has hired a senior-level executive to drive a national approach to the new market. It's still much too early to grade them out just yet. But within the Time Warner network, region-by-region, division managers are looking at new access technologies that can unlock more use of the current HFC network.

But, over-extension and the consequent retrenchment from fiber-based business models is just one side of the story, and it's not the pretty side either. On the shiny side of the coin are the few operators who took a more careful look at how to best serve commercial customers early on. Today, those groups are in the best position financially, and farther along in establishing a business poised for real growth in the short term.

Cox Business Services markets directly, and often humorously, to potential commercial customers.
Reserve Cox Business Services for the top of this list. The commercial services division of Cox Communications has grown up within the framework of the mothership residential business, is intimately tied to that network in terms of service delivery and company resources, and was established as a separate company only earlier this year.

"We represent such a small fraction of Cox's overall capital spending. We were told to go after the low hanging fruit, and market as much as we can to businesses that are near or beside the (residential) network," explains Bobby Amirshahi, public affairs spokesman for Cox Business Services. "Looking back, we're really glad that we took a measured approach."

That approach has made Cox Business Services one of the early successes in the commercial services game. It serves 19 of the Cox cable markets, covering more than 90 percent of Cox's overall footprint nationally, marketing basic data and video services aggressively to small- and medium-sized businesses the company can easily serve with current network connections. Cox has also had success in securing some larger projects, notably connecting school districts, government offices, and military installations in major markets like New Orleans, Norfolk, Va. and San Diego. For instance, in New Orleans, Cox has provided a Gigabit Ethernet ring to connect more than 140 school sites across the city.

Cox's slow burn approach over the past few years has helped it avoid one major bump in the road others have stumbled over, namely hemorrhaging money to fund new operations. The company has grown revenues by more than 50 percent each of the last two years, and is in the position now to grow beyond simple commercial connections into some of the more advanced services.

"Three or four years ago, we basically took what we had from the residential side and asked how can we package this for a business," Amirshahi explains. "Now we're at the point where we are looking at innovating and becoming more than what's out there." Cox currently offers circuit-switched telephony in nine markets, and is adding value-added services like Web conferencing and VPN services to the mix to differentiate even further. Having an advanced fiber ring network also means that Cox can eye high bandwidth services, and even wholesale carrier business, as a way to generate even more commercial revenue.

AT&T Broadband has also adopted a limited approach to the commercial sector, opting to target smaller-sized businesses with employee counts from five to 99. And the company is selective about which markets to offer the business services package; it's available in a handful of AT&T cities like Denver, Pittsburgh, Miami and Jacksonville, among others. The company has adopted a strategy of not building into new markets, and is content with servicing just a limited number of commercial customers that can be connected with relative ease to the residential network. This part of the business is certainly not a major contributor to AT&T's bottom line, but it also isn't a drag on company revenues, as it is with some of the other MSO commercial plays.

Charter is perhaps the best example of how fiber construction has impacted the commercial services market for MSOs, in that Charter began its road to commercial services with a fiber-intensive strategy, but is today cozying closer to Charter's core residential network. Owner Paul Allen gobbled up a company called Marcus FiberLink as part of an acquisition of the Marcus Cable group in 1996. The FiberLink business evolved into Charter Business Networks, separately established in 1999. But what was an initial strategy to do large-scale fiber deals has quickly shifted to a smaller-scale, HFC-based commercial services model.

"We have moved toward integrating and not having a separate organization–integrating it into the existing field operations, down to the system and group level," says Jim Rice, corporate vice president of Charter Business Networks. "We decided that we are a broadband company, and (we want to) leverage what we think is the best broadband access network going."

He adds, "We're not giving up on the fiber business, because we have a tremendous amount of fiber in the ground. But our focus now is small business Internet. We've retooled and we're driving hard to leverage our coaxial plant in the ground."

In a sense, Charter is offering small business Internet services that it can handle easily. It designates three categories of services, differentiated by the level of advanced Internet services certain customers require. Within the three categories, it offers four speed options, topping out at 1.5 Mbps on the download.

MSOs today are realizing that in order to have success in the commercial sector, at least in the short term, they'll have to leverage the currently available cable plant to turn even a meager profit and keep the watchful eyes of Wall Street at bay. MSOs that realized this early on are perhaps in the best position to spawn badly needed new growth engines based on commercial service delivery. Yet the skies are not pure blue–commercial divisions whose eyes initially were far bigger than their stomachs are reeling from their early misjudgment, and are struggling today to salvage what's left of their early vision.

 

Core Commercial Technologies

Despite a fairly arid climate for introducing new technologies into current MSO networks, there are a handful of vendors who hope to assist operators in unlocking the hybrid fiber/coax network's potential to offer high-bandwidth commercial services.

MSOs are testing and trialing access gear in the optical, coax and even microwave realms. Tapping new sources of revenue is something operators are compelled to do nowadays, and integrating advanced gear that targets commercial customers looks as if it's becoming increasingly necessary in order for MSOs to take the next step technologically.

One way MSOs can unlock the commercial potential of their HFC networks is by better using the fiber portion of their networks, which is where gear from Jedai Broadband Networks is maximized. Jedai boxes integrate Gigabit Ethernet switching with TDM traffic–what the company calls "supercharged Ethernet"–and operators establish ring architectures by strategically adding gear along the fiber network as needed. Jedai touts the cost savings and better utilization of fiber within the network. But it is still a shift in how operators have used that part of the network in the past.

"We're asking (operators) to take the money they were spending on Sonet gear–the optical connections they were going to make anyway–but we're asking them to make three times as many connections for the same amount of money," says Tony Pierson, vice president of marketing and product management at Jedai. "From a technology standpoint, it's a change, and they have to get their minds around that."

Also in the optical camp, Aurora Networks touts the commercial capabilities of its advanced optical transport gear, mostly as an additional benefit to the return path digitization that happens when operators integrate Aurora transmission products into their networks.

"When you buy just residential service equipment, what we offer for commercial services basically comes for free. It's a side benefit of doing everything in the digital domain in the return (path)," explains John Dahlquist, Aurora's vice president of marketing.

Another vendor with a particular commercial services bent is Narad Networks, whose technology works over coaxial plant, utilizing the unused frequency band above 860 MHz to deliver "switched Ethernet over HFC." Comparing it to a competitive fiber solution, "there's a clear competitive and cost advantage," according to Ahmet Ozalp, Narad's vice president of strategic marketing. He adds, "And if you have really high-end customers, who traditionally have been Sonet customers, Narad appears to measure up pretty favorably."

With an eye to converged services, Advent Networks offers up a last-mile access solution that can deliver switched Ethernet connections over HFC, with dedicated connections from 5 Mbps to 40 Mbps per connected customer. Its Ultraband platform could potentially yield such high-bandwidth services as very high-speed Internet access, VoIP, even VOD-over-IP because of its dedicated, reliable nature, say company executives.

MSOs are even flirting with wireless technologies over the last mile, as an alternative way to extend their HFC networks out to non-traditional customers. Wireless Bypass is a newcomer touting its DL-5800 Wireless Cable Access Radio system, a microwave-based system that operates in the unlicensed 5.8 GHz band, offering full throughput data in either a point-to-point or point-to-multipoint configuration.

The radio simply attaches to the cable with a tap, and a small antenna is aimed in the desired direction. Being unlicensed, it's a low-cost way to extend the traditional network to new sources of data revenue.

Like sharks smelling blood, other companies are adding products or coming to cable operators with new gear. Relative newcomers like Wave7 Optics are being joined by the likes of longtime cable suppliers Scientific-Atlanta and Motorola Broadband as providers of the high-bandwidth gear needed to capture commercial service revenue.

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