Cable Operators

Cablevision Revs Up for Business Blitz

9/22/2006 8:00 PM Eastern

New York— With the highest penetration in residential voice-over-Internet Protocol telephony service in the cable industry, Cablevision Systems Corp. is gearing up to attack the commercial-telephone market full-bore, eyeing large enterprise customers as well as small-to-medium-sized business.

At the Goldman Sachs Communacopia conference here last Wednesday, Cablevision chief operating officer Tom Rutledge estimated that the commercial business within the operator’s footprint is worth nearly $6 billion — $3.6 billion for small-to medium-sized business and $2.2 billion in large enterprise business.

“That’s a whole new opportunity for us and we’re going after it aggressively,” Rutledge said. “We think there is a substantial opportunity to lower the prices in that area, take our already existing plant and service those customers with secure data and voice products. We’ve begun mass marketing in earnest in the last several months.”

DECADE OF CONNECTIONS

Rutledge added that with its existing competitive local-exchange carrier business — recently rebranded Optimum Lightpath — Cablevision already has fiber service to twice as many buildings in its metropolitan New York footprint as incumbent regional phone company Verizon Communications Inc. Lightpath, as the service was formerly called, has been offering business services for more than 10 years.

Among its current business customers is Verizon Wireless, Rutledge added, which uses the Optimum Lightpath network to connect its cellular phone towers to their services.

Adding to the opportunity in the commercial market is Cablevision’s success with its residential-phone product.

“We’ve gained credibility in the marketplace as a voice provider,” Rutledge said. “People know that Optimum Online and Optimum Voice work well; they’re good products.”

Rutledge said that the relative cost efficiency of Cablevision’s VoIP network will also allow Cablevision to offer commercial services at rates that are half of what Verizon charges.

While Rutledge plans to take away a big portion of Verizon’s commercial phone business, he seemed relatively unconcerned with the telco’s efforts to offer video in Cablevision’s service area.

Rutledge estimated that Verizon’s video footprint is in about 15% of Cablevision’s service area and that less than 200,000 homes passed have active video service. He added that Verizon’s total video customer penetration in that area is less than 1%.

Rutledge also expressed some doubt that the telcos will have the stomach to spend the billions of dollars needed to build out their video networks, reminiscing about past failed telco-video efforts from Ameritech Corp., Pacific Bell, AT&T Corp. and Southern New England Telephone.

“They have done it before and stopped,” Rutledge said. “In the best cases, against the good operators, they had single-digit [video] penetration. In the worst cases, with the worst operators, they had high double-digit — 19% or 20% — penetration. I think we’re a good operator.”

COMCAST EYES COMMERCIAL

Comcast Corp. chief operating officer Steve Burke, presenting later at the conference, also saw a huge opportunity in the commercial telephone market. But while Burke estimated that business telephone is about a $20 billion business in its footprint, Comcast does not believe that it will have to cut prices to attract customers. Comcast expects to begin offering commercial telephony next year, with the big push in 2007 and 2008.

Burke praised Cablevision’s success in phone, data and video service, adding that Comcast will likely concentrate on small-to medium-sized business and concentrate on adding value to those business customers, rather than on lower prices.

“I think we would be more inclined to compete on the basis of added value, rather than price,” Burke said. “If you have a small or medium sized business, you may not have seen anybody from Verizon or SBC for years. It’s very hard to get competitive pricing; it’s very hard to get anybody’s attention. So, I like to think at least in the beginning we don’t need to compete on the basis of just price.”

Later, Burke told reporters that while he admires Cablevision’s moxie, Comcast is taking the more cautious route with commercial phone service.

“My understanding is Tom is just going for it,” Burke said. “He’s basically saying, 'I’m taking their knees out.’ It’s kind of what he did on triple-play — he went to $90 [per month], we were $99. ”

Earlier in the day, Comcast said it had crossed the 1 million residential VoIP telephony subscriber threshold. Most analysts believe that Comcast actually crossed that mark at the end of August, implying that the company is pacing ahead of its own expectations.

Comcast said during its second-quarter conference call that it expected to add between 1.3 million and 1.4 million telephony customers this year, ahead of earlier estimates of 1 million customer additions. That new guidance meant Comcast would have to add between 300,000 and 400,000 phone customers per quarter to reach that goal.

31,000 PER WEEK

If Comcast did cross the 1-million-subscriber threshold in August, UBS Securities analyst Aryeh Bourkoff estimated that the company was adding about 31,000 phone customers per week. At that rate, Comcast could finish the third quarter — which ended Sept. 30 — with more than 400,000 additional customers.

Wachovia Securities cable analyst Jeff Wlodarczak took his estimates even further. Wlodarczak wrote in a research note that Comcast could add between 400,000 and 500,000 telephone customers in the third quarter, well above his conservative estimate of 375,000 additions.

“We point out that [the third quarter] is heavily back-end loaded, as households return from 'the beach’ and students return to college,” Wlodarczak wrote. “The likely strong phone result bodes well for basic video, digital and data results in [the third quarter].”

September