Cable Operators

Triple Play Means Business In ’07

9/22/2006 8:00 PM Eastern

Over the past few years Comcast Corp. has made it a practice to focus on one specific new product annually: 2004 was the year of video on demand and 2005 and 2006 saw moves in telephony. So what is in store for 2007? Call it the year of the triple play.

But that is a loaded phrase. While in most cable circles, triple play means the three-product bundle of voice, video and data services, it seems that Comcast chief operating officer Steve Burke is talking about those three products and much more.

The operator began rolling out residential voice-over-Internet Protocol service last year. And that rollout will continue through 2006 — Comcast expects to have residential VoIP available across 80% of its 42.4 million-homes passed by year’s end. But in addition to residential voice, video and high-speed data, the country’s largest cable operator is also gearing up to offer commercial voice service to small and medium-sized businesses and widening the scope of its Comcast.net Internet portal, including offering some video outside of its traditional cable footprint.

Practically every operator has expressed interest in bolstering business-telephony offerings, mainly targeting small to medium-sized businesses. Time Warner Cable and Cablevision Systems Corp., the two pioneers in VoIP, have touted the enormous opportunities they see in the business-phone market. Time Warner estimates the sector is worth $10 billion a year inside its market area.

“I think [the focus for 2007] is triple play, which I would say is different than starting to roll out phones,” Burke said. “It’s really understanding at all levels of triple play, and then commercial. I think we’re going to surprise people with commercial in 2007 and 2008.”

'OTHER REVENUE’

Comcast already has a small commercial high-speed data business. It doesn’t break out commercial revenue separately — it is included in the “Other Revenue” category, with installation revenue, guide revenue, commissions from electronic retailing, other product offerings, and revenue from its digital media center and regional sports programming networks. In the second quarter, Comcast reported “other revenue” of $206 million.

But Comcast is obviously looking toward the commercial business: Burke estimated it could be a $5 billion business for the company within the next five years. And earlier this year, Comcast hired away business phone guru Bill Stemper from Cox Business Services, where he was vice president, to head its commercial services operation.

Cox Business Services has grown from 100,000 customers and $270 million in revenue in 2003, the year Stemper joined Cox from AT&T, to 140,000 customers and $395 million in revenue in 2005.

Sanford Bernstein & Co. cable and satellite analyst Craig Moffett said that hiring Stemper was a key move for Comcast.

“Bill Stemper is a terrific hire,” Moffett said. “He’s a well-respected executive, he already demonstrated that he knows what it takes to build a business services organization and he has a specialized set of skills. Comcast couldn’t have done better.”

Moffett agreed that commercial phone could be a $5 billion business for Comcast and hinted that it could be even bigger.

“That may be an underestimate of its upside,” Moffett said of commercial phone. “It has much higher margins than residential phone. Historically, it has been the juiciest profit pool in telcos — there is no facilities-based competition. It’s an enormously attractive market for Comcast.”

TAKING AWAY RBOC BUSINESS

Burke estimated that cable is taking away 7% to 8% of the regional Bell operating companies’ residential lines each year, and cable phone is still in its infancy. While Burke expects a reaction from the telcos once cable begins to chip away at the commercial phone business, he doesn’t expect it to be drastic. He believes that as long as cable sticks to the small and medium-sized business market — leaving larger enterprises for the RBOCs — the two can coexist peacefully. And Comcast has past experience to draw upon.

“We’ve been in the commercial business, we just haven’t prioritized it as much as we’re going to,” Burke said. “It’s going to be a challenge, rolling out telephone. Integrating AT&T quickly and effectively was a big challenge. We did that. Rolling out telephone, I think most people believe that we’re now serious about phone and we’ve hit our stride, and the phone rollout is going well. I think they’re really going to believe that when they look at our numbers out over the next few quarters. I don’t think there’s anything about commercial that we can’t do or that’s any more challenging than what we’ve done on all these other business lines.”

Rolling out commercial phone will take a lot of capital — Burke would only say it is a “substantial” amount — and Wall Street in the past has abandoned cable stocks at the slightest hint of increased capex. Burke believes that with the success of Cablevision and Time Warner on the residential phone front, Wall Street has become less skittish about additional capital expenditures.

Burke also believes that the high return on investment inherent in commercial phone will calm any investor fears.

“We’re going to break our commercial business out when we talk to Wall Street and say, here’s the capital employed, here’s the return we’re getting. Don’t worry that the existing cable business has a different capital dynamic. It’s really the commercial part, and you need to analyze that separately,” Burke said.

“I think as long as you’re aggressively rolling out new products, people want to see cable companies grow,” he said. “So if you look at Cablevision, Time Warner and ourselves, I don’t think people when they’re analyzing our stocks are as fixated on capital as they were 18 months ago.

“Eighteen months ago, the prevailing wisdom was, you buy a cable company because you want to harvest free cash flow. I think now the prevailing wisdom is, you buy a cable company because these companies are going to have real significant growth over the next few years, and it’s hard to imagine a scenario where they won’t. As long as the capital is directly attributed to that growth, I don’t think Wall Street is going to have a problem.”

Earlier this year, Comcast sparked controversy when it said that it was investigating making its Internet Web portal, Comcast.net, available outside of its footprint. While the company had made features such as The Fan — which makes accessible hundreds of movie clips, TV shows, general and entertainment news and music videos — available to its own high-speed data subscribers, it would be the first time that such content would be available from a cable company outside its own franchise area.

Burke said that Comcast’s intentions were initially misunderstood. The company does not plan to make any cable content available on its portal that would compete with other operators. But exclusive content — like its soon to be launched on-demand horror channel — is fair game.

“The idea is that with the amount of video programming that is online, are there ways to have niche channels, niche Internet Web sites which are like channels, that may also have a VOD component,” Burke said. “A perfect example is the horror channel, which is going to be launching on Halloween of this year. That’s a channel that doesn’t exist as a linear TV channel, but does exist as a VOD and a broadband channel. And for that business to really work as a broadband channel, it should be national.

Burke likened Comcast’s content strategy to Tele-Communications Inc. and its Liberty Media Corp. programming arm in the 1980s and 1990s, helping to launch fledgling channels on its systems to differentiate itself from the competition.

“We would like to find niches that other people don’t occupy” Burke said. “There is no horror channel on the dial right now, and I think it would be a mistake for us to go head to head with really strong existing Internet sites, but you could imagine us birthing a number of Internet businesses. This is very similar to what TCI and John Malone did in the early days of Liberty. They took advantage of the fact that they had a lot of distribution to create content.

“I think those days are over, or close to over, for linear video cable channels, but those days aren’t over for nonlinear VOD channels, and we don’t think those days are anywhere near over in terms of broadband Internet sites.”

Even farther out in the future, Burke sees a melding of wireless, broadband and traditional cable. And Comcast has a unit dedicated to just such future thinking, code-named Eureka. Burke said that the Eureka team is focused on creating applications that go across more than one device.

One example Burke gave of a possible Eureka application could be a customer watching a show on television, being able to determine which of their friends are watching that show at the time — and informing those that aren’t to begin watching now — and engaging in an e-mail chat with those friends as they are watching.

“That’s a fantastic product, and what’s particularly good about it for us from a business point of view, if you have a friend who happens to be an EchoStar [Communications Corp.] or DirectTV [Inc.] customer who can’t do that until they become a Comcast customer, you have a great way of using a big network effect to pull people into coming to cable,” Burke said.

It is that kind of product and application differentiation from satellite and telco competition that is driving the company’s efforts in 2007 and beyond.

September