Cable operators are suddenly finding riches by doing something they've seemed technologically designed to do from the start: take care of business.
Business services, in particular business telephony, have become a bright spot in the cable industry's finances. As the recession continues to chip away at core residential businesses — as well as such past growth drivers like digital cable, high-speed Internet and even telephony — sales to small and medium-sized business may become more important than ever.
The business category is one of the few areas where subscriber and revenue growth appears to be accelerating. The market for commercial telephony varies by geography, but the five largest MSOs — Comcast, Time Warner Cable, Cox Communications, Charter Communications and Cablevision Systems — have estimated that small and medium-sized businesses in their respective territories spend more than $30 billion annually on telecommunications services.
For the most part, incumbent telephone-service providers have largely served small-business customers with benign neglect, allowing cable companies to move in with lower prices and better service.
At the top three publicly traded cable operators — Comcast, Time Warner Cable and Charter — business-services revenue grew between 15% (Charter) and 41% (Comcast) in 2008. Meanwhile, for those same cable operators, residential high-speed Internet revenue grew between 9% and 11.5% in 2008, down from previous years.
And Comcast, which grew commercial services revenue by 47% in the fourth quarter, only had a multi-line phone product for the back half of the year, compared to a two-line phone the company previously offered.
While most cable operators have been selling high-speed Internet service to businesses for years, the difference now appears to be the telephone product. On its fourth-quarter conference call with analysts, Comcast chief operating officer Steve Burke said the business product really began to take off after July, when the largest MSO in the country began offering an eight-line phone product.
Time Warner Cable's commercial high-speed data customers rose 1.1% in 2008, from 280,000 to 283,000. Business telephony grew at a 500% clip, from 5,000 in 2007 to 30,000 in 2008.
“Business services is a real success story, with very high returns, and we are giving that group the capital they need to expand quickly,” Comcast's Burke said on the February conference call. Capital expenditure for business services in 2008 was about $231 million (out of a total $5.7 billion capex budget), according to Comcast.
Wall Street analysts couldn't be happier. “Clearly there is some good traction there,” said Miller Tabak media analyst David Joyce of business services. “It's just a natural extension, once they got off the learning curve for the residential service on the voice side.”
Couple that with a recessionary climate that is forcing business owners to reduce costs, and the prospects for the business market look better than ever. “The economy is to a degree helping because businesses are looking at every line item, and when they can save money on telecommunications costs, they are going to do it,” said Collins Stewart cable analyst Tom Eagan.
“Phone is growing because of the economic pressures,” Eagan added. “I think the biggest gaps seem to be really in the phone-line costs. That's what we're seeing now; companies would rather cut their phone lines than their employees.”
Cable operators have taken notice of that advantage and are driving home the price/value message in much of their marketing. “Right now, we are talking about smart ways to economize,” said Time Warner Cable New York City Region Commercial Business president Ken Fitzpatrick.
TWC emphasizes the point that the cable company is a hometown business, said Fitzpatrick. “Because we are in the communities and the markets that we serve, we have the capability to sit down with businesses, understand what their needs are and put together a solution that meets those needs.”
While most cable operators didn't want to tip their hand on pricing, cable business-telecom service usually is priced about 15% to 20% lower than the incumbent phone company. In one of its ad campaigns, Cablevision claims that its business double play of high-speed data and phone service is 50% lower than a similar phone company product.
Cable can generally offer a lower price because its cost base is much lower than the telcos — business services run from the same network as residential products and are more efficient than older telco plant — and because, in the past, telcos have subsidized residential services by charging business customers more.
But some telcos are beginning to step up and take notice — in New York, Fitzpatrick said, Verizon “has gotten very aggressive with their small-business offering, where they are calling out cable directly.”
For example, Verizon Communications — which also offers residential video service through its FiOS TV product — is aggressively offering a voice, high-speed data and wireless package to businesses with fewer than 20 employees for between $63 and $108 per month.
Fitzpatrick agreed that the economy is making some businesses look at cable commercial services in a new light. “Everybody is looking at areas to reduce cost and improve efficiency,” he said. “This is an area we can play a part in and give them a higher level of service and put some money back in their pockets.”
But the extent of the economic decline will play a big role, Fitzgerald added. “It depends on how steep the decline goes and how impactful it is to businesses closing their doors.”
Not everyone is playing the price card. At Cox Business, the focus is more on value. “We're not always lower in price,” spokesman Todd Smith said. “We think the total value proposition is better in the long run. We think we deliver better service, we have local sales and service teams in all of our markets and we're usually competitively priced. We don't espouse to be a certain percentage below the competitor.”
Smith also stressed the ability to go after larger customers — traditionally, cable has been tethered mainly to small businesses — by offering advanced-networking capabilities like Ethernet service. Now, with products like Metro Ethernet, virtual private networks and other advanced business services, Cox is able to tap into larger businesses like Rappahannock Goodwill Industries, a nonprofit in Chantilly, Va., with 323 employees.
“It's really our primary product because we don't have a large base of legacy-networking customers that they [incumbents] do,” Smith said of Cox's Ethernet technology. “It's a huge opportunity for our customers to move to a more efficient networking technology. They're not getting that message from their provider.”
Business customers have become the primary focus of cable companies, viewed as a prize in a war that will only become more intense. While phone companies could still match cable's pricing, cable operators' infrastructure is more efficient. And revenue growth from the sector doesn't appear to be slowing soon.
At TWC, commercial revenue was up 20% in the fourth quarter of 2008 and closed at nearly $800 million in sales for the full year. The company expects its commercial business to grow at least another 20% in 2009, twice as fast as its residential business.
Data and telephony revenue at Cablevision's Optimum Business unit was up 40% in the fourth quarter. And though Cablevision does not separate its business customers from its residential subscribers in financial filings, chief operating officer Tom Rutledge said on its fourth-quarter conference call that the MSO activated 250,000 phone lines for small businesses in the fourth quarter.
At Cablevision Lightpath, a separate unit that focuses on large business customers, operations are still growing at a rapid clip. In the fourth quarter, Lightpath's revenue grew by 16.2% to $65.2 million, and adjusted operating cash flow rose 20.6% to $22.8 million.
That trend is holding for many operators offering business telephony — Smith said Cox Business is still seeing 20% quarterly customer growth on the commercial side and recently passed the 600,000 commercial-phone-line milestone. Revenue for the unit of the privately held company was up about 16% in 2008 and is expected to climb to $1 billion by 2010.
The growth curve is widening even for those later to the commercial-phone game. Comcast only began offering a business-phone product about 18 months ago. The cable giant estimates the market for telecom services in its footprint is between $12 billion and $15 billion annually, with 5 million small businesses with less than 20 employees in its service territory. So far, the MSO has only scratched the surface in reaching its goal of capturing 20% to 25% of that business-telephony market.
“The main way that we sell now, our real goal, is to go in and deliver data, voice and video to small businesses,” Burke said on Comcast's fourth-quarter call. “There are many, many weeks voice is growing faster than data, but really as a strategy, we are trying to be the entire business solution. What is happening now is when you can offer voice as well as data, it tends to accelerate the data, and the voice is obviously a brand-new revenue stream.”
Burke said that Comcast is attacking the market by offering a better product at a better price.
“Very frequently, we are able to offer a better value than the existing RBOCs and traditionally, the RBOCs have targeted larger accounts and not been able to service the smaller accounts,” Burke said. “And we really concentrate on the small and medium-size businesses and provide a great alternative for them.”
The industry has been helped by cable's success in residential telephony. “There is such a halo effect from the residential business to the commercial business and the fact that we've got just about 4 million phone customers,” Fitzpatrick said. “Those are 4 million phone lines that have solidified the fact that cable is a viable solution for your phone services.”
While business telephony continues to gather steam, cable operators also see opportunities for video with business customers. Each of the larger MSOs is targeting a video product, mainly for doctor's offices, restaurants and bars and other businesses with waiting rooms. And the operators are looking for innovative ways to make video a compelling and economical business purchase.
“We're trying to design packages that are even more attractive to them [businesses]; things like packages without sports, for example, that would reduce some of their costs,” Smith said. “Some waiting-room environments may not have the desire to have all the premium sports channels, but they may want some of the basics to entertain their customers.
“We're trying to do things like restaurant/bar packages, a financial-only type package, a family-type package, things like that.”
Time Warner Cable also is looking at ways to target video for its business customers.
“The need for real-time news and information is probably at an all-time high,” Fitzpatrick said. “And there probably is no better way to get that than cable TV.”