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Dialing for Business Bucks

Alan Breznick
12/4/2007

It looks as if 2008 may actually be cable's breakout year for commercial telephony services. Both of North America's two biggest MSOs, Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Time Warner Cable Inc. (NYSE: TWC), are honing in on business voice as the next really big product because of the market's huge size, growth, and promise.

Take Time Warner. The No. 2 MSO is now rolling out commercial VOIP service in more than a dozen regions. In its most recent move, the company launched its "Business Class Phone" product in the New York metro area late last month, making the Big Apple its 20th market of the year. The company's plans call for extending service to the rest of its markets by the spring.

"This year we're focusing on getting the markets launched," Ken Fitzpatrick, senior VP of business services for Time Warner Cable, told us in a recent interview. "2008 is really the year we're looking to scale." He's aiming to capture at least 20 percent of the $13 billion commercial telephony business in Time Warner's markets over the next few years.

Or consider Comcast. The No. 1 MSO is gearing up to roll out commercial VOIP services throughout its markets, after dedicating $250 million for plant upgrades to prepare its systems for business telephony and related services this year. Comcast plans to spend up to $3 billion on the upgrade and rollout effort over five years.

"This is a great, wonderful opportunity," says Bill Stemper, president of Comcast Business Services. Speaking at a recent symposium on business services sponsored by the Society of Cable Telecommunications Engineers (SCTE) (SCTE), he argued that cable operators have "been given a gift, and I believe in treating gifts with respect." By 2011, he's shooting to pick up $2.5 billion in commercial services revenue, with voice generating at least 51 percent of the total.

In particular, the two big MSOs are seeking to lure small to medium-sized businesses (SMBs) away from the incumbent telcos. They view SMBs as an extremely lucrative target group frequently within easy reach of their residential HFC networks. They also see them as underserved phone customers especially ripe for the taking.

"We really have a sweet spot at the small end," Stemper said. In fact, Comcast calculates that its national footprint covers 5 million firms with fewer than 20 employees each. These firms spend $12 billion to $15 billion on phone and data services each year, with voice again making up the lion's share, according to Stemper.

Of course, it may not be quite that easy. For one thing, business customers are decidedly pickier about phone service, features, and reliability than residential subscribers. For another, businesses typically expect much higher-quality customer service than consumers. So cable operators can't just take their residential VOIP packages and repurpose them for commercial users.

"I think, in many cases, we've pushed it to the limit," noted Fitzpatrick, speaking at the same event as Stemper. "We're hitting that threshold of needing to look at the infrastructure, technology, back office… We've got to look at our infrastructure and look at areas to invest in," including "hardware, software, and human capital."

Yet cable operators seem convinced that they can at least cut into the phone companies' commercial haul. Noting that Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T) both take in more than half of their income from business users, they're hankering to do the same.

"This is a proven model," Stemper said. "Time Warner, Cox Communications Inc. , Cablevision Systems Corp. (NYSE: CVC), and Charter Communications Inc. are proving we can do this… We just have to embrace it and take it to a new level."

— Alan Breznick, Senior Analyst, Heavy Reading

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