Over the last ten years, commercial services (a.k.a. business services) have grown to fill a critical revenue growth need for cable operators. We will be taking a closer look at multiple system operator (MSO) performance and opportunities in commercial services in this four-part series over the next few days. In the first part today, we'll look at what's happened since the early 2000s, when many operators organized formal commercial services teams. Since then, subscriber growth and small business demand have fueled double-digit revenue growth.
Cable's commercial services initially met a key area of demand for small businesses. Cable operators successfully challenged the national telcos by providing high-speed data (HSD) services at a better price and at higher speeds than telco DSL services. Although the telcos have responded with their own high-speed options (e.g., Verizon Fios and AT&T U-Verse), these services cover a fraction of the footprint of cable's hybrid fiber-coax (HFC) DOCSIS infrastructure. Other new entrants, like Google (Nasdaq: GOOG)'s Google Fiber initiative, will face similar cost and deployment challenges to achieve the geographic scale of the MSOs'.
As a case in point, the map below compares the franchise areas of Verizon Communications Inc. (NYSE: VZ)'s Fios service with the three dominant cable operators in the mid-Atlantic. Like AT&T Inc. (NYSE: T)'s U-Verse product, Fios is only deployed in the largest metros that the cable operators cover. Furthermore, even where they do provide these fiber services, AT&T's and Verizon's serviceable areas are typically just a fraction of the MSOs.
Small businesses, defined as one to 20 employees, have caused a surge in demand for data capacity and throughput at an affordable price. These needs align well with cable's capabilities in both product and service, given that the MSOs' existing HFC networks have the ability to deliver faster data speeds over a large geographic footprint.
Although small business was cable's natural starting point for commercial service, operators are now vigorously pursuing large, profitable customers in the mid-market and enterprise segments. As the market share opportunity in small business begins to tighten with higher penetration, winning a share of the large-customer segment is critical if MSOs are to maintain their current growth trajectory.
To contextualize the MSOs' growth in the commercial segment, the charts below illustrate revenue and subscriber growth over a multi-year period.
The Comcast Business profile above, illustrating the shift from small business to midsized and enterprise customers, is evidence of cable's growing success at moving up market. Moreover, the MSO's overall trend is consistent with similar success across the industry.
The chart below illustrates the drivers of MSO revenue from 2004 to 2015 from a volume (customer growth) and rate (revenue per customer) perspective. From this picture, it's clear that the average rate was a significant revenue driver during the recent six-year period from 2010 to 2015. This is a contrast with the six years prior (2004 to 2010), when customer growth, or net new subscribers, drove most of the revenue increase, albeit at a lower overall level.
To be sure, some of the growth in rate is due to increasing small business customer demand for faster data speeds, as well as the cable operators' success in selling service bundles (mostly HSD with voice) to the small business segment. However, a large portion of the growth in rate is due to the higher monthly spend of mid-market and enterprise customers as MSOs win greater share in this critical segment.
Using another single company example, the former Time Warner Cable Business Class (TWCBC), which is now part of Charter Communications Inc. , has increased its average rate by more than 8% per year since 2012. Combined with similarly impressive customer growth, TWCBC has boosted its total revenue by 20% per year since 2012. Similar to other MSOs, TWCBC has moved aggressively up market by leveraging its presence in enterprise-friendly metros like New York, Los Angeles, Dallas and Charlotte.
Building on the significant inroads made in the SMB and mid-market segments, cable operators are increasingly setting their sights on enterprise customers. However, the market dynamics in the large business space necessitate new capabilities in product, service and support. Plus, large, entrenched telcos, both ILECs and CLECs, have controlled the mid-market and enterprise business segments for many years. They have developed specialized capabilities that meet customer needs.
These factors, along with the length of their relationship and the degree of integration, create unique switching barriers for the segment. In addition, these customers' needs, as well as the decision-makers' buying journey, are significantly different from small business.
So how are cable operators addressing the challenges of moving "up market," and how can they accelerate success in the mid-market and enterprise segments? Our next article tomorrow will focus on how MSOs can take steps to address the unique needs and service demands of mid-market and enterprise customers.
— Mark Chinn, Partner, CMG Partners