True Contenders: Cable MSOs & Business Communications Services

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1 V2MTM TM vision2mobile s p e c i a l r e p o r t True Contenders: Cable MSOs & Business Communications Services Original Research from NPRG

2 TM s p e c i a l r e p o r t V2M TM Table of Contents SECTION 1 CABLE MSOs & THE BUSINESS SERVICES MARKET... 3 vision2mobile SECTION 2 BUSINESS SERVICES OFFERED BY CABLE MSOs... 4 New Technologies Enable Cable Operators to Create Business Services...5 Future Evolution of Cable s Business Services Portfolios...6 SECTION 3 CABLE SECTOR STRATEGIES FOR BUSINESS SERVICES... 8 Market Segmentation Strategies...8 Organizational Strategies Network Strategies Marketing Strategies Product Strategies Wireless Strategies Growth Strategies (M&A) SECTION 4 COMPARATIVE ANALYSIS - TELCOs VS. CABLE MSOS Strengths of Cable MSOs in the Business Services Market Weaknesses of Cable MSOs in the Business Services Market Opportunities for Cable MSOs in the Business Services Market Cable MSOs Comparison to Other Provider Sectors SECTION 5 OUTLOOK & FORECASTS...25 The Cable Sector s Opportunity in Business Services The Cable Sector s Future Prospects in Business Services Overall Outlook V2M True contenders: cable Msos & business communications services

3 SECTION 1: CABLE MSOS & THE BUSINESS SERVICES MARKET Cable system operators have evolved from deliverers of one key consumer service multichannel television to provide the full spectrum of telecommunications services, including Internet access and home telephone. Concurrent with the broadening of their product portfolios, the major cable MSOs (multi-system operators) invested tens of billions of dollars upgrading and extending their physical plant, implementing back office systems and processes to handle the new services, and cultivating marketing and sales experience within and between their respective companies. With these new tools in hand and their historical consumer customer base virtually saturated, cablecos have set their sights on the market for business communications services. Heretofore the bastion of incumbent LECs (especially the RBOCs), competitive LECs, and a variety of national and regional business segments specialists, the commercial market has been practically virgin territory for the cable sector. Every gain in the business market adds incremental revenue on top of a cableco s primary streams, the ones for which its network was originally built. Moreover, most of the major cablecos gains come at the expense of their biggest competitors: AT&T, Verizon, and Qwest. The cable sector s aggressive moves in business segments over the past decade, which have intensified since about 2005, have generated intense interest within the industry. Incumbent telcos recognize that the cablecos have network depth not unlike their own, as well as products for the smallest business segments that are quite comparable in their capabilities, threatening longstanding ILEC cash cows. CLECs perceive a new challenge to their own erstwhile revolution, forcing them to reevaluate their customer strategies and marketing tactics. Meanwhile, vendors envision a whole new category of operator customers that need their wares to power business-grade capabilities. This report quantifies and analyzes this emerging battleground. Drawing on more than a decade and a half of NPRG analysis of the relevant sectors CLECs, ILECs, Fiber Network Operators, and Wireless Service Providers, in addition to cable system operators themselves the report spells out the who, what, and how much of the cablecos foray into the business services market. True contenders: cable Msos & business communications services V2M 3

4 SECTION 2: BUSINESS SERVICES OFFERED BY CABLE MSOS Cablecos serve businesses of every size, from one-person shops to massive data centers and offices of global corporations. Like their telco competitors, they offer products of every type, including video, voice, data, and advanced services. Although operators specific service selections vary, and no company offers every service, their typical product offerings and defining characteristics within the generalized service categories are summarized in Figure 2.1, below: Figure 2.1 Business Services Offered by Cable MSOs Category Services Offered Cable modem high-speed Internet access Asymmetrical bandwidth (downstream faster than upstream) Maximum speeds (downstream) typically range from a few Mbps to 30 Mbps or more Data Voice Metro Ethernet Symmetrical bandwidth Maximum speeds typically range from 10 Mbps to 1 Gbps E-DIA (Ethernet dedicated Internet access) EPL (Ethernet Private Line), a point-to-point service EVPL (Ethernet Virtual Private Line), point-to-multipoint service for hub-and-spoke architectures ELAN (Ethernet LAN), for multipoint architectures Specialized implementations of the above services for niche verticals: financial services, content/media, etc. Voice over IP Single- and dual-line (i.e., entry level service) Multi-line, up to 8 to 12 lines Trunk services, scalable to dozens/hundreds of lines: SIP, IP-PBX Hosted services: IP Centrex Traditional telephony, including TDM emulation Voice T1 trunks and NxT1, T1 PRI, etc. Video TV for Businesses Cable TV (analog) and Cable Digital TV, including pay-per-view (a/k/a video on demand) Installed and engineered as required: for multiple rooms (hospitality, restaurant) or single room (office, waiting area) Metro Wi-Fi Base stations distributed throughout a metro area to create a coverage umbrella and roaming hot spot Wireless Mobile data Broadband-like speeds delivered wirelessly: 3G and 4G As of 1H 2010, offered by cablecos primarily through partnership with Clearwire and Sprint Fixed Wireless Speeds akin to wired access lines (NxT1 and above) Managed Security Managed Services and Applications Enterpise Network Planning and Design Web Hosting Remote Data Backup Storage up to ~10 GB Retention for up to ~30 days Not currently a central focus of Cable MSOs Source: New Paradigm Resources Group, Inc. 4 V2M True contenders: cable Msos & business communications services

5 New Technologies Enable Cable Operators to Create Business Services The cable sector has capitalized on a series of technical developments over the past two decades. CableLabs, a research and development organization modeled on Bellcore, the RBOCs R&D consortium, was founded in 1988 by leading cable system operators and has been the fountainhead of the sector s new technology and services ever since. It completed its initial data networking standard, DOCSIS (Data Over Cable Service Interface Specification), in Standards-based cable modem equipment and services created an opportunity for cable operators to offer Internet access services and compete with Internet service providers (ISPs) and telcos which were likewise trying to bring their digital subscriber line (DSL) broadband technology to the mass market in the then-emerging service category. CableLabs subsequently announced improved, faster versions of the DOCSIS specifications in late 2001 (DOCSIS 2.0) and late 2006 (DOCSIS 3.0) that exceed the nominal maximum for comparable telco-provisioned DSL. Figure 2.2 below illustrates the trend of these developments and speed gains over time. As of early 2010, DOCSIS 3.0-enabled business services based on operators existing cable plant have been launched for general availability in many markets at 30 to 50 Mbps downstream, and even upwards of 100 Mbps in a few test areas. Over the next few years, the average maximum available speed of HFC-based business services will continue to rise and by 2014 is projected to exceed 100 Mbps. This will help them keep pace with telcos DSL and Ethernetover-copper services. Where even higher speeds are required, the sectors will compete using basically identical media and technology: fiber and Metro Ethernet. Figure 2.2 Average Maximum Bandwidth of MSOs HFC-based Cable Broadband Bandwidth to Business Customers ( ) Source: New Paradigm Resources Group, Inc. True contenders: cable Msos & business communications services V2M 5

6 Using DOCSIS as a foundation, CableLabs next developed telephony standards (dubbed PacketCable ) to enable providers to deliver two-way voice calls. Enhancements in the mid-2000s made providers VoIP calling services compliant with regulations for emergency 911 services and law enforcement surveillance, while improving call clarity and reliability, making them robust enough to stand as head-to-head alternatives to traditional telcos consumer services. In the consumer market, the cable industry holds a privileged position as the second wire into the home the traditional phone line being the first and so the combination of DOCSIS and VoIP had a natural mode of market entry. Using their existing networks of coaxial cable in residential areas, and bolstering them with billions of dollars of investments to increase backbone capacity, deploy fiber optic distribution rings, and re-engineer infrastructure to support bidirectional communications, cable MSOs have been able to bring the two critical telephony services to consumers completely independent of any incumbent carrier facilities. Future Evolution of Cable s Business Services Portfolios Using basic Internet access or video in some industry verticals as a beachhead, Cable MSOs have aggressively moved further into the business services market with the introduction of voice services, most successfully as voice over IP. Data services have grown progressively more robust and support more varied applications, now including multipoint Ethernet and high-bandwidth, low-latency optical transport. Projecting into the near future, , cablecos are likely to introduce some of the same WAN services with support for truly national (inter-regional) networks and productize the 10GigE and 40 Gbps services that are now limited to projects done on an individual case base (ICB) in the largest Tier 1 metros. Voice services, too, will become more sophisticated. In the near term, the large MSOs will be further developing their hosted VoIP services and engineering them to scale for use in the largest Enterprise scenarios. In the slightly longer term, , such hosted products could be coupled with the cablecos emerging wireless services (see Section 6) to create unified communications (UC) services that combine mobile data and voice with software-asa-service (SaaS) or cloud platforms. Like many providers in other industry sectors, cable system operators will continue growing categories of advanced or value-added services that can be sold to subscribers of their core services. The earliest such services were and security tools. More recently, cable companies have added online storage and backup, as well as free or discounted generalbusiness applications. Over the next 2 to 3 years, , a few of the large operators will look to follow the telcos lead and develop initial SaaS capabilities on a success-build basis for certain Mid-size and Enterprise customers; over time, these could be made more robust, scalable, and form the foundation of another push up-market by the middle of the next decade. 6 V2M True contenders: cable Msos & business communications services

7 Figure 2.3 Evolution of Cable MSOs Business Services Source: New Paradigm Resources Group, Inc. True contenders: cable Msos & business communications services V2M 7

8 SECTION 3: CABLE SECTOR STRATEGIES FOR BUSINESS SERVICES At the corporate level, cable companies enter the business services market in order to maximize their return on capital already invested for other purposes namely, to deliver video and triple play services. With in excess of 90% of United States households passed by at least one cable system, the costs associated with starting up local networks have generally been absorbed by the sector: legal costs to obtain a system franchise and negotiate regulatory hurdles, expenses to survey land and obtain rights of way, and general construction costs for buildings, equipment, network components, and labor. Through the mid-2000s, the larger cable MSOs invested additional tens of billions of dollars to increase distribution and access capacity, and to make their systems capable of bidirectional transmission. These investments are sunk. To better their returns, operators can either sell additional or higher-margin services to existing customers or find new customers using existing infrastructure. In their traditional core customer base, consumers, they have introduced new services in recent years: cable modem Internet access and video on demand (VOD) in the late 1990s, packet-based telephone (VoIP) in the early-to-mid 2000s, and high-definition television (HDTV) in the mid-to-late 2000s. Adding new residential customers is more of a challenge, however. Cable systems pass a large majority of residential customers already, so consumers generally have access to their services; at the same time, competition from direct-broadcast satellite (DBS) and incumbent LECs is intense. The battle here is more one of limiting customer defections (minimizing churn) and making the most of the ones you have (increasing ARPU). In contrast, the commercial customer segments are practically virgin opportunities for most cable operators. Every new business customer adds to the top line; the less an operator has to do to provision services for this customer, in the way of building out their network or deploying new equipment, the greater the impact on the bottom line. Market Segmentation Strategies Once the decision to enter the business services market is made, a service provider must identify which customers to target. A cable system operator can choose to pursue prospects based on the size of locations, focusing on either large customers or small ones; or it can orient its strategy around one or two industry verticals, or go after customers regardless of industry. In practice, strategies form at the intersection of the two dimensions (Table 3.1), and providers can pursue a couple of distinct segments simultaneously. 8 V2M True contenders: cable Msos & business communications services

9 Table 3.1 Service Provider Market Segmentation Strategies Size Strategy Large Small Broad Corporate headquarters Manufacturing facilities Call centers Central business districts (CBDs) Telecommuters Home-based businesses Small offices General retail outlets Strip malls Vertical Strategy Focused Financial exchanges & Traders Banks & Insurance companies Hospitals & Medical campuses School districts & Universities Governments Media & Content providers Branch offices: banks, insurance, investments, etc. Doctors offices & Outpatient centers Small schools Source: New Paradigm Resources Group, Inc. Each provider defines these segments differently. Many classify prospects size by location headcount, similar to the establishment size used by NPRG, following the rationale that telecom products (access lines, customer premises equipment) frequently have specifications setting the number of simultaneous users. Others subdivide based on businesses typical monthly spending on telecommunications services, reasoning that it is a more accurate barometer of the complexity and scale of services customers actually need. Similarly, one provider may target all companies engaged in financial services, including insurance and analytical services, while another may so designate only securities exchanges, investment houses, and trading firms. As relatively new entrants to the business services market, cable operators have employed extensive customer segmentation strategies to narrow their initial targets and deploy resources efficiently. Often, cablecos entering the business services market, or a portion of the commercial market, begin by targeting very small businesses which can utilize products originally designed for the consumer market. Where a cableco occupies a unique competitive position that enables it to address the needs of large customers such as Cablevision in New York City it can pursue more of an upmarket strategy. And an operator may have a dual strategy, going after customers both large and small Cablevision, Cox, and Time Warner Cable all have distinct strategies in more than one quadrant of the matrix. True contenders: cable Msos & business communications services V2M 9

10 Figure 3.2 Cable MSO Market Segmentation Strategies Broad Vertical Strategy Focused Small Size Strategy Large Source: New Paradigm Resources Group, Inc. Organizational Strategies Service providers have any number of organizational options available to them, and indeed, even among the largest cable MSOs there is great variety and frequent change in how business services are treated within corporate organizations. Management of business services can be retained at the corporate level, or most decisions can be left to local managers. When management is handled corporately, product specifications and availability tend to be implemented more universally throughout the organization, with market-level managers tasked with executing strategy rather than developing it. Pricing may vary from market to market but is set at the corporate level. Comcast hews pretty closely to this top-down approach. In contrast, the local markets for Cox and Time Warner Cable have more local autonomy. Time Warner Cable services available in New York City or Texas often are not offered in its other markets, for example, and local Cox offices have some freedom to extend promotional pricing on their own. Relatedly, providers must also decide whether to organize their commercial market programs separate from their core consumer businesses. Maintaining a separate business services unit has several advantages related to the commercial market s unique characteristics (see Section 1, The Business Telecommunications Market ). Business services are more complex and may even be delivered over a network separate from an operator s consumer one; the services are used more intensely and require more support to install and maintain; they are far more valuable on a per-delivery location basis; and therefore have a longer, much more delicate sales cycle. On the other hand, if a provider s commercial customer base is not sufficiently large, keeping a separate business unit may be inefficient. At present, the major MSOs manage their business services initiatives more or less independently from their consumer operations (Figure 3.2). The most fully separate are Cox Business Services and Optimum Lightpath, which are wholly-owned subsidiaries of Cox Communications and Cablevision, respectively; in OLP s case, it runs a network entirely separate from its parent company s consumer network. 10 V2M True contenders: cable Msos & business communications services

11 Figure 3.3 Business Unit Separation Among Major Cable MSOs Source: New Paradigm Resources Group As smaller and smaller MSOs enter the business services market, they are likely to manage these initiatives with less separation from their core (consumer) operations. They are smaller companies overall and serve fewer, smaller markets. These operators therefore do not have the scale to justify fully independent units. Too, businesses in their service areas tend to be smaller almost entirely in the small business segment and below and thus have less need for the portfolio scope or complexity of services that usually dictates the formation of a standalone business services unit. So while some operators have rigidly defined units to target consumer, wholesale, and separate business segments (Enterprise as opposed to Small business, for example), smaller operators may coordinate activities for some or all of the business segment together with their consumer operations (Figure 3.4). Figure 3.4 Organizing Around Segmentation Decisions Source: New Paradigm Resources Group, Inc. True contenders: cable Msos & business communications services V2M 11

12 Network Strategies Cable operators have extensive, web-like networks that run throughout their franchise areas, a particularly important advantage in approaching smaller businesses that are not conveniently located in a central business district. On the other hand, because their networks were designed and built with residential coverage in mind, they do not necessarily possess fiber exactly where it is needed. A generalized cable system map is illustrated below (Figure 3.4). The operator s existing fiber optic distribution network is shown with solid blue lines. It branches off and winds through residential areas (shaded green in the figure), connecting to neighborhood nodes throughout the city. Because the necessary physical plant is already in place, SOHO customers, and even larger businesses in the Micro-size and Small business segments, within these areas could be served immediately by the operator, and with no (or negligible) charges for network build. When the network was originally constructed, fiber hit the edges of a few business areas that had some demand for the operator s video services (e.g., districts with restaurants and bars), but it is either not dense or clean enough to support rapid provisioning of service to commercial customers. These areas are shaded yellow, and require small lateral builds (dotted blue lines) and/or cable upgrades to support delivery of commercial-grade services. The operator incurs more costs to initiate service to these areas, and typically requires new customers to pay for build costs, either as a lump sum upfront or amortized over the length of a contract. Finally, there are areas where the network does not currently reach. These are concentrations of businesses (shaded red) that fall outside the operator s targets in the smaller business segments; instead, these are manufacturing and Enterprise locations. Provisioning to the location would first require an extensive, costly build (dotted blue lines), and because it is targeting smaller businesses, the operator may not even have products of interest. These areas are thus passed over and left undeveloped for the time being. Figure 3.5 Generalized Cable System Distribution Network and Addressable Footprint Source: New Paradigm Resources Group, Inc. Map image: Google Inc. 12 V2M True contenders: cable Msos & business communications services

13 It is within this context that cable operators evaluate prospective opportunities in the commercial customer segments. If a location requires fiber-based service but is not on or very near the fiber network, the operator evaluates the scenario using success build criteria: would the return from the single customer opportunity be enough for the build to pay for itself and guarantee the provider some profit, or alternatively, could additional opportunities arising from the build be sufficient? Marketing Strategies In general, cable MSOs have leveraged the brand equity from the residential side of their business, albeit judiciously creating an association with an established, well-financed operator can be a big plus when dealing with business customers, but being equated with consumer-grade services (and frivolous entertainment ) can be an even bigger negative. The key components of cable MSOs business services strategies are: Recognition: Raise awareness of the operator as a business services provider; Empower Customer Choice: Present the operator as an alternative the alternative to the phone company ; Network Reach: Demonstrate that the operator has extensive reach, beating competitors (except, arguably, the incumbent LEC); Network Diversity: Remind customers that because the operator s network grew separately from the legacy PSTN, it runs different routes than the incumbent LEC s or even competitive LEC s it offers true physical diversity for disaster recovery planning; Quality: Establish that operator delivers enterprise-class service levels, e.g. VoIP is a managed digital service rather than best effort over the public Internet; preempt any customer concerns about outages, network management, and tech support; Business Tools: Reinforce that products are designed for business customers (e.g., Metro Ethernet) and include business-specific tools (calling features like hunt groups, network security tools, etc.); Competitive Pricing: Taking care not to embrace cheapness and cede future pricing power, illustrate what customers can save by choosing operator s bundled packages or taking advantage of included features. Of course, the Organizational and Market Segmentation strategies that a service provider chooses bear greatly on how exactly it markets to commercial customers. Operators that elect to target the SOHO and Micro Business segments rely on mass-market tactics, applying expertise and advertising scale accumulated over decades in the consumer market; those that focus on larger customers use more direct means. An operator that addresses the business market through a subsidiary may have more work to do educating customers about a new brand (such as Cablevision via Optimum Lightpath). Product Strategies Cable MSOs approach to products for the business market is typically two-pronged. First, commensurate with the overarching objective of generating additional revenue from existing assets, operators repurpose their consumer services portfolios for the smallest business customers, particularly SOHO and Micro-size locations with fewer than 10 to 20 employees (varying by operator). These services cable modem Internet access and VoIP telephone True contenders: cable Msos & business communications services V2M 13

14 supporting one or two voice lines, and including cable television for some industry verticals are more or less technologically the same as the residential versions they re based on. The difference, however, is that operators allocate resources (average load on the network, technical support, customer service) to handle the demands of business customers, and they price commercial variants accordingly, typically at a premium of 25% to 100% over comparable residential service. Figure 3.6 Bifurcated Cable MSO Commercial Market Portfolio Targets Source: New Paradigm Resources Group, Inc. Up-market, in the Mid-size and Enterprise segments, cable operators lead with Metro Ethernet services, in most cases delivered optically over laterals from their distribution networks. Building new capillaries is more capital-intensive than provisioning service to residences or SOHO customers over extant coaxial access, but the overriding strategic principle is similar. Cable operators already use Ethernet or IP for transport of services within their core networks, so they can extend Metro Ethernet as a retail product without a great deal of development or network re-engineering. Leveraging Ethernet s various service flavors and features EPL for dedicated point to point, EVPL for point to multipoint, differentiated classes of service to handle applications efficiently, etc. providers can support practically any client architecture using a single network. On the voice side, cable operators have followed a pattern of initially buying services wholesale that they are not initially capable of delivering themselves. Then, as they develop in-house expertise, define more precisely the highest priority features, and grow their customer base for the service, they achieve the scale necessary to build an support the service themselves. In the early 2000s, this was the strategy followed by many large and small operators with residential and SOHO VoIP. More recently, they have relied on wholesale providers to supply hosted VoIP services; the largest operators view hosted VoIP as one of their top strategic priorities and are currently developing their own capabilities in the area. 14 V2M True contenders: cable Msos & business communications services

15 Wireless Strategies One of the biggest profit drivers for service providers over the past decade has been wireless service. While most providers combat TDM access line erosion and downward pricing pressure on wired services generally, cellular penetration has increased and average revenue per user (ARPU) has risen with the growing adoption of mobile data services, powering much of the growth reported by major wired carriers like AT&T, Verizon, and Sprint. Wireless service in the business market can be especially lucrative for carriers: large contracts for corporate fleets with tens of thousands of users, high penetration of data services, and extended contract terms that can help keep customer churn low. Figure 3.7 Cable MSO Product Portfolio Strategies to Enter Wireless Source: New Paradigm Resources Group, Inc. As illustrated in Figure 3.7, cable MSOs are presently pursuing three different strategies to address this wireless gap. For one, Cox Communications is in the process of building a wireless network and service of its own. The operator acquired spectrum at FCC auction in 2009 for more than $550 million, and it has committed more than $1 billion to the effort overall. It is relying on Sprint s 3G CDMA network to get started, but in the long-term it intends to build its own wireless infrastructure, eventually offering 4G LTE, across much of its market footprint. Cox has targeted small businesses for the service, initially in Hampton Roads, VA; Omaha, NE; and Orange County, CA; however, with the exception of Hampton Roads, the service is not yet generally available, and the company is simply inviting customers to register their pre-launch interest on its websites (see Figure 3.8). True contenders: cable Msos & business communications services V2M 15

16 Figure 3.8 Cox Wireless Pre-Launch Web Commercial Source: Cox Communications website (unbelievablyfair.com, retrieved May 18, 2010) The second strategy being pursued is partnering with others. Cablecos have entered into resale agreements with wireless carriers in the past, but in the current iteration, begun in 2008, Comcast, Time Warner Cable, and Bright House Networks invested directly in Clearwire, a company that has been building a national broadband wireless network since (Joining the cablecos in investing were Google and Intel, with Sprint Nextel purchasing a majority stake.) Clearwire itself is building out markets incrementally, about one to two dozen per year; the partner cablecos launch consumer service under their own brand shortly thereafter. Business-specific products or bundles are a key to their long-term strategy. The three cableco investors aim to get the best of all worlds. They are immediately able to offer customers access to a national wireless network and the promise of faster 4G service where and when it is available. Although their investments have been significant, they tie up far less capital than if they tried to replicate the wireless network themselves, making funds available for other priorities. By sharing the network and investments across a number of parties, they minimize their downside risk; they also avoid direct responsibility for the ownership, management, and maintenance of wireless infrastructure. It also ensures a committed customer for their nascent wireless backhaul services, helping to build their wholesale business and expertise. Finally, the third cableco strategy is utilizing alternative technology to build a localized, homegrown network. Cablevision, Comcast, and Time Warner Cable have all deployed Wi- Fi base stations in the New York metropolitan area. In early 2010, the operators extended access to each others customers. The maneuver is defensive in nature, an attempt to thwart the mobile data advantage held by Verizon and AT&T. Because it is being included as a free bonus to subscribers (both consumers and businesses), the operators obtain no incremental revenue; even where operators may offer Wi-Fi as an add-on, they cannot sustain a high MRC, certainly nowhere near the ARPU that national wireless carriers obtain from plans combining wireless voice, voic , and mobile data. The strategy amounts to a low-cost, low-risk gambit to fill the wireless gap in their portfolios. 16 V2M True contenders: cable Msos & business communications services

17 Table 3.9 Pros and Cons of Cable MSO Wireless Strategies Homegrown Wireless Partnership/ Investment Homegrown Wi-Fi Cost to Disadvantages Advantages Operator Operators to Date Technology Used Cox Spectrum: $550 million Total: > $1 billion CDMA (3G) LTE (4G) Control Don t pay competitor (wireless carrier) to penetrate your territory On-net coverage limited, roaming extensive Lack of wireless culture, expertise Unknown quantity in wireless: will it fly? Comcast Time Warner Cable Bright House Comcast: ~$1.25 billion TWC: ~$650 million Bright House: ~$120 million WiMAX (4G) Minimize risk Invest in next-gen technology (4G) National roaming option via partnership Lack of full control: decide by consensus Loose integration into product portfolio Cablevision Comcast Time Warner Cable Build: $5-50 million per market (varies by size) Wi-Fi Hot Spots (IEEE ) Reduced Risk Control Ease of deployment: attach Wi-Fi base station to generic broadband endpoint or tap into conduit midpoint Hotspots more limiting to customers than wide-area 3G/4G coverage Not substantial enough to replace nationwide cellular voice and mobile data for many business customers Low reward: currently a free bonus now (at best only a low MRC is sustainable) Source: New Paradigm Resources Group, Inc. Growth Strategies (M&A) The largest MSOs have grown by acquiring other large and mid-sized operators, selecting targets carefully with an eye on creating geographic concentrations of physical network, customers, and local offices. These regional clusters present economies of scale that enable operators to run their networks optimally. Business customers have already and will increasingly become an important consideration in these decisions. Rather than expanding further geographically to add these customers, True contenders: cable Msos & business communications services V2M 17

18 however, cablecos could look to acquire either valued commercial customer bases or upmarket service capabilities or both by purchasing companies that have business market specialties. The most likely categories of potential targets are examined in Table 3.3 below, in roughly descending order starting with the most likely targets, CLECs. Comcast has been the most aggressive of the cablecos as of early In late 2009 it announced its intention (and in early 2010 received regulatory approval) to buy CIMCO, a Chicago-based CLEC serving almost 20,000 access lines and generating $10-15 million annual revenue. Perhaps as or more important than its metro fiber or customer base, CIMCO possessed valuable technology and expertise in the Small and Mid-sized customer segments, as it served businesses with up to 250 employees. Then in the first quarter of 2010, Comcast announced that it would buy New Global Telecom (NGT), a provider of wholesale trunk and hosted VoIP services. Again, it brings customers and revenue to Comcast, if leveraged successfully, NGT s large-scale VoIP expertise jumpstarts the cablecos aspirations to move upmarket beyond the Micro-sized business segment and approach bigger fish in the Small or even Mid-sized business segments. 18 V2M True contenders: cable Msos & business communications services

19 Table 3.10 Merits of Cable MSOs Potential Acquisition Targets CLEC Potential Target MSO Rationale for Acquiring Acquire prime commercial customer base Higher-end business services to address gaps in portfolio Downside to MSO Legacy telco infrastructure not directly compatible with cable plant Hosted VoIP Fiber Network Operator Interregional Provider (e.g., IXC) Higher-end business services to address gaps in portfolio Offer acquired customers a full range of on-net services Acquire prime commercial customer base, particularly Mid-Size through Large Enterprise Add high-capacity fiber covering popular routes in central business districts Coast-to-coast backbone and extensive reach to Tier 1 and Tier 2 business districts Acquire WAN platform (MPLS, Ethernet VPLS) Acquire Enterprise customer base A second business VoIP platform could pose integration challenge cablecos have yet to encounter Investors may view as lowreward application of capital Acquired customers may be interested only in extreme bandwidth services that yield lower margins Building own fiber may be preferable Buying/leasing long-haul capacity and services may be preferable Cableco organization may not currently be capable or supporting national enterprise service Federated strategy (with other cablecos) could accomplish similar results, with little or no investment required Wireless Carrier Solidify cableco presence in high-margin, high-growth wireless service categories Market quad-play bundle entirely on-net Buying a national or quasinational wireless carrier would be enormous investment, diverting capital from core business Partnership with third-parties for mobile data (4G/WiMAX) does not require cablecos to carry infrastructure, network management burden Emerging roaming WiFi via federated cablecos could address mobile data gap in portfolios with far less capital Management and investors may prefer marketing resold or white-labeled cellular/mobile data service from a third party Source: New Paradigm Resources Group, Inc. True contenders: cable Msos & business communications services V2M 19

20 SECTION 4: COMPARATIVE ANALYSIS - TELCOS VS. CABLE MSOS A wide array of service providers compete in the business services space, but the cable MSOs' vigorous pursuit of this market can rightly be viewed as a volley aimed at the incumbent telcos, the remaining RBOCs (AT&T, Verizon, and Qwest) foremost among them. In the past decade, the rivalry between cable MSOs and telcos intensified, and the distinction between their products and strategies blurred. Cablecos introduced consumer VoIP service, accelerating the technology substitution made manifest in the RBOCs' access line erosion. For their part, telcos entered the video entertainment business by launching fiber-to-the-home and residential triple-play bundles, cutting into the core cableco market already besieged by satellite (DBS) providers. The cable MSOs bring specific strengths and carry a few weaknesses into the contest for business customers. Strengths of Cable MSOs in the Business Services Market Pervasive network facilities: Cable systems snake throughout their communities, running past residential neighborhoods and low-density commercial zones where other service providers historically have not possessed facilities of their own. Although there are important differences between the two, cable networks are comparable to ILEC networks in terms of reaching neighborhood shops, small office buildings, and other businesses that lie outside central business districts where facilities-based competition is most intense. Corporate muscle: The MSOs blazing the trail in the business services market are large organizations of comparable scale to their telco competitors. As importantly, however, they are sophisticated marketers that know how to sell communications services successfully. Operators can reinvest profits from their established business lines, namely consumer video and Internet access, in their commercial services operations. They have the resources and expertise to advertise aggressively, to price optimally, and to acquire the technical and human resources to build more robust business services units. Financially, they are in a better position than the small CLECs of old to fund product development and subsidize short-term sluggishness in particular markets. Products adaptable to a range of business targets: With the advent of VoIP, MSOs have products in their arsenals that are as attractive to SOHO and Micro-size businesses as they are to consumers. These segments alone account for more than three-quarters of business locations and one-quarter of business services revenue (see Section 1). With additional technological advances and enhancements for the commercial market, these products can be extended even further up the food chain to Small and Mid-size businesses a lot of bang for relatively little incremental investment. Physical diversity: Cable systems were built entirely separate from the public switched telephone network (PSTN) of the telcos. As a result, MSOs cable plant has very weak correlation to the telco network unlike other facilities-based competitors, namely CLECs and fiber network operators that ultimately engineer their networks between ILEC-owned central offices where their gear is collocated. This can be an extremely enticing selling point for businesses concerned about redundancy for disaster recovery or rapid failover purposes. 20 V2M True contenders: cable Msos & business communications services

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