Looking for big money, cable is... getting down to business
Cable's great commercial market awakening is underway. From tall, shiny buildings to remote rural offices, the industry's marquee players and many of their little system brothers are seeing the revenue wisdom of providing business-class service to millions of SMB (small- to mid-size businesses) and larger enterprises.
And what a market it is. Most analysts peg the commercial market at between $85 billion and $100 billion. By 2008, more than 7.8 million SMBs and larger enterprise businesses will exist, with cable servicing 2.4 million of them through a variety of data, telephony and network managed services. And, over the next year, more than 50 percent of SMBs intend to switch to broadband, according to The Yankee Group's SMB Broadband Study.
Considering that most of those businesses are within a simple fiber strand or wireless extension of existing cable plant, and with a growing number of cable operators showing healthy ROI and revenue from their business services, most industry experts are convinced cable's commercial play is real, and quickly turning into a near no-brainer.
"For operators that have proven they're generating revenue, it's ludicrous that some haven't been doing it. They are already passing businesses that can be offered business service, and the only expense is segmenting the customer service of residential and business. There's lots of low-hanging fruit, and it's a proven revenue opportunity," says Lindsay Schroth, analyst for The Yankee Group.
Yet the cable industry currently ekes out about a five percent market share, at best, and for even the most foresighted, savvy business service groups at the major MSOs, revenues are more a trickle than a torrent. But there's a good reason why. "When new services like business come along, it changes the dynamics of sales, marketing, provisioning, customer service and the back office. It's difficult to form a corporate strategy. But in this case, the SMB market is well worth it," Schroth insists.
As appealing as the commercial market appears to be, transforming a traditional residential cable provider into a highly reliable, multi-service data and telephony business is no gimmee.
The business sector has high expectations, and reliability is paramount. Simply billing for the smorgasbord of business services can be a mind-numbing experience for novice business service groups at cable systems. Add to the mix a shift in marketing and sales mentality versus the residential side, and the message to the cable industry becomes clear: Build the business plan and follow it, or get out of the way.
"Our whole strategy is disciplined growth, with each business having its own business case," explains Kevin Curran, senior vice president of product marketing and strategic sales for Lightpath, a wholly-owned subsidiary of Cablevision Systems. "We built the network one customer at a time and have averaged $100 million in annual capital expenditures to build it out. Our payback period is a few years, and by year-end 2003, we will be become free cash-flow positive. But it takes a very disciplined approach to growth into the market."
click here to enlarge forecast chart
Lightpath, Curran adds, is expected to generate $500 million in revenue "in the next few years," and is currently looking hard at the $15 billion local and long-distance telephone markets. "If we capture 10 percent of that market, that's huge. We'll focus on a discrete number of businesses and where their regional phone needs are."
Other MSOs are following similar strategies. Cox Communications, arguably the leader in cable's commercial services arena, sees the commercial services business as a whopping $9 billion opportunity in its market exclusively. "We think we can service $3 billion to $4 billion of that market with systems already in place by leveraging our infrastructure. The business customer is very different, and the expectations are very keen, but we're significantly down the learning curve with customer service and commitment. It's an enormous business opportunity," says Bill Stemper, vice president of Cox Business Services.
Cox recently reported revenues of $230 million for its data and telephony business services, up 31 percent over last year. Its current strategy, Stemper notes, is to invest in "tall, shiny buildings" over the next few years and saturate its existing SMB markets. "Now we need more salespeople on the street, greater scalability, billing, etc., and we're prepared to make the investments."
Those investments can be pricey, especially for the hard-to-reach businesses. A coax or fiber connection to a distant business away from an existing fiber plant in Lightpath's market, for example, will cost about $40,000 per business, creating a tricky ROI challenge. Those distant businesses, however, can wait, most operators say.
"We're focusing on buildings close to our existing plant and will penetrate from there," says Ken Fitzpatrick, senior vice president of commercial services for Time Warner Cable. "We realized the opportunity to leverage our existing infrastructure and drive new revenue streams to business class, and high-speed data and tiered access are driving our commercial market. This is no longer an ancillary product; it's a growth segment and a very large opportunity for us."
Time Warner, Fitzpatrick adds, is concentrating on its SMB cable modem market of businesses under 100 employees. "With our facilities-based infrastructure, we can capture universities, government buildings, and more with data and communications services. We're also looking at the vertical markets like medical, insurance and hospitals, and to larger business enterprise customers and teleworkers."
At the local level, Time Warner-San Diego is experiencing solid growth. "The big push here is building out our network building by building. We will add 1,200 building passes of businesses this year and 2,000 next year–from legal firms to accounting offices. It really runs the gamut," says Fran Mingura, commercial services manager for Time Warner in San Diego.
Insight Communications, which has been serving the commercial market with business broadband service for several years, is pushing its business service deeper and wider into the enterprise markets, both small and large. Yet like most of its contemporaries, Insight is challenged by the cost of expanding a network to a business facility, and the transformation from a residential to a business-class mentality.
"The biggest cost is plant expansion, but it's not prohibitive with larger businesses. The smaller the business, the more costly. Growing the business as an extension of our existing cable business is the challenge. However, our overall commercial market is $1 billion, and we'll get our fair share of that by approaching it market-by-market," says Mike Page, senior vice president of telephone and data services for Insight Communications.
Even smaller cable operators are seeing the wisdom of offering business service to SMBs. In some cases, they're turning the small-business-first strategy on its head. "When we looked at the commercial market, we wanted to protect the large business turf first, so it's a different approach. Now, we've got 1,500 businesses and nearly 40 percent market share. We're very pleased with that segment," relates Joe Jensen, president of Buckeye TeleSystem, a Toledo, Ohio-based communications company serving 28,000 business customers.
For some MSOs, however, developing an effective SMB business plan continues to be a work in progress. Adelphia, for instance, while continuing its journey through a tedious bankruptcy process, is slowly assembling a business service strategy. "We're still trying to develop a commercial market strategy and have the fiber plant that we can leverage in the SOHO (Small Office Home Office) and small end of the business space. We'll be very opportunistic in going after those markets," says Karl Ossentjuk, vice president of Internet services product management for Adelphia Communications.
Comcast, the nation's largest cable operator, "remains almost exclusively focused on residential services," according to one research report. Nevertheless, Comcast is widening its commercial market strategy to include small business, teleworkers and larger businesses. "We've integrated our small business products into our Internet group and a top priority is business class support, so we have created a separate support group for them. We are in the beginning stages of taking advantage of this business opportunity and will begin to grow the SMB and teleworker markets next year. We're definitely behind this," maintains Suzanne McFadden, senior director of marketing for Comcast Online.
Yet even with the proven upsides of offering business class service, morphing into a multi-service provider to the business sector is challenging the fundamental business model of cable itself. Says Schroth: "Operators must understand new customer service requirements and how to support and sell the business service. Their success will depend on how well they break off from their core video business and move into business class service, quality of service and security."
Though not a given, cable's industry-wide success in the business service market is expected to happen, albeit in four to five years, experts acknowledge. Yet for its supporting vendor cast, it means a series of fundamental shifts as well. "It's (business class service) still very new to many (cable operators). And now the industry is about communications, not cable or video. When you look at the business market segments, they're hard to avoid. SMBs are willing to pay $200 a month, but they want to be sure of reliability and availability. So for us, we have to be ahead of the deployment curve," admits Hilton Nicholson, president of IP cable business for ADC, a supplier of broadband services.
Scientific-Atlanta, for example, created its Emerging Businesses Group, which specifically targets the commercial market, and Motorola is investing substantial dollars in its engineering and product development process. "We've spent lots of engineering resources on redundancy and teams of engineers to support the MSOs' commercial markets, which they want to leverage on one network. It's not about disparate networks, but about standing ROI and leverage," says Jeff Walker, senior director of marketing for Motorola.
It's also about transforming a network into an efficient, reliable and available bundle of business services such as high-speed data, telephony and a host of ancillary and supportive business products such as file storage, e-mail, messaging and more.
"The industry is stepping up to business services and still thinking through and developing the business models, along with the best ways to build their networks in the current economic environment, while being smart with their capital expenditures and budgets. But they're gaining momentum," says Michael Pritz, president and CEO of Jedai Broadband Networks Inc., a supplier of broadband access technology to the cable industry.
And it's about time, some experts claim. "The first two years of rollouts were slow because cable operators didn't have the business market as a priority," acknowledges James Ratcliffe, director of strategic marketing and planning for Narad Networks Inc., a provider of business broadband solutions. "Now, the commercial rollout is accelerating. For us, it's now the number-one business opportunity, but we need to continue pushing our products forward and working with the MSOs to move the business segment forward."
Toshiba is also in the business services mix. It recently established its Digital Solutions Division to handle many of the commercial market issues. "MSOs are turning to vendors and asking: What else do you have that creates a value-add beyond the cable modem? It does put a strain on our engineering teams and we must make decisions on how best to invest our time and resources, so we're shifting our engineering resources to handle this new growth market," explains Chris Boring, communications manager for Toshiba America Information Systems Inc.
The results, however, could be dramatic for both MSOs and its supporting vendors. Adds Boring: "MSOs are looking at any service that can bring them incremental revenue and leverage their existing plant. This is a very significant change for them."
In this case, change is good. Concludes Paul Connolly, vice president and general manager of emerging businesses for Scientific-Atlanta: "The small business market is double the entire residential market, so cable doesn't need a big piece of the market to generate good revenues. So, it's clearly important for us to put an organization around it."
Others, such as Tropic Networks, which provides an optical layer that can deliver video, voice and data services to businesses, is also ramping up for what it believes will be an onslaught of business services delivered by cable companies.
"For the past six months we've been working with tier one operators and looking at some type of network management, which we believe they must have for business services so they can deliver services as quickly as possible and grow from there," says Rob Lane, vice president of marketing and business development for Tropic Networks Inc.
And growth is the optimum word. "Some MSOs are reluctant to talk about their business service plans and are very siloed, and it took awhile for companies like Cox to determine that the revenue was there for their business service. But it's there, and is a natural progression for MSOs. So why not extend to smaller businesses?," asks Schroth.
For cable operators and vendors alike, that question is being answered on a daily basis as more businesses sign up for cable's business services. Yet reaching the big time revenues associated with larger enterprise businesses and the majority of SMBs won't be easy.
Concludes Fitzpatrick: "We must separate ourselves from the residential service and learn how to deliver high-speed data, security, bandwidth and overall capabilities. And, we must constantly stay on top of new products, while driving the message home that cable means business."
|2003 revenue:||$17 million (Est.)|
|Key clients:||HoneyBaked Ham|
|Univ. of Toledo|
|Medical College of Ohio|
|Key markets:||N.W. Ohio|
|Business accounts:||1,500 (with 10 or more lines)|
|Products and services:||Business lines|
|Analog and digital trunks|
|Fiber net buildings:||900|
|Customers in service area:||15,000|
|Revenue:||YTD June $131.5 million|
|Employees:||50 corporate; 1,100 local|
|Products and services:||Dedicated data transmission|
|Switched voice and long distance|
|Video services and Music Choice|
|Carrier access services|
|Web-hosting and E-commerce|
|Key business clients:||Tinker Air Force Base (Oklahoma City)|
|Several public school systems|
|Senior VP of commercial services:|
|Larger enterprise business|
|Products and services:||High-speed access|
|Dedicated access solutions|
|Key business clients:||Government|
|Markets operating in:||50 nationwide|
|Senior director of marketing:|
|Large business enterprise unit:||Comcast Commercial Services|
|Key markets:||SMB; Teleworkers|
|Products and services:||High-speed Internet access|
|Price range:||$50 to $225 for tiered levels of business service|
|Product name:||Workplace (under 100 employees)|
|Senior VP of product marketing and strategic sales:|
|Revenue:||$160 million in 2002|
|New Jersey (portion)|
|Products and services:||Ethernet connections|
|Key clients:||Healthcare, government, education, financial services|
|Fiber plant:||2,700 route miles|