The promise of delivering true broadband services has driven the cable, telephony and networking industries down many roads from the technical and business development perspectives. While there's no question of the lucrative residential and commercial opportunity for demand-driven broadband services including video-on-demand, virtual private networking and storage area networking, the jury is still out on which communications approach will emerge as a leader.
Clearly, in the residential broadband services market, the cable industry is dominating. According to the National Cable & Telecommunications Association, Morgan Stanley Dean Witter has estimated that more than 12 million U.S. households will have cable modems by the end of 2002, with 920,000 customers added in the second quarter of 2001 alone.
But on the commercial side, a potentially higher-margin of opportunity exists for MSOs looking to expand their businesses.
Unfortunately, cable-modem success and growth in the residential space has not translated into the business market. Forty-five percent of MSOs said less than 10 percent of their Internet subscribers were businesses, according to a recent survey by marketing research firm Cahners In-Stat Group. A Morgan Stanley study shows cable-modem penetration in the commercial market is low compared to digital subscriber line, T-1s, dial-up, integrated services digital network and other methods, and is not expected to increase in the foreseeable future. MSOs are reluctant to aggressively market the cable modem to business customers who use up a lot of bandwidth and need guaranteed services and symmetrical communications capabilities to support mission-critical business operations.
Recognizing the limitations of their current offerings, many MSOs have deployed separate physical networks based on asynchronous transfer mode, Sonet and other proprietary access technologies. However, the high cost of deploying and maintaining a separate physical network has limited the addressable commercial market to a few concentrated areas. Also, with the up-front capital-intensive investment required to deploy a fiber to the edge solution, many MSOs remain unable to crack open quickly the commercial markets in any meaningful way.
So where does the opportunity lie for MSOs to enter and win in the commercial broadband services market? Interestingly enough, we pass by it every day. About 6 million small-to-medium-sized businesses (SMB) are within a few hundred feet of the local hybrid fiber/coaxial network and can be cost-effectively reached by the MSO. Some 2 million SMBs already subscribe to cable video services and studies show this audience readily recognizes cable company brands. According to In-Stat Group, cable MSOs and long-distance carriers were ranked as the most capable to provide commercial broadband access by respondents — who viewed competitive local-exchange carriers; Internet-service providers and wireless providers as far less capable.
But how large is the small-to-medium-sized opportunity for MSOs who are considering this option? From a big-picture perspective, the vast SMB audience currently spends more than $50 billion annually on commercial telephony and data services, more than current cable industry revenues estimated at $37 billion. SMBs continue to demand advanced data, broadband data and voice services, with estimates showing market growth reaching $93 billion by 2003.
In terms of per-business revenue, when the very low end of the market — small businesses with less than five employees — are excluded, the average SMB contributes $12,000 in annual revenue to its service provider, which, in most cases, is the incumbent local exchange carrier. With the current hybrid fiber-coax infrastructure passing nearly 2.5 million of these SMBs today, the near-term potential market opportunity for the cable industry is $30 billion annually. The size of the opportunity increases manifold when future broadband services such as virtual private networking and network-attached storage are also added to the service portfolio.
Finally, we can judge the SMB opportunity against the residential market. When comparing the potential revenue value of SMB customers to that of residential customers, it is interesting to note that one qualified SMB contributes as much cash flow to an MSO as roughly 40 consumers due to higher revenues and better cash flow margins and discounting revenue from the future services mentioned above. So the 2.5 million SMBs in the five- to 100-employee size segment that the HFC network passes equal 100 million consumers — an impressive number especially when noting that today there are 65 million domestic cable subscribers.
And let's not forget that commercial broadband services like voice over IP, video conferencing and enterprise-class IT services are typically higher margins offerings, which will give MSOs who position themselves to provide these services an opportunity to grow their revenues and margins significantly.
Obviously, there's tremendous potential upside if we can crack the commercial services market with the SMB as our primary target. But how do MSOs capitalize on this opportunity? The first step is to evaluate existing assets.
Leveraging HFC To Service Business Customers
The smartest approach for building out business services to SMBs will leverage the MSO's largest deployed asset — the HFC network. However, because of inherent limitations in the shared nature of current HFC architecture, existing networks cannot scale up to meet the needs of the underserved SMB market. Remember, these customers require predictable, symmetrical bandwidth; granular quality of service performance; VPN solutions; service level agreements; security; low cost; outsourced management; and multiple levels of service.
So is a complete rebuild of the network required? No. That approach is too costly for most, too time-consuming for all and delays our ability as an industry to capitalize quickly on this burgeoning SMB market.
The answer is a new technical perspective, not rebuild. Just as the SMB market is within the MSO's grasp, so is the technology needed to satisfy customer needs. What's required is the ability to leverage the HFC network beyond its current 860-megahertz limit to activate more bandwidth. We need to embrace the use of efficient packet-based IP technologies running only a switched gigabit Ethernet network implemented on frequencies above 860 MHz on the existing MSO physical plant. We need to infuse network management and service creation capabilities into our networks in customer-centric ways so we can deliver custom services reliably and quickly. With the speed, space and management in place to reliably carry more information much faster, MSOs can deliver a whole range of new services to businesses.
A new roadmap for commercial success is evolving. It is up to us as an industry to evaluate the opportunities and technologies so we can maximize not only the business market, but our own business as well.