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Cable Sets Business Sights Higher

Alan Breznick
11/30/2009

Despite the Great Recession, cable operators are still making notable strides on the business services front. Over the past year, all five of the biggest MSOs in the U.S. have notched sizable gains in commercial services revenue even as their overall revenue growth has flattened out.

In the third quarter, for instance, Time Warner Cable Inc. (NYSE: TWC) reported its commercial services revenue climbed to $236 million, up 15 percent from the year-ago period – nearly four times the increase in its residential and overall revenue. Although TWC's commercial unit accounted for a mere 5 percent of its total revenue in the quarter, business services generated 19 percent of the company's total revenue growth.

Similarly, Comcast Corp. (Nasdaq: CMCSA, CMCSK) reported that its commercial service revenue surged to $216 million in the third quarter, up an impressive 49 percent from the year-ago period. In contrast, the giant MSO's overall revenue edged up a mere 3 percent.

What's more, Cox Communications Inc. said it remains on track to hit $1 billion in commercial services revenue this year, which would make it the first MSO to do so. Privately owned Cox took in an estimated $853 million in business services revenue last year, up 16 percent from its commercial haul in 2007.

Even Charter Communications Inc. , typically the laggard among the five largest MSOs, recorded a healthy commercial revenue increase in the third quarter. Charter reported that its business services unit generated $113 million in the summer quarter, up 13 percent from a year earlier, as it rolled out more voice products and more customers opted for its multi-product bundles.

The big question now is whether cable can continue to make such great strides as the economy improves and the incumbent telcos start to fight back. As we'll discuss at this week's The Future of Cable Business Services event in New York, cable operators aim to maintain their momentum by rolling out more advanced phone and Ethernet services, expanding further into the cellular backhaul market, installing more fiber links to commercial customers, and introducing targeted business video services, among other things.

In addition, cable operators are generally setting their business sights higher, pursuing firms that are larger than the neighborhood pizza shops, dry cleaners, restaurants, law firms, medical offices, and other small, family-owned retail and service establishments that they've wooed up till now. For example, Comcast is now expanding its sales efforts to companies with 20 to 250 employees, after initially focusing on smaller firms. The nation's largest MSO estimates that these larger companies represent a fresh $10 billion to $15 billion market opportunity.

As a result, cable operators are still boosting their capital spending on plant and equipment upgrades for commercial customers, even as they're slashing their overall capital budgets. Over the first nine months of the year, for instance, Time Warner Cable hiked its commercial capex by a whopping 60 percent, while cutting its much larger residential capital budget by 16 percent.

Will these strategies succeed? Can cable become a strong contender for the telecom budgets of midsized and larger firms? Or will the industry's commercial services market share – still no more than a measly 3 percent – plateau at that low level as Verizon Communications Inc. (NYSE: VZ), AT&T Inc. (NYSE: T), Qwest Communications International Inc. (NYSE: Q), and the other telcos wake up to the budding cable challenge?

We will be addressing these questions and many more at our third annual The Future of Cable Business Services event. So, if you can make it to New York, join us at the Westin Times Square Hotel on Thursday. If not, then tune in for the live keynote presentation and roundtable discussion that will be Webcast on Thursday afternoon. Hope to see you there!

— Alan Breznick, Senior Analyst, Heavy Reading

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