Cable Finds Big Opportunity in Big(ger) Business

White Paper Cable Finds Big Opportunity in Big(ger) Business Prepared by Alan Breznick Senior Analyst, Heavy Reading www.heavyreading.com on behalf of ciena.com cyaninc.com veexinc.com May 2013

Introduction: Cable Eyes Bigger Prize Over the last few years, cable operators have become a competitive force in the commercial telecom services market. In the U.S. alone, commercial data, voice, video and related services generated at least $7 billion in revenue for cable providers in 2012, up nearly 20 percent from an estimated $6 billion in 2011. Many of the largest North American and European cable operators are reaping the benefits of branching into commercial services as they seek to counter telco, satellite TV and over-the-top (OTT) incursions into their core residential video business. In the U.S., for instance, at least four of the five largest MSOs enjoyed healthy commercial revenue increases of 15 percent or more in 2012. What's more, the top three U.S. MSOs Comcast, Time Warner Cable and Cox Communications have all topped the $1 billion annual revenue mark for the first time in the industry's history, and Comcast has scaled the $2 billion level. Similarly, in Europe, large, aggressive MSOs such as Liberty Global's UPC Broadband division, Virgin Media, Kabel Deutschland, Unitymedia Kabel BW and Ziggo are registering healthy gains from commercial services. In the U.K., for example, Virgin reported business segment revenue of more than 670 million last year, up more than five percent from its 2011 revenue total, despite a down fourth quarter. Midsize and smaller cable operators on both sides of the Atlantic are also achieving sizable revenue gains from business services. In North America, for instance, such diverse cable providers as Rogers Communications, Shaw Communications, Cogeco Cable, Suddenlink Communications, Buckeye Cable and BendBroadband have all made strong inroads into the market. Most of these revenue gains have been derived from small-to-midsize businesses (SMBs) traditionally served by incumbent telcos. In particular, small firms with fewer than 20 employees have proven to be cable's sweet spot. Indeed, leading cable commercial services players, such as Cox and Comcast, report that more than 65 percent of their commercial revenue comes from these smaller establishments. Encouraged by their success in the lowest end of the small business market, cable operators are now setting their sights higher and broader by targeting larger firms. Cable providers are seeking to attract midsize firms and even enterprises in a wide variety of ways. Specifically, cable operators are: Deploying more fiber and coaxial lines and more advanced technologies like Carrier Ethernet 2.0 (CE 2.0) and software-defined networking (SDN). Rolling out better pricing and packaging. Introducing more sophisticated services, including Metro (or Carrier) Ethernet, Ethernet over Coax (EoC), hosted voice, PRI trunks, online backup and security, network virtualization and other cloud-based offerings. Boosting capital spending on commercial infrastructure and equipment, expanding sales and support teams and increasing their service quality. Delving deeper into key vertical markets, such as health care, education, financial services, government, hospitality and media. Scooping up other cable companies, competitive local exchange carriers (CLECs), data center operators and business services specialists to expand their service footprints and boost their expertise in the middle market. HEAVY READING MAY 2013 WHITE PAPER CABLE FINDS BIG OPPORTUNITY IN BIG(GER) BUSINESS 2

Refining their go-to-market strategies to expand prospect bases, recruit customers more cost-effectively and accelerate market-share growth. But, as cable operators climb up-market in the commercial sector, they will face fresh challenges in serving larger companies. This white paper looks at those technical, operational and financial challenges, which include the growing complexity of commercial telecom services, the more sophisticated needs of larger firms, the disruptive rise of cloud services, stricter requirements for service quality, assurance and redundancy, and the need to train cable workforces to serve larger companies. The paper sorts through these midsize market challenges and explores how cable providers can fulfill them. Then it explains the benefits of these proposed solutions and suggests how cable providers can monetize them. HEAVY READING MAY 2013 WHITE PAPER CABLE FINDS BIG OPPORTUNITY IN BIG(GER) BUSINESS 3

Cable's Commercial Market Opportunity Clearly, the commercial market opportunity for the cable industry is huge. In the U.S. alone, estimates are that more than 27 million businesses spend about $130- $140 billion a year on data, voice, video and related telecom services. Thus, even after surpassing the $7 billion annual revenue mark in 2012, cable providers are still capturing just six percent of the overall telecom haul. The opportunity is particularly ripe for the largest cable providers. The five leading U.S. MSOs collectively have more than 11 million companies within their reach, representing a revenue opportunity of more than $100 billion, as shown in Figure 1. Figure 1: U.S. MSO Commercial Market Opportunity MSO NUMBER OF FIRMS IN REGION MARKET OPPORTUNITY Comcast Time Warner Cable Cox Communications Charter Communications Cablevision Systems Source: MSO Reports 5.2M very small (<20 workers) 400,000 SMBs (20-500 workers) 5.6M total 2.3M-2.7M very small 2.5M-3.0M all SMBs 3.0M total 820,000 very small 1.3M total 1M total 685,000 very small and small (<100 employees) 50,000-60,000 midsized and large firms $10B-$15B very small $20B-$50B total $6.3B very small $17B-21B all SMBs $21B-25B total $6.2B wireline $4B wireless $9.5B total $3.0B very small and small $3.2B midsize and large firms Indeed, Comcast and Time Warner Cable each have a market opportunity of at least $20 billion in their respective service regions. So, even if they capture just 10 percent of the commercial market, each would realize an incremental $2 billion in revenue annually. Despite their relatively small size, SMBs (or firms with up to 250 employees) account for a huge chunk of that telecom spending. In the U.S., estimates are that these smaller firms spend anywhere from $50-$70 billion a year on data, voice and video services, depending on how midsize firms are classified. And this total keeps steadily growing. Fortunately for cable operators, they already pass many of these smaller businesses with their hybrid fiber/coax (HFC) networks. In fact, industry estimates are that cable HFC lines pass as many as three-quarters of all SMBs in the U.S. Many other smaller firms lie just outside cable's reach, making for relatively easy, inexpensive plant extensions. HEAVY READING MAY 2013 WHITE PAPER CABLE FINDS BIG OPPORTUNITY IN BIG(GER) BUSINESS 4

Breaking down the numbers further, cable operators now pass more than 4.1 million very small firms (with one to nine employees) in the U.S., as defined by SNL Kagan. That figure, which represents most of the very small firms with employees in the nation, is up from almost 3.8 million just four years earlier. Similarly, Kagan reports U.S. cable providers now pass more than 730,000 companies that it defines as midsize (with 10 to 99 employees) well more than double the number of midsize firms passed by cable lines four years earlier. So, cable providers have many, if not most, of the nation's small and midsize firms already within their wired grasp, as Figure 2 shows. Figure 2: Small & Midsize Firms Passed by Cable Lines in U.S. MSO 2008 2009 2010 2011 2012 Small firms passed 3,792,000 3,933,000 4,071,000 4,168,000 4,100,000+ Midsize firms passed 295,000 455,000 606,000 706,000 733,000 Source: SNL Kagan Now add the larger SMBs not included by Kagan, as well as some of the small office/home office (SOHO) firms, to the mix. With such home-based, nonemployee firms also taken into account, the SMB market potential could still be a bit greater, even though many, if not most, home-based firms, likely buy beefedup residential services. Based on the latest figures from the five largest U.S. MSOs, Heavy Reading calculates they collectively have at least 10.5 million small-tomidsize firms within their reach. That represents a revenue opportunity of well over $40 billion. HEAVY READING MAY 2013 WHITE PAPER CABLE FINDS BIG OPPORTUNITY IN BIG(GER) BUSINESS 5

Cable's Commercial Services Progress Blessed with this ample opportunity, cable operators have made impressive strides in the commercial telecom services market. As a result, cable providers have emerged as a rising competitive force against the incumbent telcos in both North America and Europe. Cable providers have made particularly great strides with very small companies of 20 employees or fewer, signing up hundreds of thousands of them as customers. Comcast estimates it has now signed up nearly 15 percent of the 5.2 million smaller firms in its regions and calculates they spend $10-$15 billion annually. Similarly, Cox reports that firms with fewer than 20 employees account for 85 percent of its nearly 300,000 business customers, generating at least 65 percent of its $1.4 billion in commercial revenue. With their commercial customer totals steadily rising, cable operators are reaping more and more revenue from business services. Thanks to this trend, commercial services are becoming an increasingly important contributor to operators' income growth. In the U.S., for example, at least four of the five major MSOs enjoyed healthy commercial revenue hikes of 15 percent or more in 2012. Due to such gains, the top three MSOs Comcast, Time Warner Cable and Cox are now all well above the $1 billion annual revenue mark, and the top two Comcast and Time Warner Cable have either scaled the $2 billion mark or will scale it this year. In particular, Comcast stands out. After getting off to a slow start last decade, the company has enjoyed extremely impressive growth in the past few years, boosting its revenue totals by at least 40 percent per year, even as it increased its revenue base. With these gains, North America's largest MSO is now leading the pack, collecting nearly $1.8 billion in 2011 and $2.4 billion in 2012, as shown in Figure 3. Figure 3: U.S. MSO Business Services Revenues 2007-2012 Sources: MSO reports, Heavy Reading estimates HEAVY READING MAY 2013 WHITE PAPER CABLE FINDS BIG OPPORTUNITY IN BIG(GER) BUSINESS 6

Several economic sectors are contributing to cable's growing commercial bounty. Those sectors differ to some extent by region; but, in most metro areas, the industry's business customers are primarily coming from four key vertical markets: health care, education, financial services and government services. Although there's no exact data available, these four verticals account for the bulk of cable commercial services revenue. In the U.S., Cox provides a classic example. The nation's third largest MSO now focuses heavily on what it terms the "large locals," or larger establishments that are densely concentrated in its regions. Cox officials see these large locals including densely concentrated establishments such as local hospitals, universities, school systems, hotels, community banks and government agencies as one key to their goal of reaching $2 billion in revenue by 2016. "If you're focused on everything, you're focused on nothing," said Phil Meeks, former senior vice president of Cox Business Services, speaking at a conference on cable business services hosted by Light Reading late last year. HEAVY READING MAY 2013 WHITE PAPER CABLE FINDS BIG OPPORTUNITY IN BIG(GER) BUSINESS 7

Cable's Up-Market Drive Encouraged by the strides they have made in the lowest end of the small business market, cable operators are increasingly setting their sights higher and broader. Besides the very small firms that they have traditionally pursued, operators are now targeting larger businesses, institutions, agencies and others with 25, 50, 75, 100 and even 200 or more employees and with facilities in multiple locations, not all of which fall within their service areas. Cable providers are eyeing midsize companies primarily because of their greater market potential. Although they are fewer in number than smaller firms, midsize firms spend substantially more on telecom services. For example, Comcast estimates that 400,000 companies with 20 or more employees collectively spend more than $35 billion a year in its regions alone. In addition, midsize firms are increasingly appealing to cable operators because they purchase higher-value services and offer the opportunity to develop more value-added revenue streams. Moreover, midsize firms favor long-term relationships that grow over time and tend to be less price-driven than their smaller counterparts. Yet they don't have the huge national presence that puts them out of the reach of all but the biggest MSOs. As a result, cable providers now seek to lure midsize firms with a wide variety of inducements. For one thing, they are stepping up capital spending on dedicated fiber extensions, indoor and outdoor Wi-Fi hotspots and other commercial infrastructure enhancements, more advanced technologies and new customer equipment. Take Cablevision's Lightpath unit, which built the cable model for going up-market nearly a decade ago. Focusing purely on midsize firms and enterprises that spend at least $1,500 a month on telecom services, Lightpath now serves more than 5,500 commercial buildings in the New York metro area with an all-fiber network that stretches over 5,000 route miles, up from 5,000 fiber-lit locations and 4,500 route miles a year earlier. In another recent move, Lightpath began offering managed Wi-Fi as a service to its commercial clientele last fall, providing complete design, implementation and management of private, in-building wireless data networks. "With Managed Wi-Fi, we are removing the cost and management barriers that have prevented many businesses from deploying a state-of-the-art wireless data network, helping New York metro area organizations advance," said Julia McGrath, senior vice president of marketing and business development for Lightpath. Cablevision has also launched an extensive outdoor Wi-Fi network in its home New York market and created a nationwide Wi-Fi roaming network with fellow MSOs Comcast, Time Warner Cable, Cox Communications and Bright House Networks. Similarly, in Canada, Rogers Business Solutions is now wooing midsize firms and enterprises in Toronto and other major Ontario markets with an expanded fiber footprint, a suite of new Ethernet and IP-based services and a growing lineup of hosted voice, online storage and other managed and cloud-based services. The large Canadian MSO is also developing new Ethernet-based network-to-network interfaces (NNIs) to interconnect its Ethernet service offerings with those of other Canadian and U.S. cable operators. HEAVY READING MAY 2013 WHITE PAPER CABLE FINDS BIG OPPORTUNITY IN BIG(GER) BUSINESS 8

"Owning the plumbing isn't sexy, but it is a competitive advantage," said Terry Canning, senior vice president of Rogers Business Solutions. Speaking at another Light Reading cable business services conference, Canning urged MSOs to "work together to align their product offerings, establish interconnects with each other and evolve from regional players to integrated national ones." Like Cablevision and Rogers, cable operators are also introducing more sophisticated commercial services to attract midsize businesses. The roster of new services includes Metro (or Carrier) Ethernet, Ethernet over Docsis, hosted voice, PRI trunks, network virtualization, online backup and security, managed services and other cloud-based products. Consider Comcast: Over the past two years, the largest U.S. MSO has been rapidly rolling out its new Metro Ethernet service for small-to-midsize firms with 20 to 500 employees. The fiber-based service can deliver data download speeds as high as 10 Gbit/s to business customers. Commercial subscribers can choose among three classes of service (CoS) and four types of solutions, including Ethernet private line (EPL), Ethernet virtual private line (EVPL), Ethernet local area network (E-LAN) and Ethernet dedicated Internet (EDI) access services. Comcast's Metro Ethernet service is now available in more than two dozen key U.S. markets, including Atlanta, Baltimore, Boston, Chicago, Denver, Detroit, Houston, Indianapolis, Miami, Philadelphia, Salt Lake City, San Francisco, Seattle and Washington, D.C. "Metro Ethernet is the center of gravity" for this mid-market group, said Kevin O'Toole, senior vice president and general manager of new business solutions for Comcast Business Services. Speaking at the same conference as Canning, O'Toole said Metro Ethernet is "poised to do to legacy TDM-delivered data service what cable modems did to dial-up." In a coup, Comcast recently became the first service provider to gain Carrier Ethernet 2.0 (CE 2.0) certification from the Metro Ethernet Forum (MEF). Comcast, which had already cleared the bar for MEF's earlier CE 1.0 standards, achieved 2.0 status in mid-february for its E-Line and E-LAN services. The CE 2.0 specs cover improved CoS, service manageability and service interoperability for delivery across multiple networks. Thus, with the new certification, Comcast can more easily pursue larger companies that need Ethernet connectivity at multiple sites, including sites outside Comcast's vast footprint. To complement its budding Metro Ethernet service, Comcast has been quietly rolling out a Docsis-based Ethernet-over-Coax (EoC) service (also known as Ethernet over Docsis) that takes advantage of the MSO's widely deployed Docsis 3.0 network. This coaxial-based service, which offers dedicated upstream and downstream speeds as high as 6 Mbit/s, is now available in at least a dozen major U.S. markets, including Atlanta, Boston, Chicago, Philadelphia, Pittsburgh, San Francisco and Seattle. Earlier cable EoC deployments relied on older Docsis 2.0 technology, limiting dedicated upstream and downstream speeds to 2 Mbit/s. Moreover, cable operators are offering more customized pricing and packaging, expanding sales and support teams and striking deals with third-party resellers and agents. For instance, Time Warner Cable has been working with national and regional telecom agents, value-added resellers (VARs) and systems integrators to market its commercial data and voice products to SMBs and enterprises for the past five years. Under the Time Warner Cable Business Class Partner Program, the MSO is drawing heavily on these indirect sales channels to reach companies that purchase their telecom services through other parties. HEAVY READING MAY 2013 WHITE PAPER CABLE FINDS BIG OPPORTUNITY IN BIG(GER) BUSINESS 9

Further, some cable providers are scooping up other cable companies to expand their service footprints. Recent examples include Liberty Global's pending buyout of Virgin Media in the U.K., Charter's pending purchase of Cablevision's Optimum West properties and Time Warner Cable's acquisition of Insight Communications last year. While the business services market may not be the driver for these deals, the buyouts enable MSOs to serve larger businesses with multiple locations better, due to their expanded footprints. At the same time, several cable operators are snapping up CLECs and businessservices specialists to boost their expertise in the middle market. Some examples here include: Comcast's purchase of Chicago CLEC Cimco Communications and hosted voice specialist New Global Telecom; Time Warner Cable's acquisition of cloud services specialist NaviSite; Cogeco Cable's purchase of outsourced managed IT specialist Quiettouch Inc. and data-center specialist Peer 1 Network Enterprises; and Bright House Networks' purchase of cloud services specialist Telovations Inc. Finally, cable operators are generally refining their go-to-market strategies to expand their prospect bases, recruit customers more cost-effectively and accelerate their market-share growth. A prime example is Cox, which is now looking at how to keep its commercial services revenues growing beyond its 2016 goal of $2 billion and expand its wired market opportunity beyond the current $6.5 billion. "We've been making the shifts from commercial products to managed commercial services to managed apps," Meeks said. "It's critical that we move down that continuum of redefining the business to make the opportunity bigger." He noted that Cox Business Services "will look a lot different in 2017 than we do now." The big question is just how far these ambitious middle market efforts can go. Although the industry's initial forays seem to be paying off so far, it's not clear yet whether cable operators can achieve the same level of success in the midsize market. Much will depend on how well providers can meet the challenges of that unique market, which are spelled out in the next section. HEAVY READING MAY 2013 WHITE PAPER CABLE FINDS BIG OPPORTUNITY IN BIG(GER) BUSINESS 10

Cable's Midsize Market Challenges As mentioned earlier in this paper, cable operators face a raft of technical, operational, logistical and competitive challenges as they seek to move upmarket and deliver carrier-grade telecom services to midsize firms and enterprises. In this section, we will examine the major challenges that cable operators face in pursuing larger companies. These challenges include the growing complexity of commercial telecom services, the more sophisticated needs of larger firms, their stricter requirements for service quality, assurance and redundancy and the pressing need to train the cable workforce to serve larger firms. They also include the need to develop and deliver more complex services, such as E-LAN, EPL, EVPL and IPv6 offerings. In addition, the cable industry's challenges include increased competition from the large, entrenched telcos, CLECs and other rivals, such as AT&T, Verizon Communications, tw telecom, Level 3, XO and the like. Plus, new competitors will continue to emerge, such as Google Fiber, Aereo, Apple, Dish Network and Intel. Many, if not most, of these challenges stem from the fact that midsize firms and enterprises are not just bigger than their smaller counterparts; they are inherently different due to the scope and complexity of their networks. Larger firms are also different than their smaller counterparts because they have broader service reach and frequently have multiple locations, some of them outside the cable operator's service area. In addition, larger companies tend to have dedicated IT departments, data center operations, more sophisticated data management needs and more complex site-to-site communications (voice and video) requirements. Finally, larger firms have more advanced business continuity requirements and greater demand for such hosted services as Microsoft Exchange, hosted voice, online storage and backup and the like. "When you move up market, it's a different game, a different league," said David Pistacchio, president of Cablevision's Lightpath unit, which generally targets firms with 100 employees or more. "That's not to say that the SMB space is not great or that bigger is better. They're just different." One key challenge that cable operators must overcome is the growing complexity of commercial telecom services, particularly on the voice side. Due largely to the introduction of more advanced IP technology, many more voice capabilities can now be offered than ever before, including multiple addresses, white and yellow page listings, company profiles, feature packages, a la carte features, dial plans, hunt and call groups, multi-port devices and group voicemail support. Cable operators must have the capability to offer these services on an increasingly large scale, as well as the flexibility to tailor them to each commercial customer's particular needs. For example, the development of such advanced voice services as hosted private branch exchange (PBX) and managed IP-PBX will generate many more end points for cable operators to serve, especially as phones and other end-user devices evolve from network-based call signaling (NCS) to Session Initiation Protocol (SIP)-based technology. Each of these numerous devices must be fully activated and provisioned, along with all of the other many network components. This is a much more complex process in a commercial, feature-rich environment than in a less cluttered residential service environment. HEAVY READING MAY 2013 WHITE PAPER CABLE FINDS BIG OPPORTUNITY IN BIG(GER) BUSINESS 11

"The complexity is much greater for business services, especially in the area of telephony orders," noted Bob Putnam, CIO of Suddenlink Communications, which has greatly expanded its presence in the business services market over the last three years and recently named Kevin Stephens as the first president of its commercial unit. "There are many more features, lines and technology needs for business phone services than residential. Accordingly, the systems have to be more complex and flexible to accommodate business telephony needs." Another critical challenge that cable operators face in the middle market is that larger firms have more sophisticated data management, Ethernet service and other needs than their smaller commercial cousins. To cite one increasingly prominent example, larger firms have a higher, and rapidly growing, demand for cloud-based computing and telecom services, including end-user apps, datacenter storage/extensions and business continuity. "It's a cloud world now," O'Toole said. "The cloud changes everything. It's transforming how businesses consume IT services." In response to this growing demand for cloud-based services, Comcast has rolled out a new hosted PBX service, known as Business Voice Edge, throughout its territories over the last year. Even more recently, Comcast introduced a cloud-fed, curated app store, called Upware, for its SMB customers with up to 50 employees. Other large MSOs are also venturing into the cloud. For example, Cox Business now offers virtual computing services to its commercial customers. Plus, Comcast and TWC have a partnership with Microsoft for Exchange, SharePoint and other cloudbased services. With these offerings, they're attempting to compete with innovative rivals like tw telecom, which offers an on-demand bandwidth service, known as Dynamic Capacity, over its entire network. The middle market is also a different breed of animal because larger companies have stricter requirements for service quality, reliability, assurance and redundancy than smaller firms. For example, midsize firms often want, and expect, such things as service-level agreement (SLA) transparency, greater quality of service (QoS)/CoS guarantees and high-performance attributes (such as latency, jitter and packet delivery rate or PDR) for Ethernet services optimized for cloud-based apps, as well as HD video streaming and voice over IP (VoIP). In addition, the architecture of MSO metro networks which typically consist of independent DWDM, OTN, Sonet and Ethernet layers presents several key hurdles to meeting larger business customers' needs for better Ethernet service performance and improved SLA transparency. For one, optimizing service performance across multiple network layers involves considerable engineering complexity using traditional means. Along with this, end-to-end service provisioning can be a burdensome and time-consuming process, which translates to slow deployment times for customers. So, cable operators must focus on improving service velocity and delivering a better overall customer experience to woo more demanding midsize firms and enterprises. Further, midsize companies frequently have a greater need for multi-service telecom products and packages that are tailored for their particular business. Whether it's a local hotel, hospital, auto dealer, bank or university campus, these types of establishments are typically looking for answers to the unique problems they face. So cookie-cutter, one-size-fits-all solutions won't do the trick for them, no matter how attractively priced and packaged they are. Instead, cable operators must develop customized programs that meet each industry's specific needs. HEAVY READING MAY 2013 WHITE PAPER CABLE FINDS BIG OPPORTUNITY IN BIG(GER) BUSINESS 12

Moreover, midsize and larger firms are much more likely than smaller firms to have facilities in locations beyond an individual cable operator's territory. As a result, they present much more of a logistical challenge than their smaller counterparts. With multiple stores, branches, offices, factories, warehouses, units, etc., in multiple locations, they don't fall neatly into the dense service region of any one cable provider. Instead, they have commercial facilities spread across several or even numerous markets, making them far more difficult to serve. Unfortunately, what this lack of national or even regional reach too often means for cable operators is that they can't capture the telecom business of these larger concerns because they can't offer full coverage on their own networks. With the enterprise market increasingly taking an all-or-nothing approach to telecom services, if a provider can't serve a company's five branches in Albuquerque, NM, it likely won't gain the firm's 200 branches in New York City either. "Moving up-market, we get into enterprises such as banks with services around the country," said Andy Striegler, vice president of carrier services for Rogers Business Solutions, speaking at the latest Light Reading conference on cable business services. "We have to address issues of network coverage, and the fact that we don't have that coverage everywhere they want to go." One more crucial challenge for cable operators is preparing their workforce to support larger firms. That effort requires extensive, potentially costly re-training of their sales, technician and customer support teams, among other units. So cable providers must find ways to offer that staff training quickly and cost-effectively. Besides these technical, operational and logistical obstacles, cable operators face greater competitive challenges in the middle market than they have faced at the lower end of the SMB spectrum. To cite one example of that stiffer competition, AT&T is now deploying fiber to 58,000 buildings across the U.S., likely to fend off middle market incursions by cable operators. To cite another, tw telecom is now offering a Dynamic Capacity Ethernet service that seems designed to counter the budding Metro Ethernet and Ethernet over Docsis offerings of Comcast and other MSOs. HEAVY READING MAY 2013 WHITE PAPER CABLE FINDS BIG OPPORTUNITY IN BIG(GER) BUSINESS 13

A Seven-Step Program for Cable Despite these daunting challenges, cable operators are far from powerless to overcome them and can make substantial headway into the middle market. In this section, we will suggest what cable providers can do to overcome the challenges described in the last section. We will recommend several concrete steps that providers can take right now to tackle the midsize market. We will also explain the benefits of taking those steps and the ways that MSOs can make some money off them. Step 1 One step cable operators can immediate take is to extend their network reach both within and beyond their service regions. They can carry out these network extensions with both fiber and coaxial cable lines, as well as Wi-Fi signals. Such major North American MSOs as Comcast, Time Warner Cable, Cablevision Systems and Rogers have already been doing this in their territories, with great success. Cable operators can also leverage Wi-Fi hotspots and fixed wireless (micrometer and millimeter wave radio) technology where fiber builds are cost-prohibitive. In Rogers' case, for instance, the cable provider has been using both fiber and coax lines to fill in the service gaps in its existing network. Such a carefully calculated in-filling strategy enables cable providers to lure more SMBs and larger firms because the greater density of their networks puts more firms of all sizes on-net. All of this can be accomplished at relatively low cost because it's much cheaper to fill in existing networks than to extend them into new areas or build new networks from scratch. Indeed, Rogers reports that it has seen 90 percent of its wholesale enterprise orders come from locations inside its existing in-net footprint. Another eight percent of its wholesale enterprise orders have derived from near-net sources, while a mere two percent have come from off-net sources. "Doing a lot of in-fill is stretching the network out," Striegler said. To expand their wired networks in the most profitable way, cable providers can draw upon advanced customer analytics. This approach involves a careful analysis of supply (network assets) and demand (customer locations) to pinpoint exactly where fiber lines should be extended. Using these techniques, cable operators can make sure that they add the fiber extensions only in those locations where the economic payoff will be great enough to justify the extra expense. Step 2 Cable providers can embrace technologies such as the MEF CE 2.0 framework and SDN to ensure that the Ethernet network is "cloud-ready." Together, these technologies simplify the delivery of resilient, deterministic services across multilayer metro networks for their commercial clientele. These enhancements could significant help cable providers leapfrog incumbent telcos with business offerings that support faster service velocity and a better overall customer experience. Comcast provides a prime recent example of what can be done. In mid-february, the MSO became the first service provider in the world to achieve CE 2.0 certification from the MEF, enabling it to deliver improved CoS, service manageability and interoperability for delivery across multiple networks. This complements Comcast's HEAVY READING MAY 2013 WHITE PAPER CABLE FINDS BIG OPPORTUNITY IN BIG(GER) BUSINESS 14

launch of Upware, its new suite of third-party, cloud-based apps for commercial customers. The initial offering features online backup, security, storage, file-sharing and Web collaboration solutions from nine key vendors, including Microsoft, Norton and Mozy. Customers can pick and choose from these services in the online marketplace. Cox provides another good example. The third largest U.S. MSO, which ranks as the leading cable provider of business Ethernet services nationally, has introduced virtual computing services for its commercial customers. As a result, it now offers advanced online backup and storage, in partnership with Mozi and EMC, and an online security suite backed by McAfee. Step 3 Vertical specialization is another step that MSOs can take. In the small business market, many cable operators have already carved out solid niches in their service regions by focusing on such vertical markets as financial services, health care, government services and education. They can follow the same path in the middle market, as such leaders as Cox and Comcast have already done. Or they can try to break into new verticals, as Comcast and Cox are now trying to do with hotels in the broader hospitality market. Step 4 Cable operators can also focus on trumping the incumbent players by providing superior service delivery to the business sector. Instead of trying to compete with rivals mainly on price or new features, operators can concentrate on offering better service and a better experience to commercial customers. Figure 4: Business Data Satisfaction Rankings SMBs SERVICE PROVIDER INDEX SCORE POWER CIRCLE RANKINGS Cox Communications 699 ***** Optimum Business 679 **** Time Warner Cable 668 **** Comcast 652 **** Verizon Communications 648 **** CenturyLink 642 *** SMB Average 639 *** Charter Communications 638 *** AT&T 611 ** Source: J.D. Power & Associates 2012 Business Data Satisfaction Study Cablevision and Cox have set the bar here most recently, earning plaudits for their service delivery to very small businesses (those with fewer than 20 employees) and HEAVY READING MAY 2013 WHITE PAPER CABLE FINDS BIG OPPORTUNITY IN BIG(GER) BUSINESS 15

larger SMBs (companies with 20 to 499 employees). In the latest business data satisfaction studies conducted by J.D. Power and Associates in May 2012, the two MSOs led the pack in both market segments, beating out large telcos such as AT&T, Verizon and CenturyLink each time. For instance, in the SMB category (which J.D. Power defines as companies with 20 to 499 employees), Cox led the way with a 699 index score (out of 1,000 points). Cablevision came in second with a 679 score, followed by Time Warner Cable at 668 and Comcast at 652. Verizon, CenturyLink and AT&T trailed behind, with respective scores of 648, 642 and 611. As mentioned earlier, the combination of SDN, CE 2.0 and related technologies can also be leveraged to deliver more compelling, differentiated business services that offer deterministic performance and transparent SLAs to improve the overall customer experience. Step 5 Cable providers can also give customers greater visibility into their service/network performance and SLA compliance. For example, one of our initiative sponsors, Cyan, now offers Web-based portal solutions that operators can use for monitoring SLA metrics and more. Step 6 Cable operators can start banding together to pursue and serve commercial customers with facilities in multiple locations, especially outside their service regions. First, they can make NNIs with neighboring and other operators, physically linking their HFC networks. Then they can strike wholesale business agreements, align their product offerings and pricing and integrate their business processes with their fellow MSOs so that they can jointly serve these companies and split the proceeds from serving them. Rogers has probably done the most on this front so far. For the past several years, the big Canadian MSO has been developing new NNIs to hook up its network with the networks of other Canadian and U.S. cable operators. As a result, such wholesale-related business now accounts for 25 percent to 30 percent of Rogers' overall commercial revenue from next-gen IP-based services on its network. Step 7 Finally, cable providers can start training their sales, technical and customer support teams to meet the more demanding needs of larger companies. Providers can develop the training classes on their own, drawing on the experiences of such larger MSOs as Comcast, Time Warner Cable or Cox. Or they can turn to the SCTE, which runs training programs for its MSO members in IP routing and networking, enterprise voice, Ethernet services, performance verification, fault management, managed services and business customer service. For instance, SCTE now offers online and onsite training programs for business-class services. Individuals may certify to meet industry standards by completing the SCTE Business Class Services Specialist (BCSS) certification. HEAVY READING MAY 2013 WHITE PAPER CABLE FINDS BIG OPPORTUNITY IN BIG(GER) BUSINESS 16

Conclusion The midsize commercial market clearly represents one of cable's next great frontiers. After making impressive strides in the low end of the SMB market over the last few years, cable operators are now seeking to duplicate their success by pursuing larger companies, organizations and government agencies. They're hoping that midsize firms will respond with the same kind of enthusiasm as millions of their smaller counterparts in the U.S., Canada and Western Europe. As this paper spells out, cable providers are aiming to capture these new commercial prospects with a wide variety of highly attractive inducements, ranging from fresh fiber network builds and ambitious Wi-Fi rollouts to more sophisticated products like Metro Ethernet, hosted voice, managed services and cloud-based offerings. They're deploying more advanced technologies such as CE 2.0 to deliver these services. And they are introducing improved product pricing and packaging and beefing up their technical, sales and customer service teams, among other moves. But as they chase after larger firms, MSOs are running into larger commercial challenges than they ever faced before. In their up-market drive, they're grappling with the growing complexity of commercial telecom services, the more sophisticated needs of larger firms, and those firms' stricter requirements for service quality, assurance and redundancy. They're struggling with ways to compete with the incumbent telcos and CLECs by developing and delivering more complex services, such as E-LAN, EPL, EVPL and IPv6 offerings. And they are straining to meet the pressing need to train their workforce to serve the more demanding bigger firms. Fortunately for cable operators, there are several ways to overcome these middlemarket challenges. They can take immediate steps to bolster their position by selectively extending their fiber and coax networks and expanding their regional Wi-Fi deployments. They can embrace the cloud and offer more managed and hosted services. They can increase their vertical specialization and/or try to break into new vertical markets. And they can improve their staff training programs and customer service operations, among other things. In short, the middle market is well within the cable industry's collective grasp. Cable operators need not fumble to find their footing as they strive to compete against large, well-established telcos, CLECs and other incumbent players in this highly competitive market. Instead, they can draw on the proven examples of such pioneering MSOs as Comcast, Time Warner Cable, Cox, Cablevision and Rogers that have already begun venturing into the middle market and started making an impact. HEAVY READING MAY 2013 WHITE PAPER CABLE FINDS BIG OPPORTUNITY IN BIG(GER) BUSINESS 17