Cable Sets its sights on business services
August 25, 2006
By Yinka Adegoke
Major U.S. cable companies are preparing to challenge telephone companies on their most profitable turf -- the business services market.
After winning over many consumers by packaging phone, Internet and TV services into attractive bundles, cable is planning to attack the estimated $100 billion corporate market next by deeply undercutting prices offered by phone rivals.
Cablevision Systems Corp. <CVC.N> said it can give discounts as high as 60 percent to small businesses, defined as up to 20 phone lines, compared with what they would pay a phone company like Verizon Communications Inc. <VZ.N>.
Cablevision said it can take advantage of its network to offer business quality services at the same price as to residential premises.
"All of the advantages that we have in the residential market are magnified," Tom Rutledge, president and chief operating officer of Cablevision, told Reuters. "It's because the business market place has historically been priced extremely high by incumbent phone companies."
Telecommunications analysts said companies like Verizon and AT&T Inc. <T.N> have become complacent in serving small and medium businesses because they have not faced the same competitive or regulatory pressures as in residential markets.
Rutledge said phone companies have been able to charge higher rates for businesses because it was more "politically palatable" for regulators, compared to raising voters' bills.
"If I were a cable company I would be taking advantage of the window of opportunity because this particular part of the market place has been underserved for years and years," said Forrester Research analyst Lisa Pierce.
Analysts said major phone companies hold a 60 percent to 70 percent share of the business market, from small home offices to multinational conglomerates. The other 30 to 40 percent of the market is covered by smaller companies such as Time Warner Telecom Inc. <TWTC.O> and XO Communications Inc.
Small Businesses First
Cable operators aim to go after the smaller enterprises first, exploiting the tens of billions of dollars the industry has spent over the last decade to upgrade a hybrid network of fiber optic and traditional coaxial cable systems.
"If we invest a dollar in this business we get back somewhere around 66 cents of revenue within 12 months with high 30 to low 40 cents of margin," said John Dyer, chief financial officer of Cox Communications Inc., the No. 4 U.S. cable operator. "That feels like a good investment for us to make."
Cox's revenue from business services this year is expected to top $500 million.
When asked to comment on the competitive threat cable posed to Verizon's corporate market, a spokeswoman said: "While Verizon Business doesn't take any competitor for granted, the cable sector is not somewhere we're currently focused as we win and serve large business and government customers."
Cablevision estimates the annual revenue from small to large businesses in its New York metropolitan market totals $5.8 billion. Rutledge expects similar take-up rates for its business digital phone services with small businesses as residential, implying a 25 percent penetration in about two years.
In comparison, it now earns about $4 billion a year in cable revenue, from predominantly residential customers.
Other cable companies, including the largest Comcast Corp. <CMCSA.O>, are hiring executives and sales staff to convince businesses that cable is not only a residential service.
Comcast Chief Executive Brian Roberts said in an analyst call last month that the company expected business services to give revenue per user a "tug to the north" from next year.
"Cable companies have always had the assets to address this," said Janco Partners analyst Donna Jaegers. "What they lacked was the sales force and corporate strategy."
Ken Fitzpatrick, senior vice president of business services at Time Warner Inc.'s <TWX.N> cable unit, said the division's revenue is growing at about 50 percent annually and expects to take a "good chunk" of an overall opportunity of $13 to $15 billion in its market. It currently doesn't break out the division's revenue.
"With all the consolidation between telecoms operators that's going on, the choice of the business customer has been depleted and we've proven that we've got the ability to deliver," Fitzpatrick said.
