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Cable Operators

Making Business Big Business

6/24/2005 8:00 PM Eastern

It’s no secret that the cable industry built its fortunes on the enthusiasm of residential consumers, who were willing to pay any price, bear any burden, climb any mountain … just to get more. More channels. More speed. More control.

As services morphed from video to data to telephony and beyond, consumers kept buying (perhaps even grudgingly at times). And as the line items on cable bills got bigger over the years, so too did cable’s corporate coffers.

But lately, some cable executives are wondering whether residential tunnel vision makes sense anymore. Sure, the country’s largest operators are contemplating the idea of turning themselves into all-in-one information companies offering digital services of every stripe. But shouldn’t cable broaden its horizons?

“These guys are focused on residential,” says Mitch Berman, vice president of global corporate marketing for the technology supplier C-COR Inc. “Breaking that paradigm is difficult after all of these years.” The new paradigm, according to Berman and others, is the commercial market, which has been somewhat neglected by cable throughout its history.

But after spending more than $95 billion to upgrade its infrastructure, all of that has started to change. Cable executives are waking up to the reality that even slicing off a sliver of the commercial market can be quite lucrative. According to Kagan Research, cable’s estimated commercial-services revenue grew from $682.6 million in 2003 to $1.2 billion in 2004.

Kagan estimates that 2005 revenue will reach about $2 billion. “Everybody is gradually ramping it up,” says Chuck Kaplan, chief operating officer of research firm Narad Networks Inc. “We see activity from every MSO in the commercial sectors.” Kaplan predicts that cable can steal 20% of the telcos’ T-1 high-speed Internet market “uncontested,” and “after that, who knows?”

Some operators seem anxious to make that prediction come true.

In May, the Cable & Telecommunications Association for Marketing held its third annual Commercial Services Forum to bring together MSO executives, vendors and consultants. The event packed 308 attendees into the Sheraton Premiere ballroom in Vienna, Va., a 25% increase in MSO participation over 2004. Its inaugural conference in 2003 drew only 182 attendees.

The jump in attendance is “no surprise given the increased focus [operators] are placing on serving business customers,” says CTAM president Char Beales. “It’s apparent they recognize the untapped market potential in delivering expanded voice and data options to all types and sizes of commercial accounts.”

Even stealing a few T-1 customers from the local telco can add up fast. “You take a couple thousand a month from the phone company, and that’s a couple thousand more for you,” Kaplan says.

The serendipity of hurting telcos while increasing revenues isn’t lost on cable executives. During his keynote speech at the CTAM forum, Cox Communications Inc. president and CEO Jim Robbins noted that “when we take any one of those customers from them, that really hurts.”

And Kristine Faulkner, vice president of product development and management at Cox Business Services, reminded attendees that the business market “feeds the [competitive local-exchange carrier’s] fire and is what makes them tick.”

Of course, the commercial market isn’t just sitting there undefended. Unlike residential video markets, this is the domain of entrenched telcos that aren’t about to give up their bread and butter without a fight. But then again, cable may be able to sneak in under the radar, at least initially, by targeting small- and mid-sized businesses, which typically don’t receive the kind of VIP treatment that incumbent CLECs often lavish on their large corporate clients.

“Where’s the gold in them thar hills?” asks Berman. “The real revenue and power of commercial services is serving small- and medium-sized businesses in the cable system — and doing it better than the telcos.”

Myles Mendelsohn, a partner at consulting and integration firm BusinessEdge Solutions, says: “The small-business market is particularly ripe for this.” According to Narad’s research, some 70% of small business telecom spending is concentrated in about 25% of the cable nodes, suggesting that cable operators can efficiently steal select small- and medium-business accounts as they infiltrate the market.

Telcos are watching cable’s movements in commercial services closely. In fact, “on the small-business side, we’re seeing stiff competition in the markets today,” says SBC Communications spokesman Jason Hillery.

He says incumbent telcos have faced increasing competition from CLECs and, to some degree, cable for years. “It’s a bridge that has already been crossed,” Hillery says.

But as competition has increased, telcos have changed their product offerings to preserve their high-value T-1 business. One example is SBC Communications Inc.’s “integrated access” T-1 package, which allows small businesses to use one T-1 line to get voice and data. (In the past, businesses had to purchase separate T-1 lines for both services.)

As part of its pitch to businesses, SBC points out that a T-1 line — unlike a cable modem — is broken into specific channels to increase service reliability. Hillery says MSOs face “challenges” matching that service quality when integrating voice-over-Internet protocol and standard broadband data. “If you start to throw all of that over one pipe, there has got to be a quality-of-service issue,” he says.

From Mendelsohn’s perspective, it’s large business where cable faces the real competitive challenge. He and others say large businesses often have several branch offices that extend beyond the local cable plant, making it difficult for operators to match the uniformity offered by incumbent telcos. Private peering arrangements between operators (many of which are now in the works) “would be the first and early step” to serving larger businesses, he says.

Then there’s the issue of reliability. Tackling commercial markets brings with it considerable service challenges unmatched in the consumer realm. Most residential users might be willing to cope with occasional hiccups or fluctuating data speeds, but for a business, a two-hour outage can cost thousands of dollars in lost sales. And for some entities — such as hospitals and clinics — service reliability can be life and death.

Joe Brickweg, director of network services at the Marshfield Clinic in Wisconsin, bluntly reminded forum attendees that “if you’re network fails, someone could die on that table.” The increased responsibility weighs heavy. Operators are “learning the pains of it,” says Jean-Luc Valente, senior vice president of marketing and strategic alliances at InfoVista, an IT management software firm. “They are learning as they go and as they grow.”

At the same time, telcos have managed over the years to build a stellar reputation among businesses that rely on them to keep their phone and data lines humming.

To provide commercial service, cable operators are reorganizing their companies and culture to ensure that employees who sell to businesses understand the different nuances. “It’s a different customer we’re going after,” says Ken Fitzpatrick, Time Warner Cable senior vice president of commercial services. “It requires different skills. It’s a different marketing message.”

For its part, Time Warner Cable sells 13 different varieties of commercial-service packages, requiring a sales and support staff intimately familiar with the unique needs of those customers. The company now has about 350 salespeople specifically devoted to commercial services and boasts average annual revenue growth of 50% over the last five years. “It’s tough to ignore the accelerated growth and revenue,” Fitzpatrick says.

In May, J.D. Power & Associates awarded Time Warner Cable’s Road Runner Business Class broadband service its “highest customer satisfaction” ranking — beating well-heeled telcos in that category.

Cox Communications Inc., meanwhile, is widely regarded as the most aggressive and forward-looking MSO when it comes to commercial markets. Its forays into circuit-switched telephony in the 1990s gave executives there an early lesson on how to market to both residential and business telecom customers. Cox now offers business service in 22 markets. (Seventeen of those markets are “triple plays” offering voice, video and data.)

Cox Business Services’ annual revenue jumped from $263.7 million in 2002 to $395.6 million by 2004. “They’re doing 25% a year, and they would be doing more than that if we would give them more money,” Robbins said of the division when he spoke at the CTAM forum.

Bill Stemper, vice president of Cox Business Services, says higher-ups at Cox and throughout the cable industry have little choice but to pay attention to commercial markets. “What’s driving the commercial business is the business opportunity,” he says. “We have our eyes on becoming a one-billion-dollar business.”

September