Wave Broadband is in the middle of an aggressive expansion of its fiber-optic network meant to significantly boost its presence in the growing commercial-services market, a business that combined with residential broadband could overshadow the video business in the next three years.
Wave, a Kirkland, Wash.-based independent cable provider, secured $130 million in bond financing last month to help add about 1,500 route fiber miles to its existing 5,000 route fiber mile network. That enabled the 420,000-subscriber Wave to extend its reach in the growing high-tech business communities in such markets as Seattle; Portland, Ore.; and San Francisco.
The fiber extension will enable Wave to offer Ethernet connectivity and private branch exchange (PBX) functionality to business customers throughout its service territory.
“We’re building where fiber isn’t,” Wave chief operating officer Harold Zeitz said.
NO VIDEO IN BUNDLE
The additional fiber also will allow Wave to bring data speeds of 1 Gigabit per second to about 10,000 additional residential customers in Seattle this year, with expansion into San Francisco and other markets in 2015 and beyond.
The company is taking a different tack with its residential Gigabit service, Wave founder and CEO Steve Weed said — it isn’t including traditional video in the bundle.
Wave offers 1-Gbps speeds to about 20,000 of the 650,000 homes it currently passes, packaged with phone service but not traditional cable-TV service.
For the moment, Wave is encouraging those customers to obtain access to over-the-top streaming services like Netflix and Hulu on their own, he said.
“We’re not franchised for cable [in those areas],” Weed said. “We thought about it and said, ‘Why bother?’ We’re not making any money on it anyway.”
With programming costs rising and more and more content becoming available online, Weed has long predicted that video would take a less-important role in the business.
He said that with about 10% of gross profit coming from video, Wave is basically offering video at cost to its subscribers to help drive the other businesses.
“It’s the way that we’re going,” Weed continued. “Other than new homes being built, we’re not expanding the legacy cable business; we’re rapidly expanding the fiber-to-the-premises business. Legacy cable is still a good business, and we love it — especially for the broadband piece — but we’re going to look much more like a fiber business in three years than we are a cable company.”
Weed said his company already deploys TiVo set-top boxes that include Netflix apps and is working toward offering a TiVo box that will give customers access to over-the-air broadcast channels, similar to its Roamio product.
Weed said he foresees a time in the very near future when half of Wave’s revenue comes from commercial services and the other half from residential. On the residential side, he said he sees 40% or more of revenue being derived from broadband services, with 10% or less from video.
Like other cable operators, Wave’s commercial business is growing at an accelerated clip — about 25% per year — and Wave is beefing up its management team to help manage the growth.
Wave has about 100 people dedicated to the fiber build, headed by longtime executive Steve Friedman, who was recently tapped as executive vice president of fiber design and construction, and Zeitz, former president of Classmates.com.
Weed estimated that total business telecom spend in his territory is in the billions of dollars annually, with Wave capturing less than 1% of that market. Although bigger companies such as Qwest Communications, Comcast and other competitive local-exchange carriers (CLECs) have dominated the business-telecom space, Wave has managed to carve out a niche with government agencies, hospitals, medium-sized and enterprise businesses and providing IP transport and back haul services for cellular companies between towers.
And the market is growing rapidly. Wave, which has about $350 million in annual sales (15% of that from the commercial telecom business), has been preparing for the telecom boom for years.
The company has made about 17 acquisitions since Weed founded the company in 2002, but has focused on acquiring data centers and dark fiber lately.
“Unlike in the old days when we were buying cable companies and tying them together, most of our focus has been on buying fiber companies in the markets we are looking to expand to,” Weed said. “We’ll either build fiber networks based on customer demand or acquire companies that have fiber where we want to build it. We’ve definitely accelerated the buildout and that is what is driving the need for additional funding. M&A is probably going to continue at a similar pace as in the past or maybe a little more.”
Waller Capital president Garrett Baker, who has advised Weed and Wave Broadband on its sale to Oak Hill Capital and GI Partners but was not involved in its latest financing, said the trend among smaller cable operators has been to focus on business services and data transport to differentiate them from the competition. “Wave is definitely on the cutting edge of this trend and they have been for at least five years,” Baker said. “The success that they’ve had in commercial services in and around their footprint is a big reason that other midsized operators are following their lead.”
Baker said Wave has been particularly aggressive because of its geographic location. Wave’s markets include the Silicon Valley in California and the tech corridor in Seattle. For example, in downtown Seattle alone, Amazon.com employs about 20,000 people in a 100,000 square-foot facility.
While Wave isn’t on its own in those markets — its chief competitors are telco Qwest Communications and cable giant Comcast — it has managed to squeeze out a niche in what is becoming an increasingly large pie.
But with its more robust fiber network, Wave may have the upper hand compared to other smaller cable operators, Baker said.
“Other midsized operators don’t necessarily have as many commercial growth opportunities as Wave,” Baker said. “But there is still a lot of low-hanging fruit in all cable markets on the business-services side, and small operators are increasingly going after that business aggressively.”