Cable Operators Boost Focus on Midsize Firms with New Services

In recent public presentations at an industry conference in New York and interviews with us, senior business services executives from Comcast, Cox Communications and Rogers Communications all laid out strategies for boosting their companies’ shares of the estimated $140 billion commercial services market. With market analysts seeing the cable industry on pace to take home at least $7 billion in commercial services revenue for 2012, up from $6 billion in 2011, the executives think they still have plenty of room to grow.

For example, Comcast views telecom services for small to midsize businesses (SMBs) as a $20 billion to $30 billion market opportunity in its cable regions. “We're about 10 percent penetrated in that opportunity,” said Kevin O'Toole, senior vice president and general manager-new business solutions for Comcast Business Services. “We've got a lot of room to run."

Cox Business Services, which broke $1 billion in annual revenue in 2010, is headed to bring in $1.4 billion for 2012, said Phil Meeks, senior vice president of the unit. He said Cox aims to hit the $2 billion revenue mark by 2016 by focusing on just a handful of specific areas, including “large locals,” the wholesale business (cellular backhaul) and new market opportunities like cloud-based services. “If you're focused on everything, you're focused on nothing,” Meeks said.

For starters, Cox, which has almost 300,000 business customers in its cable territories, will concentrate on serving such “large locals” as regional universities, government agencies, school systems, hospitals and other healthcare providers, Meeks said. Because Cox is not a national cable player, he said, it makes great sense to pursue deals with companies, agencies and establishments that are densely concentrated in its regional markets. Cox will also focus on drawing in more SMBs by rolling out more cloud-based applications for firms that don’t have IT staff or dedicated IT budgets, Meeks said.

Like several other major cable operators, Cox has already begun offering hosted voice services and online backup and security for its commercial clientele. Without disclosing specifics, Meeks indicated more such services are on the way. Using such new products as cloud-based services, he said, Cox can expand its commercial market opportunity over the next four years.

Further, Meeks said, Cox will keep focusing on its core market -- firms with 19 or fewer employees. He said the cable operator aims to double its share of this market over the next few years, even as it competes against AT&T, Verizon and CenturyLink, by rolling out new products. He predicted half of Cox’s revenue growth will come from this market segment.

Cox Business officials are also thinking about how their division will evolve beyond 2016. “It’s critical that we move down that continuum of redefining the business to make the opportunity bigger,” Meeks said, noting that Cox Business Services “will look a lot different in 2017 than we do now.” He said Cox will pursue a variety of ways to achieve that goal, including M&A, partnerships and organic growth. He declined to speculate about the M&A opportunities that Cox might consider.

Comcast also is very focused on delivering cloud-based computing and telecom services to commercial customers, according to O'Toole. He said Comcast, which is on track to break $2 billion in commercial revenue for 2012 and approach $3 billion in 2013, views the rise of cloud-based services as one of three key trends in the business services market. “God bless the cloud,” he said. “The cloud changes everything. It’s transforming how businesses consume IT services."

Comcast’s first major entry into the cloud is Business Voice Edge, a hosted PBX service that partly grew out of the cable operator’s acquisition of New Global Telecom in 2010. For this service, Comcast is supplying commercial customers with the cable modem, router, firewall and phones. Everything else, including the supported apps and services, resides in the cloud. Although Comcast hasn’t revealed how many customers have signed up for Business Voice Edge so far, O'Toole said the product is becoming increasingly popular with multi-site businesses.

The growing popularity of such cloud-based services is also driving up commercial customer demand for more bandwidth. O'Toole said Comcast is addressing this demand by rolling out Metro Ethernet service over both its DOCSIS-powered coax network and its newer, fiber-fed network for larger SMBs. “Small businesses need bandwidth that a T1 and copper can’t provide … and they need it right now,” he said.

O'Toole said Comcast has now deployed fiber-fed Metro Ethernet in more than 20 markets to serve midsize businesses with 20 to 500 employees, including local hospitals, school districts and government customers. He said this mid-market section now accounts for about 15 percent of his division’s revenue. “Metro Ethernet is the center of gravity” for this mid-market group, he said.

At the same time, Comcast is moving ahead with plans to offer Ethernet services over its widely deployed hybrid fiber/coax plant. O'Toole said Comcast has deployed Ethernet-over-coax (EoC) services, admittedly “without much fanfare,” in nearly a dozen markets, including Philadelphia, Boston, Pittsburgh, western New England, Atlanta, Chicago, Denver, Portland, Ore.; Seattle, and northern California. That strategy, he said, will “dramatically expand” Comcast’s addressable Ethernet services footprint.

While earlier U.S. cable EoC deployments used older DOCSIS 2.0 technology to offer dedicated 2 Mbps upstream/downstream connections, Comcast is relying on DOCSIS 3.0 technology to deliver higher speeds, including tiers of 4 Mbps and 6 Mbps. The higher speeds will come in handy as Comcast rolls out more cloud-based services for business customers.

Rogers, meanwhile, is looking to team up with U.S. cable companies to serve more large enterprise firms that have facilities spread throughout the North American continent. Andy Striegler, vice president-carrier services for Rogers Business Solutions, urged U.S. cable providers to link up their networks and develop their wholesale businesses so they can compete with incumbent telcos and competitive local exchange carriers for large commercial prospects.

"Moving from servicing small businesses to ‘large locals’ to ‘large regionals’ will drive the need for a wholesale model,” Striegler said. “You have to have the scale and understand the value proposition.” Striegler contended that cable operators have forfeited too much of the lucrative enterprise market to incumbent telcos and CLECs.

Unlike most cable providers, he said, the telcos have been interconnecting their networks for years and have developed standards and business processes for doing so. So now, he argued, it’s time for cable providers to catch up by making physical network-to-network interconnections, striking business agreements and integrating business processes. In particular, Striegler wants the cable industry to come up with its own approach to interconnecting networks so it can serve the many larger businesses that require out-of-region connections. He appealed to the cable players to forge such interconnection agreements with Rogers to their mutual benefit. “Moving up-market, we get into enterprises such as banks with services across the country,” he said. “We have to address issues of network coverage, and the fact we don’t have that coverage everywhere they want to go."

Striegler argued that cable operators could capture a bigger chunk of the $140 billion business revenue pie -- he claimed as much as $100 billion would be addressable -- if they reached more deals for interconnecting networks and selling wholesale services to each other. He noted that Rogers’ service, which entered the wholesale market several years ago to pursue midsize and large businesses, now reaps about C$100 million a year from its wholesale activities. “We're in wholesale to support the growth of our enterprise business,” he said. “We're focused on the medium- and large-sized companies.” He also noted that RBS has “learned quite a bit” from working with other Canadian cable companies like Shaw Communications. “We have gone from 17 Gig-E interconnects to more than 60,” he said.