For more than a decade, the cable industry’s main competition has been direct-broadcast satellite.
Satellite competition is not going away, but it’s no longer the only adversary. The cable industry is fighting a two-front war, with the telcos emerging as worthy competitors with large balance sheets to leverage.
As MSOs build their systems and organizations to engage the telcos, much of the heavy lifting that has been oriented to the residential triple play can also be applied to the commercial markets. Given that softswitches, gateways, back-office systems and operations centers are coming into place, many in the cable industry are taking the natural step into commercial markets traditionally held by the telcos.
But relatively little has been published on the commercial markets, including segmentation, clustering, and service offerings.
A HUGE OPPORTUNITY
A closer look at the market illustrates the magnitude of the opportunity.
Narad Networks Inc. recently hired a geo-mapping and analysis consultancy to analyze the commercial services markets in three North American cities — one major metropolitan city and two midsized markets. The results showed very similar patterns for each city.
There are many ways to cross-section the telecom markets. Here are a few that stood out, because of the clear and consistent results the analysis revealed:
- 80% of the commercial revenue comes from voice services, while 20% comes from data;
- 63% of the bandwidth is used for voice and 37% for data, and
- 55% of the revenue fell in what is known as the NxT1 sweet-spot, characterized by businesses that use from one to about 10 T-1 lines for some combination of voice and data services.
The small-to-medium businesses in the NxT1 category average about $1,800 per month for local and long distance voice and data access services. Of the other 45% of the total market revenue (the non-T-1 markets), the majority of this revenue was spent by just a few hundred very large businesses that spend $50,000 to $100,000 per month.
LIGHT ON COMPETITION
An observation about the largest market is that it does not benefit from robust competition. There was a time when competitive local-exchange carriers were a more dominant force in the competitive landscape, but the CLECs suffered from unsustainable business models. Thus, the sweet spot of the telco market is both large and vulnerable.
Since cable operators are strongly motivated to use their hybrid fiber-coax plant to address the market, the next task is to map the current revenue, with the associated symmetric bandwidth demands, onto HFC fiber nodes. The question: Where does the revenue fall on the plant?
There are several ways to do this. If actual plant maps are used, the addresses of the businesses can be geo-coded and overlaid onto the HFC plant maps. If plant maps are not available, so-called “proxy nodes” can be estimated based on logical groupings of 500 home areas as provided by U.S. Census data. (The analysis has been done both ways, and the results are consistent.)
Across the three cities studied, the results are consistent and very revealing: About 70% of the revenue for commercial voice and data services falls in about 20% of the nodes while touching only about 8% of the actual HFC plant miles.
This clustering presents a wonderful opportunity for cable operators. If the commercial revenue opportunities were randomly scattered or evenly distributed throughout a metro area, targeting would be much more difficult. But commercial zoning has made targeting very straightforward.
In turn, these “commercially attractive” nodes form the clusters that can be targeted in a go-to-market plan.
Dense clustering also has operational benefits. The fact that 70% of the commercial voice and data revenue is clustered in 20% of the nodes allows for cost-effective placement of service technicians.
THE BATTLE FOR CUSTOMERS
In the battle to win customers the challenger in any situation has an uphill battle when competing against an incumbent operator’s business.
Consumers make changes only when the alternative is significantly and obviously better. The voice and data business is mission-critical for commercial customers, so the challenger needs to make it truly worthwhile to make the switch.
Consider the offer of a voice/data bundle in the T-1 space. Suppose two T-1 lines are already installed at a customer premise — one feeding the private branch exchange (PBX), and one feeding the local-area network. The value proposition for the data service is actually easier to assert: offer two or three T-1s for the price of one (this presumes that there are cost-effective technologies available to make such an offer, and there are).
This offer preserves the revenue level and raises the performance level. Additionally, the economics are much better than simply offering a deep price discount.
The value proposition for commercial voice is a bit trickier. The incumbent voice service worked before, and the new service must also work. The so-called “higher performance” offer doesn’t work in the voice market, as it does in the data realm.
Commercial customers don’t want faster voice per se — they want the reliable and flawless voice services they have come to depend on. This highlights the importance of bundling commercial services, using increased data speed as a differentiator while bundling both voice and data into an attractive offer.
The commercial voice market is much larger than data; about 80% of total telecom spending. But the data market is more easily differentiated and is growing at a much faster rate. So how can this be used to figure out which customers to target?
There are several ways to segment the market for targeting purposes:
- Horizontal segmentation. The high-end digital subscriber line market, made up of small businesses, and the low end T-1 market, made up of small and midsized businesses who will, on average, outgrow their current service every year or two, appear to be good “horizontal” market segments. They’re going to need faster data service anyway, so changing service providers is reasonable if cable operators make a much better offer than the incumbent.
- Vertical segmentation. There are vertical-market attack plans as well, with most of the low hanging fruit in the health care, hospitality, education, and government markets.
- Clustering. Aiming at the dense clusters of attractive nodes, using geo-coding techniques, offers benefits of word of mouth, cost-effective sales and marketing, shared plant equipment, installation and field support.
The two-front war is in process, and cable operators have an opportunity to win market share in the T-1 space. With the infrastructures largely in place — and with the natural clustering that makes commercial customers easy to target with success-based investments — cable operators have a natural advantage.
Compare this with the telco situation. Those companies must invest in ubiquitous-style fiber rollouts to win some unknown residential market share in the video market.