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Cable Operators Profit from Taking on Business Data Headaches
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As technology becomes more complex for companies, businesses big and small are seeking someone else to deal with the headaches of email, security, phone service and data connections.

Cable operators are racing in with a remedy of ever more advanced offerings, such as information-technology management, website maintenance and data-hosting services. And while they are stealing share from telephone companies, many believe this market has huge potential for organic growth.

Cable’s business services are nothing new, but they are now on a steeper growth curve, thanks to the more sophisticated needs of commercial customers. In the last three years, revenue from commercial services has more than doubled. The top five cable operators -- Comcast, Time Warner Cable, Cox Communications, Charter Communications and Cablevision Systems -- reported a combined $6.7 billion in 2012, up 115% from 2010’s $3.1 billion.

MSOs across the country see their biggest growth prospects not only in attracting larger enterprises to the fold, but in squeezing additional dollars from their traditional small-business base.

At Cox Business Services, the commercial telecom arm of Cox Communications that began in 1997, senior vice president Phil Meeks said about 80% of Cox Business’ revenue still comes from companies with 19 employees or less.

Cox, one of the first MSOs to provide commercial services — high-speed data service in Hampton Roads, Va., 23 years ago — generated about $1.4 billion of commercial services revenue in 2012, up 20% from $1.2 billion in 2011. The Atlanta-based MSO expects to increase that total to $2 billion by 2016.

Cox is about two years into a five-year plan started in 2011 to achieve that revenue goal, and Meeks said small business, which currently represents about 80% of Cox Business’ customers and 65% of its revenue, is an important part of its growth plan.

“If you look at what I need to do to bring in $1 billion in additional revenue in five years ending in 2016, at least one half of that $1 billion will come in from this segment,” Meeks said. “We’re building products and services specifically designed for those businesses.”

Those products include beefedup versions of earlier offerings, such as its Voice Manager hosted IP voice system (originally launched five years ago) and its two-year old Cox Business Internet high-speed Internet connection for business, which delivers speeds of between 50 and 150 Megabits per second. In hosted IP, the equipment, servers and services are contained within the provider’s own facilities, which then manages calls and routes them to the customer’s existing telephony system and equipment. For example, Cox has layered hosted email storage and hosted security on the CBI product in the past two years, Meeks said.

“We’re stacking more value on that platform,” he said.

Meeks is most excited about Cox’s new IP Centrex product, which it has rolled out to three markets — New England, Las Vegas and San Diego — and expects to be available throughout its footprint by the end of the first quarter. IP Centrex is another hosted telephone service, providing the same features and functionality of a costly private branch exchange telephone switch at a fraction of the cost.

Like other cable operators, Meeks believes there is still ample room for growth for Cox. The total telecom wireline opportunity in Cox’s footprint is about $6.5 billion, Meeks estimates.

One way to grow revenue organically is to offer more sophisticated services to small business.

“The common thread through those companies is they don’t typically have a high level of IT expertise, they don’t typically even have an IT staff, they don’t have capital dollars to invest in IT,” Meeks said. “My vision of the future is to move from providing tiered communications services to managed communications services, to managed applications around the cloud and things like that. We’re moving down that continuum right now.”

But while upselling existing customers is good for some MSOs, for most of the sector large customers are where the next phase of growth is, Wunderlich Securities cable analyst Matt Harrigan said. “In general, if you want marketshare penetration, having an undue focus on those you have already signed up seems arbitrary,” he said.

Larger business customers who may have been reluctant to give over all or a portion of their vital telecom services to cable 10 or 15 years ago now consider it a viable alternative, Harrigan added. That’s partly because of more robust networks, as well as cable’s tendency to price business telecom services at 10% to 15% below the competition, he said.

Cablevision Systems’ business-telecom unit, Lightpath, has been serving small-, medium- and large-sized businesses in the New York metropolitan area for more than 20 years. In a statement, Lightpath president Dave Pistacchio said the unit continues to focus on what it believes to be an underserved mid-market, offering cloudbased and managed services to help change the way its clients work.

One clue to cable companies’ business services ambitions can be found in the amount of money they spend on the segment. Capital expenditure budgets for most cable companies have been on a steady decline for the past several years, mainly because the physical plant hasn’t needed a major upgrade in several years and declines in basic video customers have lessened the need for CPE. Within those overall capital expenditures, though, business services capex has gone up over the past three years.

Since 2010, overall capex at Comcast has declined 3%, while business-services capex has climbed more than 45%. At Time Warner Cable, overall capital expenditures were essentially fl at between 2010 and 2012, while business services spending rose 29%.

And even Charter Communications — which has been on a growth tear to take advantage of its industry-low penetration rates in practically every residential service — has increased its overall capex by 44.3% while nearly doubling its business-services spending between 2010 and 2012, from $138 million to $269 million.

For the moment, the money seems to be migrating toward data-hosting centers, where a third party — the cable company — will “host” servers at a neutral site that run aspects of a business’ IT infrastructure, such as email.

“The overall dialogue [for] cable companies has increased over the past few years as they have been looking to data centers and hosting as one of the avenues for getting into the business with enterprise customers,” RBC Capital Markets vice president Hans Lehmann said. “We have seen a number of guys — not making big splashes — mostly it’s either trying to build out assets or their own service platform. It’s a natural transition for these guys.”

Time Warner Cable spent $101 million last year to expand its Charlotte, N.C., campus, including the addition of a 178,000-square-foot data center. In late March, it opened the doors on a 17,000-square foot facility in Manhattan.

At a recent industry conference, TWC chief operating officer Rob Marcus commented on the growing importance of business services, adding that the segment has had 11 consecutive quarters of 20% or more revenue growth. In the fourth quarter, Marcus said 40% of TWC’s overall organic revenue growth was from business services, even though the segment represented less than 10% of the MSO’s base.

“So it really is becoming a big part of our overall growth story,” Marcus said of business services. “As we look to this year, we again have guided to 20% to 25% revenue growth.”

TWC’s business-services strategy is three-pronged — continuing to take share in the small-business realm, moving upmarket to sell telecom services to larger businesses and exploiting its wholesale opportunity, focusing on services like cellular backhaul.

Time Warner Cable is moving toward those goals by adding people — last year, it beefed up its telecom sales force by 50% to about 1,500 employees — and by investing in plant and products.

On the plant side, TWC invested about $350 million in 2012 to connect about 100,000 new buildings and 2,000 new cell towers to its network, Marcus said.

TWC also built out its product portfolio for larger customers, adding Wide Area Network (WAN) services, Metro Ethernet and a dedicated Internet- access product (with speeds of up to 10 Gigabits per second).

Comcast, too, has cast a keen eye toward midsized and large enterprises.

“We’re definitely going to stay committed to the small-business space,” Comcast Business Services vice president of enterprise product marketing Karen Schmidt said. “We just want to take that same model and do a great job serving the larger business as well.”

Comcast recently launched Upware, a suite of cloudbased business solutions that can be purchased through one integrated Web portal. Using Upware, small and medium- sized businesses can purchase software and equipment from a host of third-party vendors.

Health care, education and regional banks trying to connect data centers and multiple branches have been good customers — Comcast recently signed on a regional bank in Philadelphia with 1,000 employees, Schmidt said.

Another growth area for Comcast, given its big-city market presence, is sports stadiums. “Stadiums where they’re trying to have Wi-Fi, watch a lot of video, they’re also seeing that need for big bandwidth,” Schmidt said.

The small business telecom opportunity is about $15 billion in Comcast’s footprint, according to Schmidt, with another $15 billion for midsized and large enterprises.

“I think businesses are looking for an alternative like Comcast,” Schmidt said. “Some are looking for redundancy, need more bandwidth. That’s a chance to get in the door, proving to those businesses that we can do a great job. And there are other cases where they are switching from old T-1 technology and they are making a choice and moving more of their business to us.”

Comcast purchased Chicago-based telecom services provider Cimco in 2010, a move that many in the cable financial community believed was the start of a flood of acquisitions on the telecom side. While that hasn’t happened — Time Warner Cable did spend $232 million on data-hosting company NaviSite in 2011 — Schmidt said Cimco has provided invaluable insight into the commercial services business. Earlier this year, Comcast began using Cimco’s Naperville, Ill., headquarters as an executive briefing center where it can bring in potential clients and show them what Comcast Business Services can do for their companies.

Waller Capital managing director William Bradley, said the move toward larger customers is logical, given that past commercial-services growth at MSOs has manly come at the expense of other larger telecom players.

Bradley and Waller managing director Steve Soraparu added that while large cable companies have generally held off on commercial services M&A in the past few years, they still believe the future will include a combination of strategic buys and organic growth.

“These guys are going to continue to operate in these markets for a very long period of time,” Soraparu said of cable operators. “We are in the early stages of commercial services for most cable companies. They are looking at this as a long-term play and they so far have just scratched the surface of the opportunity that is available to them.”

TAKEAWAY

Cable operators are offering increasingly sophisticated services for businesses in need of data management.

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