Comcast Thinking Small

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Brian Roberts has seen the future of business telephony, and for Comcast, it could be no farther than a pizza joint in a town near you.

The Comcast chairman and CEO, speaking at the Citigroup Entertainment, Media & Telecommunications conference in Las Vegas last week, said that the nation's largest cable operator will focus its initial efforts to break into the business communications market on companies with less than 20 employees, like pizza parlors and other ultra-small businesses.

While it might seem a bit odd for a company of Comcast's size — 24.1 million customers and estimated 2006 cable revenue of $26.5 billion — to focus on the small fries of the business world, Roberts said the small-business segment is ripe for the picking. He said such firms don't have a choice for business phone service, outside of the local incumbent telephone company.

“We believe that business is an incredible replacement alternative of the incumbent local-exchange carrier,” Roberts said. “And this is an area that has very little to no competition today from a facilities-based provider. Go to really large enterprises — we all have many facilities in our large office buildings — but if you're a pizza parlor, youpretty much have one choice.”

Roberts estimated there are roughly 5 million such small businesses within Comcast's footprint — 3 million of them within or near Comcast's existing network — representing an annual revenue opportunity of $12 billion to $15 billion.

“We think this is a natural extension of the network that we've already built,” Roberts said.

Comcast believes that it can capture at least 20% of the small-business phone market in five years, at a total cost of about $3 billion during that period. The company intends to spend about $250 million on commercial telephony in 2007.

Roberts said he anticipates operating cash-flow margins of 50% or higher for business services and predicted that within five years, commercial telephony could contribute $1 billion in operating cash flow per year.

“This has a meaningful impact for the growth rate of the company for the next five years,” Roberts said.

Roberts was buoyed by the strength of Comcast's residential voice product — the company added about 1 million residential telephone subscribers in the first nine months of 2006. Business customers already accounted for about $250 million in revenue in 2006 — for high-speed Internet services, not phone — so the operator already has an inroad to those customers for phone service.

Reflecting the popularity of the residential product, Comcast said last week that it would hire an additional 2,600 employees this year in its Eastern division, which includes Pennsylvania, New Jersey, Maryland, Virginia and Washington, D.C.

In a research report, Merrill Lynch media analyst Jessica Reif Cohen estimated that commercial telephony could be a $2.6 billion business for Comcast by 2011, with cash-flow margins of about 55% by that same year.

Comcast has already begun making moves to address business telephony, hiring former Cox Business Services guru Bill Stemper to head up Comcast's own initiative last year.

Roberts said that Comcast will hire an additional 500 employees to focus on business telephone services in 2007.