Cable Cos Eye Small Businesses For Internet, Phone Sales

July 10, 2003
Dow Jones News Service Of DOW JONES NEWSWIRES
By Ellen Sheng

NEW YORK -(Dow Jones)- When information technology consultant Greg McCullough had to pick a phone and broadband Internet service provider for a BMW dealership, he was surprised to see cable company Cox Communications Inc. (COX) among the bidders.

McCullough had overseen installations for numerous car dealerships and previously only dealt with phone companies. Cable companies came into play only when cable television was needed.

"Most people think of Cox as a baby in the marketplace; they don't trust Cox," McCullough said.

Ultimately though, Cox's rates and range of offerings swayed him. Today, the Irvine, Calif., dealership's 140 employees use Cox for phone, broadband Internet and video service. Even music piped into the dealership's lounge comes from Cox, which has music channels on its digital TV package.

Business services have traditionally been dominated by phone companies such as AT&T Corp. (T), while cable typically served bars or restaurants in need of video service.

But that's changing as cable companies, armed with a new bundle of services, are courting business customers more vigorously than ever. Their ranks include Cox, AOL Time Warner Inc.'s (AOL) Time Warner Cable and Cablevision Systems Corp. (CVC).

Business customers are still not as high a priority as residential, but "cable companies are starting to take note of the opportunity," said Adi Kishore of the Yankee Group.

Smaller businesses, especially those with 20 or fewer employees, are particularly good targets because they are more likely to sign up with cable operators. Large businesses have entrenched relationships with phone companies and aren't likely to switch service, as it could require rewiring.

That's not an issue for small businesses, many of which don't yet use high-speed Internet. And, for small-office and home-office users, or SOHO, cable's offering is on even terms or better than what phone companies have, said Joe Laszlo, an analyst at Jupiter Research.

The cable industry has already been successful in residential broadband Internet service, outselling DSL two to one. By bundling a voice and data offering, cable companies are confident they stand a good chance of competing against phone companies in the business market as well.

"There is still a lot of low-lying fruit," said Bobby Amirshahi, a Cox Communications spokesman.

About 3.7 million of 4.6 million businesses in the SOHO market have Internet access, but only 1.6 million, or 34% have broadband, according to Jupiter. In the small business category, describing businesses with 10 to 99 employees, Jupiter believes 1.2 million of 1.4 million have Internet access and about 700,000, or 53%, have broadband. Cablevision Finds Health-Care NicheAmong the most aggressive to pursue new business customers has been Cox, the nation's fourth-largest cable operator. The new market has expanded dramatically. Revenue from Cox Business has increased by at least 50% each year since 1999. In 2002, the company reported $218.8 million in revenue - a 52% increase from the year before. In the first quarter, commercial revenue rose 27% from the fourth quarter, to $63 million. At Cablevision's business services unit, Lightpath, revenue increased 20% in 2002 to $158.3 million. In the first quarter, revenue was $43.3 million, up 18% from a year ago. The unit - which has about 4,500 customers subscribing to phone, Internet or a bundle of services - nearly doubled its number of broadband Internet subscribers in the past year to 18,600, from 9,600. It has over 140,000 access phone lines. Though Lightpath targets businesses of all sizes, the bulk of its customers are small- and medium-sized companies, the company said. The Cablevision unit has also made inroads in certain industries, such as health care. At least 90% of hospitals on Long Island use Lightpath for voice, Internet, or both services, according to Jim Maiella, a Cablevision spokesman. Time Warner Cable doesn't break out revenue by business unit, but reported its Road Runner Business class service had 90,000 subscribers as of the end of March, compared with 50,000 a year ago. Its customers, unlike those at Cablevision and Cox, are mostly only broadband Internet, as the company doesn't have phone service except in Portland, Maine, at present.

More Infrastructure Needed
Despite the heady growth, challenges remain. "Talk to any cable operator, and they will tell you that small business is a priority, at least at the corporate level. It's something Wall Street likes to hear...but at the operations level, folks are of another mind. There are operations that cable operators can tap into, but many are so busy building out infrastructure that business kind of falls to second place," said Jupiter Research analyst Laszlo. The cost of infrastructure is a major obstacle. Though the industry spent billions upgrading fiber networks, the improvements were largely limited to residential areas. Extending cables into large business complexes requires major investment that isn't always cost-effective. Because most large offices already have T1 connections - which are offered by phone companies - cable companies have to be strategic in deciding when and how to build out. "That disadvantage grows with size of business," Laszlo said. Yankee Group's Kishore adds that "some of it is just conditioned. Companies tend to choose phone companies as their primary provider since they already have a relationship." Meanwhile, companies are carefully examining the market, figuring out their next move. Cox is targeting smaller businesses, such as those in strip malls and office parks. The company estimates that 30% of its network runs 100 feet or closer to businesses, in which case it costs very little to extend the line. The company recently unveiled a new marketing campaign - "Hy-Life" - and will send direct mailings to prospective customers starting in July. "The commandment with the sales force is to revisit and to bring those folks on board," said Amirshahi.