CONVERGENCE: A Household Service Goes Corporate
March 10, 2005
by Christine Nuzum
NEW YORK (Dow Jones)--SBC Communications Inc. (SBC) and Verizon Communications (VZ) should watch their backs as they muscle their way into selling to multinational companies by swallowing up long-distance carriers.
New competition is brewing for smaller corporate customers - small businesses and branch offices of larger corporations, particularly retailers - as cable companies start to enter this arena.
Competition between the cable and phone industries is nothing new, but mainly has been confined to the consumer market. In recent years, the cable industry has become an increasingly aggressive competitor for controlling the line to the household, even in local wireline voice services, which the Baby Bells have traditionally dominated. The Bells are fighting back by joining forces with satellite TV companies to sell video services in the near term. At the same time, the Bells are constructing high-tech networks that will deliver video services to people's homes so they won't have to share the revenue with the satellite companies.
Slowly, the cable companies are starting to expand the battlefield where they take on the Bells - local phone companies SBC, Verizon, BellSouth Corp. (BLS) and Qwest Communications International Inc. (Q) - to include business services.
"Cable has a presence in the business market," said Brahm Eiley of Convergence Consulting in Toronto. "Every year it grows, and definitely with voice, they're going to have much more."
Media and entertainment consulting and research firm Kagan Research reckons that cable companies' revenue from selling telephony and high-speed Internet to businesses could exceed $9.7 billion in 2008, up from an estimated $1.4 billion last year.
Time Warner Inc.'s (TWX) Time Warner Cable division and privately held Cox Communications Inc. have been particularly aggressive in selling to businesses, analysts say. They also point to Cablevision Systems Corp. (CVC) and Charter Communications Inc. (CHTR).
Cox's revenue from the sale of telephony and high-speed Internet services to businesses was $394.7 million in 2004, compared with $312.4 million for all of 2003. That revenue has generally been increasing at about 25% annually and is expected to show a similar increase in 2005, said spokesman Bobby Amirshahi. It was about 6% of the company's total revenue last year.
"It's one of our fastest-growing engines within the company," said Amirshahi.
At Cablevision, a separate unit called Lightpath is devoted to business services. Lightpath revenue, which includes sales of network services for other communications carriers as well as high-speed data and telephony for businesses, rose 14.5% to $204 million last year, growing slightly slower than Cablevision's consumer cable business.
Cable companies have always primarily sold to consumers because their traditional offering, still representing the bulk of sales, is video broadcasting. But as they have delved into telephony and the Internet, some cable companies have begun targeting more and more businesses that are in striking distance from the networks they have already built out to residential areas. Small businesses and local branches of retail chains are the chief target customers. Cox is focusing on business sites that are within 100 feet of its network.
A notable exception is the nation's largest cable carrier, Comcast Corp. (CMCSK, CMCSA), which has stayed on the sidelines in telephony as well as business services, focusing instead on collecting more revenue from their residential customers through new offerings like video-on-demand.
Adelphia Communications Corp. (ADELQ), still in bankruptcy proceedings and scarred by the bankruptcy of its telecom business spin-off, has also been less aggressive in selling to businesses in recent years, said Rob Sanderson, an analyst at American Technology Research.
All Gravy
Lindsay Schroth, a senior analyst with Boston research and consulting firm the Yankee Group, sees other cable companies continuing to turn to businesses as a source of growth, partly because it requires little new investment.
"Business is all gravy for them," said Eiley of Convergence Consulting. "It doesn't require them to spend huge capital."
One hurdle has been selling to businesses that have offices in different metropolitan areas. A national business can turn to a national phone carrier - like Sprint Corp. (FON), AT&T Corp. (T) or MCI Inc. (MCIP) - to wire all its disparate offices. A regional business can often turn to one of the regional Bells - which each dominate local service in four large swaths of the country. But the cable operators each own networks in various metropolitan areas scattered across the country. In many cases, different cable operators serve adjacent cities, confusing the choices for businesses that operate in many areas.
What's more, the national long-distance carriers have experience negotiating interconnection agreements with all the regional Bells.
"If you're a cable company, you don't want to have to do all the interconnection agreements yourself," said Sanford C. Bernstein & Co. cable equities analyst Craig Moffett. "Instead, you partner with somebody who already has those in place."
Before MCI last month agreed to be acquired by Verizon, MCI Chief Executive Michael Capellas suggested he was casting the company's lot with the cable operators.
"The cable guys become another competitor and a very serious one for control of the household with the regional Bell companies," he said Jan. 11 at an investor conference in New York. "They will be a partner of ours and we will sort of be in the consumer wholesale business."
MCI's agreement to be acquired by Verizon likely will change that. With AT&T in a deal to be acquired by SBC, another competitor to the cable industry, cable companies can still partner with Sprint and other, lesser-known long-distance companies such as Level 3 Communications Inc. (LVLT), which sells telecom services mainly to other carriers for resale.
"Sprint would definitely be well-positioned," said UBS analyst John Hodulik.
