Cable Companies Seek a Boost from Service

April 7, 2004
Dow Jones Newswires
By Ellen Sheng

NEW YORK -- Cable TV companies' forays into residential broadband and telephony have already put traditional phone companies on the defensive. Now, cable operators are launching their most ambitious efforts yet to chip away at phone companies' monopoly in telecommunications services for businesses.

Although retail customers remain the bread and butter of the cable industry, the focus on business customers comes as growth in video services, cable's main product, is slowing. Digital TV hasn't caught on in the way many had hoped, forcing cable operators to lean more heavily on services such as broadband Internet or high-definition TV.

"Cable companies need to add revenue streams, and video is a mature business," said Mike Goodman, an analyst at the Yankee Group.

Operators like Cox Communications Inc. and Time Warner Cable, a unit of Time Warner Inc., which started out courting smaller businesses and telecommuters, are moving to sign on larger companies, butting heads with incumbent phone carriers in the process.

Cox revealed recently that it is supplying telecommunications services to several business customers, including MGM Mirage resorts and Chesapeake Energy Corp.

Time Warner Cable in the third quarter rolled out a suite of services geared toward the hotel industry, and has also signed on companies such as L.L. Bean and Fairchild Semiconductor International Inc.

Cablevision Systems Corp., which has been in the business-services market longer than most, has 4,800 business customers concentrated in the health-care, financial-services and government sectors. Cable TV's increasing ambitions could give phone companies reason to worry. On the residential side, the number of subscribers to cable-modem service outnumber digital subscriber lines, or DSL, by a ratio of two to one.

Standard & Poor Ratings Service recently put Verizon Communications Inc.'s long-term credit on review for a possible downgrade, citing cable telephony as a "substantial" new threat. Verizon joined BellSouth Corp. and SBC Communications Inc. to become the third Baby Bell with investment-grade debt ratings now on S&P's watch list.

The regional phone companies are themselves relative newcomers to the enterprise telecommunications space, which has been dominated by long-distance carriers AT&T Corp. and MCI. But the carriers expressed some skepticism that cable operators have all the services and capabilities that larger business customers want. "As far as nationwide [Internet protocol] backbone networks, which are prerequisites to serve these companies, cable companies don't have that," said Michael Coe, a spokesman for SBC. "They probably are winning smaller customers, but not what we would consider enterprise.

"Competition in the consumer area is very intense in broadband and we anticipate it will get more so in the voice arena. But in the business arena, we really haven't seen it yet," Mr. Coe said.

SBC's wireline communications revenue in the fourth quarter was evenly split between residential and enterprise customers, with $3.4 billion from residential and $3.2 billion from business.

Verizon's enterprise solutions group, the third-largest enterprise telecommunications provider in the market, sells to about 10,000 customers in 35 states and has plans to expand.

Enterprise customers are usually pretty demanding and the trend is toward even more customer service, said Verizon spokesman Jim Smith.

Expanding into business services gives cable companies another way to use their newly enhanced networks. The industry spent about $85 billion on network upgrades to offer additional services such as HDTV, broadband Internet, phone service and video on demand.

Business services are a great opportunity for cable companies, because they take advantage of existing infrastructure, said Ken Fitzpatrick, senior vice president of commercial services at Time Warner Cable. Cox reported that business services was a major contributor to overall revenue growth in the fourth quarter. The Atlanta cable operator's business services unit earned $287 million in 2003, a 25% increase over a year earlier. Cox expects a comparable increase this year.

Lightpath, the business services division at Cablevision, reported its net revenue for 2003 increased about 13% from a year ago to $178 million. Consolidated revenue at the Bethpage, N.Y., company increased 10% during the year.

Other companies said they don't break out revenue or subscriber figures by unit. Cable companies have had an eye on the business market for some time. Yet efforts to court large business customers have taken off in earnest only now, as cable operators polished their telephony offerings.

Not surprisingly, Cox and Comcast Corp., which both offer phone services, are also the most active in pursuing business customers. Broadband Internet service is the core of most business offerings, while telephony comes in a close second. Most cable companies that don't yet offer telphony are testing some form of phone service.

Comcast, the country's biggest cable operator, has focused mainly on offering broadband Internet to small-business users, but recently said it will consider adding to its business offerings with a voice-over-Internet protocol product, which provides telephone service over the Internet. The company is preparing to roll out a residential service in several markets this year.

Time Warner Cable's "Road Runner Business Class" product doesn't yet offer telephony, but has expanded its services to include managed security, firewall services, Web hosting and static Internet protocols, Mr. Fitzpatrick said. The company is testing a voice IP product geared toward telecommuters in San Diego. But as newcomers, cable companies have a number of hurdles to overcome, particularly one of image.

Cox, the country's fourth-largest cable operator, launched a $4 million advertising campaign last week to give its business services division a separate brand identity. "We have had very good success in serving all aspects of the customer base," said Bill Stemper, vice president of Cox Business. The ad campaign is "trying to open their eyes and their minds in starting to see Cox overall in a different way."

Cablevision has also gone the route of giving its cable business services division a separate identity by calling it Lightpath. "Different cable operators are adopting different strategies ... it does seem that companies are thinking very hard about building a separate brand from the core brand," said Joe Laszlo, an analyst at Jupiter Research.

Cable operators also have to break through established relationships that many companies have with incumbent telecommunications providers. To appeal to businesses, many are stressing flexibility. Cable operators traditionally have localized sales and marketing efforts. Companies are playing that up as an advantage in business services, emphasizing local knowledge and more personal service.

"Larger customers are realizing some things, that regional Bells aren't the only ones who can provide good data service. Companies don't want just one telecommunications provider," said Joe Lhota, president of Cablevision's Lightpath.