Cable Makes Advances Into CLECs' Wake

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Competitive voice and data access, a business segment that has provided the cable industry with moderate revenues over the past decade, is primed to move center-stage in at least some MSOs' plans.

The industry's commercial initiatives — most notably offered by Time Warner Telecom, Adelphia Business Solutions and a handful of others — are benefiting from three interrelated trends: the maturation of cable's infrastructure, the failure of the first wave of competitive local exchange carriers and the lack of choice offered to small and medium-sized businesses in the nation's secondary and tertiary markets.

Cable's recognition of this opportunity is evident in how it is structuring itself. In addition to giving commercial units more autonomy, some operators are breaking them out. Last year, Comcast Corp. created a wholly owned commercial subsidiary, while Cox Communications Inc. followed suit earlier this year. Charter Communications Inc., meanwhile, is considering starting commercial units outside of the Midwest.

Cable companies "are certainly trying to drive the business more toward the small-office and medium-size business," said Mike Paxton, a senior analyst with Cahners In-Stat. "That's an emphasis they never really focused on before. It's a market that's full of possibilities for them."

In large measure, the telecommunications world has provided them with the opening. The Telecommunications Act of 1996 created the perception that competition was coming and, indeed, a myriad of CLECs were born within a year or two.

However, those companies are now in deep trouble because of the bad economy, bad business plans and a reliance on regional Bell operating companies for connections to their customers.

Cable companies say they have learned from CLECs' mistakes. They plan to harness the elements that differentiate them from the classic competitive access provider — control of rights-of-way, real estate, fiber rings and coaxial last miles, recognizable brand names and subsidizing cash flows from their core video and residential data businesses — to move into the space.

"One ace in the hole cable has is that they aren't dinky little CLECs," said Bob Shirley, an analyst for New Paradigm Resources Group. "They are large public companies with billions in revenues. If they make the decision to invest, it's probably a relatively solid one."

The reality is that the networks built to serve businesses and those built to serve residences are converging.

Operators, trying to deliver new services to residential customers and stave off competition from direct-broadcast satellite providers, have transformed tree-and-branch networks into telecommunications systems capable of supporting mission-critical tasks.

As infrastructure "got more homogeneous across cable and telephone networks, there was less of a reason just to focus on residential neighborhoods and more of a reason to take advantage of the proximity to small- and mid-size business as well," said Greg Mycio, New Paradigm Resources Group's director of broadband.

SLICING BANDWIDTH

New technology is also making it possible to slice bandwidth to the point that services can be offered to smaller businesses that are closer to the cable networks than traditional businesses served by CLECs.

"You may be in suburban areas, shopping areas intermingled with residences," said Lynda Starr, the vice president of U.S. carrier research for Probe Research. "Cable pretty much passes by. You don't want to sell a doctor's office HBO, but you can sell them data, videoconferencing or VPNs [virtual private networks]."

However, the industry faces challenges in its efforts to grow significantly in its business-service customer base. Most importantly, it needs to continue working to solve one of the problems that has dogged it since it turned to business services: The idea that it is lost when it comes to serving businesses.

"It's more of a challenge in educating these businesses that they have an option," Paxton said. "They can say, 'Hey, you don't have to rely on the local RBOC or some funky CLEC, because we can do it.' "

Another challenge is creating the overall management functions, such as billing and operational support, that are far more vital and complex than those needed for residential neighborhoods.

"They have to have robust OSSes [operations support systems], the billing has to be good, the network management software and capabilities have to be significantly more reliable and robust than the average home," Paxton said. "To make a long story short, they are still experimenting, and it has to get better."

Finally, the industry needs to figure out where it stands on voice services. While some operators, including Charter, are waiting for voice over Internet protocol, others, like Cablevision Systems Corp., Comcast and Cox, have opted for traditional circuit-switched technology.

The key may not be choosing one system. Indeed, still it's possible to support both and position them differently. And most operators want to avoid getting hung up on the issue and waiting too long to get into the business.

Three operators — Cox, Comcast and Charter — are representative of the industry's growing interest in data services.

While Cox and Comcast are old hands at the game of competitive access, Charter is looking at the field from the vantage of a newcomer.

CHARTER HOLDS PHONE

Charter Business Networks, the MSO's commercial unit, is moving the most deliberately.

CBN's main CLEC activity is in the parent company's North Central region, where it employs 70 people. The data business is a legacy of Marcus Cable's FiberLink unit, which was formed in 1996 and acquired, with the rest of the company, by Charter in 1998.

CBN claims that as a facilities-based entity it can outperform other CLECs because it doesn't rely on incumbent telephone companies, a common refrain among the cable-owned CLECs.

Like other cable CLECs, Charter mostly eschews big metropolitan areas in favor of secondary and tertiary markets that are primed to go with a competitor.

"Businesses are dying for a cost-effective solution," said Jim Rice, the vice president of commercial/residential services for the region, which covers Minnesota and Wisconsin.

To date, the company has about 70 distance-learning video sites and has fiber connections to about 400 businesses. Those 400 businesses serve about 3,200 home workers with VPNs.

The company also provides high-speed Internet service to more than 1,300 small and medium-sized businesses.

Those companies have been good customers of the commercial Internet service, which features business-ready DOCSIS-compliant cable modems — complete with static IP addresses and firewalls.

According to Rice, health-care suppliers, local and state governments, universities and Internet-service providers needing backhauls to Internet peering points, have been the most responsive vertical markets.

CBN's focus has been on building data links for its facilities within the region. Because of that effort, the company has put in place a synchronous optical network (SONET) ring covering Wisconsin, and will soon complete one in Minnesota.

The ring — also used by the residential side of the business to ferry programming, internal video and residential Internet traffic — provides services ranging from T-1 equivalents to 155 mbps depending on the edge devices used.

The ultimate goal, Rice said, is to migrate the network to IP. That will likely be a multi-step process. "We'll see a mix of SONET, ATM [asynchronous transfer mode], IP I believe for some time," he said. "The interplay of how we mix it up will be determined by the price of equipment and how well it functions."

Charter is holding out on voice, a move that separates them from many CLECs. The company has clearly taken the words of pundits to heart: In the packet network of the future, voice is merely another application, albeit a potentially lucrative one.

Currently, Charter's voice initiatives — being run under the aegis of its residential division — are VoIP tests in Wausau, Wis., and St. Louis.

The trials, which will end in January, follow earlier tests that showed disappointing progress in connecting the public-switched telephone network and VoIP networks. Things are going better this time around, Rice said.

The Wausau tests are using gear from Cisco Systems Inc., Telcordia Technologies Inc. and Motorola Inc., while Nortel Networks equipment is being used in St. Louis. The winning vendors will be chosen by the end of January, Rice said, though he doesn't expect a black-and-white decision.

If the technology proves to be ready, residential market trials could be held next year in those two cities. Commercial-grade VoIP may not be a factor until the 2003-2004 timeframe, Rice said.

"We're working hard on VoIP, packet cable for residential customers," he said. "We're intent on the commercial side on leveraging that. We're plowing ahead building relationships with businesses."

If the company is really throwing more support to its commercial initiatives — and it said it is looking at expanding from the Midwest to the East Coast soon — word hasn't yet filtered down to industry watchers.

"Of the three, Charter is probably the least committed in terms of its CLEC business," said New Paradigm's Shirley. "It's a late bloomer. I'd say for Charter it's more of a nice little ho-hum thing, but not really one with a sense of mission."

COX: INTERNAL GROWTH

One sign of how mature Cox Business Services is in the relatively immature world of cable-anchored CLECs, is that most growth is expected from penetration gains in markets where it already operates, instead of new markets, vice president and general manager Chuck McElroy said.

"It looks to us that in the cable industry Cox is by far the most aggressive in pushing into the business segment," said Paxton. "Cox has a six- to nine-month head start."

The company is one of the granddaddies of cable's business efforts. In the mid-1990s, Cox, Tele-Communications Inc., Continental Cablevision and Comcast bought Teleport Communications Group from Merrill Lynch.

At about the same time, Cox began upgrading its cable systems and offering business services in select markets. Virginia Beach, Va., Oklahoma City and New Orleans were the first three markets served by the unit's antecedent Cox Fibernet. Those businesses were established independently of Cox's TCG investment, though there was some sharing of facilities.

Hampton Roads, Va., and Oklahoma City are now responsible for about 55 percent of Cox Business Services revenues. The unit accounts for about $150 million of its parent's $3.5 billion annual revenues. It has a presence in 19 markets, 11 of which were new this year.

Cox Business Services realizes commercial video revenues from three other markets. The unit will upgrade the operational structure and services offered next year, McElroy said.

"It's getting to a point quickly that we match the Cox footprint," he said. The answer is to introduce new services and to more deeply penetrate markets in which they are up and operating, he added.

The sweet spot is medium-sized businesses that are not being satisfied by other providers. Cox has a good client base in the educational, military and government sectors and is addressing the hospitality market.

These market segments generally require both high-speed data and video service, and using Cox makes life easier for these companies, who would otherwise need two providers.

Increasing penetration offers some prospect of growth for Cox Business Services. On average, Cox franchises include 70 percent of the business in the local metropolitan area. Of these, only about 20 percent are on or near the fiber ring.

Judiciously linking business areas to the ring can create pockets of potential new customers, McElroy said. "I can continue to grow the footprint and get 60 percent growth over last year."

Voice is offered in nine markets. Unlike Charter, Cox has opted for traditional circuit-switched telephone services. The nine voice markets have class 5 "big iron" switches. Once VoIP becomes viable, McElroy said, the company will have the flexibility of offering it alongside the circuit switched products.

The company then would be able to offer circuit-switched services for business customers and IP services for inter-office communications.

McElroy said the business unit reuses about two thirds of the infrastructure used to provide services to residential customers. These include physical assets such as rights of way, buildings, switches and distribution gear, and back-office elements including financial, accounting, regulatory and human-resources expertise.

Billing and operational support systems require incremental investment, since far more sophisticated and granular metering is necessary.

Businesses want services like discrete billing, "they want to know what the long distance billing is for a specific department," McElroy said.

Marketing is done on a case-by-case basis. For instance, the majority of customers in the Hampton Roads system are large businesses, while systems in Omaha, Neb., San Diego and most other services areas concentrate on smaller businesses.

The goal in both cases is to gravitate toward the middle.

Like other cable companies, Cox committed to a discrete organization to handle what is essentially a different business.

Until recently, the commercial services unit reported to the general manager of the region — the person in charge of the residential business. With the advent of Cox Business Services, a parallel organization is in place.

Cox Business Services, headquartered in Atlanta, recently increased its ranks from fewer than 700 employees to more than 1,000. It also has its own general manager in every region, according to McElroy.

The year ahead could see significant growth in cable operators' commercial revenues. "I'd say it is an opportunity for them to spread their wings a little bit and reach out to new customer," said Paxton. "They are now realizing that they can run networks and can provide data to residences. Why not take one step father and provide it to business?"

In mid-November, Cox introduced Cox Carrier Services in 22 markets. CCS is designed to give carriers an option to the incumbent local exchange carrier. CCS offers two main services: The ability to reach end-user customers at speeds as fast as OC-12 and private line service enabling them to interconnect their own POPs or link to other carriers at speeds as fast as OC-192.

COMCAST: VOICE LEVERAGING

Comcast Business Communications, christened early last year, will serve customers is six markets: Baltimore, Philadelphia, northern and southern New Jersey, Detroit and Delaware.

As another original cable owner of Teleport, Comcast is familiar with the overriding concept of repurposing cable plant to realize commercial revenue streams. CBC has passed several milestones since it was established in February. On Oct. 31, it officially opened a network operations center in Moorestown, N.J., and Philadelphia, Delaware and New Jersey operations followed suit, though they were serving customers prior to that.

In June, the company began offering services in the Baltimore region. Later in the summer, CBC won its first contract for services in Detroit.

CBC's sweet spot, according to president Bob Keane, is medium-sized businesses and other enterprises with more than one location within Comcast's region.

The game plan, as with other cable-based CLECs, is to leverage rights of way and equipment as well as the fundamental fiber infrastructure.

The backbones use ATM protocols over dense wavelength division multiplexing (DWDM).

In the access portion, the company uses ATM and IP protocols on passive optical networks (PONs), which promise reduced cost and heightened reliability because they use no active components, like amplifiers.

Corporate locations are either "on-net" — tied directly into the fiber ring — or connected via dedicated connection. This scheme gives CBC a tremendous level of flexibility in provisioning customers, Keane said.

The only service not fully packetized is voice, which is provided using traditional circuit-switched gear. While the calls are, indeed, packetized on the access and transport portion, they are migrated to traditional time-divided multiplex (TDM) format at Comcast's class 5 switches.

The company will add an Internet telephony element when that technology comes of age, Keane said, but didn't want to wait.

This is in line with the corporate parent's position. The VoIP product, when it is added, could be used to link company facilities, with the circuit-switched product used to reach the outside world.

The reality is that the company couldn't afford to wait for commercial-grade VoIP products, which Keane believes may not be here for 18 months.

Unlike Charter, CBC believes that not having a local voice product leaves too much money on the table. "The bottom line is once you are in a commercial market that you believe is underserved, you have to have a voice product," Keane said.

In addition to Detroit and Baltimore, the company is aiming at CBC setting up shop in Washington and Northern Virginia markets, perhaps in early 2003.

Outside of the technology, Keane feels his company brings three things to customers that traditional CLECs miss: a strong brand name, the need for minimal dealings with the local exchange carriers and the ability, even in tough economic times, to get its hands on money.

"We provide a lot of value compared to a lot of CLECs right now," he said.

The company, which employs about 500 people, will reach profitability in 2004, Keane said, and could expand beyond the markets it now serves.

Though the cable industry has long had a toe in commercial services, it is still very tentative. A March survey of 50 randomly selected MSOs by Cahners revealed that only 6 percent of cable-modem subscribers were commercial. That could change quickly as the cable industry seeks new revenue streams. According to analysts, the industry positioned itself to at least have a chance.

"They have the networks, and they've upgraded them to 550 MHz and 750 MHz," Probe's Starr said. "They may well leverage that investment."

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