Cable Lurking in SMB Market
December 13 , 2004
by Vince Vittore
Cox Communications is an anomaly. It has been an anomaly since it became one of the first major multi-system operators to install a Class 5 switch and offer voice services over its coax plant. It remains so today.
While the entire cable industry “rediscovered” telephony services, in large part because of voice over IP, Cox never wavered and continues to provide voice to more than 1 million customers, putting it at about the same size as Puerto Rico Telephone and just ahead of Cincinnati Bell. The same could be said about its pursuit of the business market for data services. While other cable operators have flitted in and out of the market as financiers of the early CLECs in the mid-1990s, Cox has remained steadfast in its belief that serving businesses that fall into its traditional cable TV franchise areas is a strategic imperative. The result: Cox Business Service now counts more than 100,000 customers, generated $275 million in revenue in 2003 and is growing at a compound annual rate of 37%. What's more, the company isn't just serving the local dry cleaners and real estate offices in strip malls.
“I think the perception has been, and very naturally, that as cable emerges beyond residential service, it's going to be serving the mom-and-pop shops,” said Kristine Faulkner, vice president of product development and management for Cox. “We tend to skew higher [on the corporate size chart] than you would think. About 25% of our customers fall into what I would call medium to large.”
And though Cox's definition of large business starts at 100 lines and higher, lower than most big telcos' description, the services it's offering make it clear that the company is targeting anyone's translation of big.
“On the data services side, we can go all the way up to OC-192,” Faulkner said. “We're also doing transparent LAN services, which has become more important, Web hosting and VPNs. On the voice side, the product focus ranges from basic lines to PRI to voice mail.”
Among the client list now receiving services from Cox are Boeing in Wichita, Kan., Siemens Automotive and Langely Air Force Base.
All of which adds up to Cox becoming an aspirant model for cable operators wanting to get into the business services market. Cable's desire to serve businesses with voice and data is generated largely by the same drive pushing telcos in the residential video market — competition.
“They're looking beyond cable modems, and the reason is competition,” said Appollo Guy, vice president and general manager of broadband and cable at Telution. “Right now, their resident revenues are getting eroded on data because DSL has become so cheap.”
And though most vendors and some analysts that serve the cable market agree on the general trend, there is widespread divergence on many of the details. In fact, there appears to be two schools of thought emerging on how cable operators will make their move into business service. One holds that business services will be a natural extension of residential markets with cable modem service (around 3 Mb/s) as a starting point. Among this group, cable operators will be most effective by targeting small businesses of less than 10 lines or “pro-sumers” who run businesses out of their homes.
Mitch Auster, director of cable product marketing for Ciena, said marketing to small businesses is a much more natural transition for cable operators, particularly because those companies are just ramping up the sales infrastructure needed to target large business.
“Probably over the next few years, they will generate the most commercial revenue through the cable modem offering,” he said. “It's not just the very, very small, though. It's any business that can benefit by the speed that the cable modem can offer. As they go after places like hospitals and universities, it's more of a fiber-based offering.”
According to the other school of thought, the abundant amount of fiber that cable operators have installed as part of their video and data upgrades over the last decade will more likely serve as the launching point for business services. By extending those networks with laterals into multi-tenant buildings, government offices and educational campuses, cable can have an immediate advantage over incumbent carriers that might have existing copper plant, the theory goes. Indeed, some believe, because, unlike telcos, cable operators don't have to worry about eroding existing T-1, that Ethernet services are the natural offering.
Many cable operators already are using Ethernet as a backhaul mechanism for their residential data services, and making the jump to offering it as a product to business users makes economic sense, said Mark Fishburn, vice president of strategy for Spirent and chairman of the Metro Ethernet Forum.
“They have the luxury of having this delivery mechanism (cable plant) that already goes everywhere,” he said.
Moreover, because the cost of Ethernet network equipment has dropped so significantly, cable operators can offer those services across a wide variety of customer segments. Perhaps just as important, much of the infrastructure is already in place, said Bill Zakowski, vice president of business development for Amedia Networks.
“They've already got gigabit Ethernet links into all these neighborhoods,” he said. “The fit here is that in that fiber distribution node that's already there, they can put in an aggregation switch and now bring fiber into the business.”
Cox, in fact, tends to focus its services in markets where it has the greatest concentration of fiber. Like many service providers serving all segments of the business market, the company is seeing increasing demand for Ethernet, though not necessarily by name, Faulkner said.
Of course, Cox is at a bit of an early advantage because of its existing Class 5 switches. However, the company typically has not been using voice as its lead product. That may change as Cox and others begin rolling out voice-over-IP services.
For much of the cable market, though, the customer segment will dictate the ingredients in that bundle. Some have started with Ethernet as a basic element, particularly if the service is targeted at vertical markets like municipal government and education, said Brian Van Steen, senior analyst for optical networking with RHK. As a select few have started moving into traditional verticals, the experience of both early enterprise and residential cable modem users has gone a long way to improving reputations.
“Some of it has to do with expectations,” Van Steen said. “A lot of early customers for Ethernet services were just buying a best-effort service. It didn't have to be critical data that they are carrying. For a small to medium enterprise that would sign up for that sort of service, the question comes down to ‘is there a need for a critical circuit?’”
However, not everyone is convinced that cable operators have fully solved the question of whether they run secure enough networks.
“When you start talking about layering on services like VPNs, a lot of large businesses have concerns about things like backbone security,” Telution's Guy said.
However, many believe that with new quality-of-service tools and some other techniques taking care of those concerns, most cable operators will begin seeing significant revenue from business within the next 12 months.
“Next year is the year of VoIP and expanded VOD,” Guy said. “Probably by June 2005, though, you'll see some aggressive budgets go after the business market, and by 2006, you'll see some movement.”
