Comcast, Charter lead cable's challenge to telcos in the business services sector

Cable operators of all sizes have found growing opportunities to take part in the lucrative and ever-evolving business services space.

By nature, cable operators enjoy a largely local presence with an embedded base of traditional hybrid fiber coax (HFC) cable that they can rapidly use to scale higher speed services and voice to local business customers. They are also rolling out fiber-based Ethernet, cloud and next-gen IP voice services like SIP trunking.

Business service revenue across the largest MSOs continues to rise, a trend that continued into the third quarter.

Comcast reported third quarter business revenues increased 15.5% to $1.4 billion, with the majority of the growth coming from the small and midsize business (SMB) segment.

A similar trend took place at Charter, which reported commercial revenue grew 12.1%. The cable MSO said commercial revenue was a bit slower than last quarter due to lower cell tower growth and one-time benefit at NaviSite in 2015.

Not to be outdone is Cox. While Cox is no longer a public company, the Atlanta-based cable MSO said it is on track to reach $2 billion in business revenues this year. 

Regional cable operators are also seeing movement as well.

Cable One reported that third quarter business service revenues increased $3 million, or 13.2%, due primarily to growth in its business data and voice services to both small and medium-sized businesses and enterprise customers.

Mediacom, which is in the process of a major revamp of its business and consumer networks, reported business revenues rose to $58.1 million. 

Charlie Reed, a partner at strategic consulting firm Atlantic-ACM, told FierceTelecom that cable operators are being aggressive in the business market segment. 

“What’s most impressive the way cable has gained share on the business side and continuing to march on with 20% growth year over year,” Reed said. “I guess you could break that down into three sectors: small business, medium business and enterprise and the wholesale space.”

As cable starts to further itself in the business services space, their reach into business customers will clearly be impacted by industry consolidation. In 2016, deals made by Altice and Charter clearly gave both MSOs a deeper business footprint.

By purchasing Time Warner and Bright House, Charter advanced its foothold in the business segment with a set of fiber and customer relationships in areas like hospitality.

Altice, while not gaining a contiguous business footprint via its multibillion dollar acquisitions of Suddenlink and Cablevision, gains presence in lucrative business markets like New York and parts of the Midwest. 

Cox Communications acquired a large stake in Unite Private Networks (UPN), bolstering its metro and regional fiber portfolio across a number of Tier 2 and Tier 3 markets.

“Consolidation will continue to happen and you have the four companies—Comcast, Charter, Cox and Altice—rolling companies up,” Reed said. “That gives cable an advantage to serve larger customers because the larger you are, the easier it is to create a compelling offer for enterprises.”

SMBs sit in the sweet spot

Small and midsized businesses have been the bread and butter business target for cable operators from the start.

All of the largest and regional cable operators continue to find resonance with the SMB market, one that cable companies can readily address with higher speed services than what telcos can serve over copper-based DSL. What’s compelling for the cable operators is they can increase speeds rapidly over the existing HFC plant without having to necessarily deploy fiber.  

Indeed, SMB sales account for over 70% of Comcast's business segment revenue.

“We have a great product that's very relevant in a market that we would size at $20 billion to $25 billion in the small and medium-size space, where we've obviously deeply penetrated the small business side,” said Michael Cavanagh, CFO of Comcast, during the third quarter earnings call, according to a Seeking Alpha transcript.

Charter, meanwhile, plans to launch new SMB pricing under the Spectrum brand by the middle of next year for existing businesses it now covers in the legacy Time Warner Cable and Bright House Networks areas.

Tom Rutledge CEO Charter

“Similar to residential, we will offer SMB products that are better than what the telcos offer at lower prices, driving customer growth in the same way we have at pre-deal Charter since launching SMB pricing and packaging in early 2015,” said Tom Rutledge, CEO of Charter, during its third quarter earnings call.  

Cable One and Mediacom are also seeing similar gains. 

“The vast majority, or 90%, is SME [small and midsized enterprise],” said Tom Might, CEO of Cable One, during the recent UBS 44th Annual Global Media and Communications Conference. “When we did roadshow last year, we estimated we had a third market share in our markets for SME and the other 10% is enterprise.”

“On small business, I think it’s pretty evident by looking at the growth rates that cable is continuing to gain share pretty quick with bandwidth upgrades,” Atlantic-ACM's Reed said. “I think that market is doing fairly well in general with bandwidth increases and cable continues to pick off broadband customers from the ILECs, especially in areas where telcos are not doing fiber.”

However, telcos are starting to make attempts to regain their foothold in the SMB market—one that they attack by extending fiber to more businesses.

Reed said that as ILECs start to roll out fiber in additional areas to serve SMBs, they could eat into cable’s SMB market share. “The ILECs are holding OK in some areas and are reinvesting a little bit,” Reed said. “Looking forward, we do expect cable’s gains to slow, but we see the momentum continue.”

Verizon said it could replicate the FiOS model it is using in Boston to win back share in other markets where it only has copper-based facilities today. Cable has continued to beat out Verizon where it does not offer fiber services to SMBs today as the telco can’t keep up with the higher speeds cable can provide over HFC.

Similarly, Cincinnati Bell also plans to be aggressive with trying to win back SMBs that could only be served by DSL services.

Leigh Fox, COO of Cincinnati Bell, told investors during the recent UBS event that it is winning back SMBs where it has deployed fiber as part of its Fioptics build. “As we had mentioned in the past, we had been getting beat by the cable companies in the SMB market based on speed and that’s turned,” Fox said. “We’re starting to gain share back again and I look forward to increasing that momentum in the future.”

Cable moves up market to target larger businesses

Although cable continues to enjoy its growth with small businesses, MSOs are also moving into the medium and large business space. And there’s certainly upside in serving the multi-site medium and large business market, one that Atlantic-ACM estimates to be $11 billion in 2016. 

Comcast, for one, established a specific business unit focused on larger customers in 2015. This unit, which was created last year, is focused on serving medium and large businesses with branch offices.

Mike Cavanagh CFO Comcast

“Think of us as, first and foremost, going after enterprise clients that have branch networks where the individual business that is the branch, whether it's a bank, a retailer, fast-food chain, the local needs are very well served by the type of products that we have,” Comcast's Cavanagh said during the MSO’s third quarter earnings call.

In order to deliver business services outside of its territory, Comcast Business has established NNI (network to network interconnection) wholesale agreements with a number of other cable MSOs including Cox Communications, Time Warner Cable, Charter Communications, Cablevision, and Mediacom.

“As you know, [we have worked] in coordination with other cable providers outside of our own footprint and that's working nicely,” Cavanagh said. “And you'd expect that as time passes and we get better and better, that's a good sweet spot to operate in. We like the margins, we like the growth trajectory, and we think it's got a good runway.”

Likewise, Charter is looking at opportunities to go up market. Rutledge said that because Charter is “underpenetrated,” it can build up a presence that would be different than what an incumbent telco would bring to the table.

“One of the advantages of the new company and the new footprint is the regionality that has been picked up in terms of our asset base since previously Charter was less of a percentage of designated market areas (DMAs) in most markets that we operated in,” Rutledge said. “We couldn't use mass media in a lot of places. And the same effect actually impedes enterprise growth because of the regional nature of a lot of enterprises and the multi-site facilities that larger enterprises have and the inability to serve those consistently when you have a spindly footprint.” 

Being a relatively new player, Cable One's Might said his company also has plenty of room to expand its presence in the enterprise space.

Tom Might

“Now we’re going to add the enterprise engine to go along with SMB and it could be huge,” Might said. “Even in the markets our size, the enterprise customers we’re attracting our customers that want a fiber connection rather than a DOCSIS connection.”

However, cable companies face some interesting challenges in going up market. Unlike the traditional telcos, and even competitors like Level 3, cable lacks the embedded relationships and an established off-net network reach. 

Reed said that having an off-net strategy is crucial if cable is serious about making a bigger dent in the large enterprise business market. 

“I think where there’s a lot of opportunity for them is a huge market of enterprise multi-location businesses which is dominated by VPN and they currently don’t have a product there,” Reed said. “They have talked about using some switched Ethernet and working with their partners doing some off net locations, but really when you have a distributed enterprise across the U.S. you have to work off-net and they are developing an SD-WAN offering.”

Reed added that if Comcast or another provider moves forward with SD-WAN, it will be done via a home-grown cable version. “We expect it to be some SD-WAN offering that’s a bit more proprietary,” Reed said. “They might try to use some of their own broadband partner’s networks to stay off the public network.

Other large enterprise-centric service providers like Level 3 aren’t really worried about facing off with cable yet because cable can’t match its reach.

Jeff Storey, CEO of Level 3, told investors during the Goldman Sachs Communacopia 2016 earlier this fall that cable operators lack the global connectivity large multi-national corporations require.

“Cable is a good competitor and I am sure that Comcast customers are receiving a good experience, but if you look at the reasons why customers are buying services from Level 3, it’s the scope of the network,” Storey said.

Ethernet, DIA remain key offers in the business sector 

As cable operators try to penetrate large local businesses and move up market, a key business service driver is Ethernet—a service they can deliver over fiber or their existing HFC-based DOCSIS systems.

Ethernet services are key to cable operators as they enable business users to transmit network traffic across multiple locations or be used as a high speed internet connection to support bandwidth-intensive, high-volume applications. Atlantic-ACM estimates that cable’s share in the Ethernet market as of the end of 2015 was 23% and it expects that share to increase 3-4% every year.

“The Ethernet market is centered in the metro area with continued statements about contracts they’re winning,” Reed said. “The Ethernet market as a whole is slowing down and there’s not as much migration from private line and some pricing pressure on cable and others, but we do expect cable to rapidly gain share.

It’s hard not to notice how cable is influencing the Ethernet market.

Take Charter Communications. Through the Time Warner Cable acquisition, Charter gained 150,000 miles of fiber and 75,000 on-net buildings connected to its fiber network. In addition to its own network, TWC had previously established 130 E-NNI (external network-to-network interface) agreements with 25 other service providers. This allows Charter to potentially reach into larger business accounts that have locations in multiple U.S. markets. 

Likewise, the Bright House acquisition gave Charter greater scale across number of key vertical industry segments such as healthcare, hospitality, government and education and an additional 18,000 miles of fiber. 

VSG Leaderboard

After purchasing Time Warner Cable and Bright House Communications, Charter surpassed Verizon as the third largest Ethernet provider in terms of port shares sold on Vertical Systems Group’s U.S. Ethernet Leaderboard.

Other cable operators like Comcast and Cox continue to remain dominant forces in the Ethernet market, holding onto a No. 5 and No. 8 spot on VSG’s Leaderboard.

Comcast and Cox’s rankings could be altered when three other acquisitions are completed: CenturyLink/Level 3, Verizon/XO, and to a lesser degree Windstream's acquisition of EarthLink.

In tandem with Ethernet growth, cable operators are also seeing Ethernet-based dedicated internet access (DIA) and SIP trunking voice services revenues grow.

Unlike a traditional cable modem-based or DSL internet connection, which are best effort services, DIA offers businesses a specified amount of bandwidth that's carved out and dedicated for their use. DIA is important to businesses like a local engineering firm that needs to upload large files to share with its clients, for example. 

On the voice side, SIP Trunking is a VoIP-based service based on the Session Initiation Protocol (SIP) to deliver telephone services and unified communications to customers equipped with SIP-based private branch exchange (IP-PBX) and Unified Communications facilities.

Comcast Business has been attracting business customers with not only Ethernet DIA, but also SIP trunking and TDM to IP transition voice services like its primary rate interface (PRI) trunk replacement.

The cable MSO launched its SIP Trunking service in 2015 with availability across its entire service area, covering 39 states and 20 major U.S. markets. 

“Cable has a pretty compelling DIA offer and you see more and more businesses having an Ethernet and a DIA link, so you see them gaining share there as well,” Reed said. “On the voice side, you see rollouts of some of the SIP offers and the hosted VoIP from Comcast is one of their fastest growing products and is an easy sell for the medium business market.”

BDS reform issues

Following the lead of the traditional telcos, cable operators take part in the wholesale services market by selling business data services (BDS), including Ethernet and optical services, to traditional service providers and business customers. Being a relatively new player in the BDS market, cable operators are concerned that if the FCC were to regulate lower speed Ethernet over HFC (EoHFC) services, it could hinder new network investments.

CenturyLink purchases lower speed wholesale EoHFC services from cable operators to deliver business services outside of its traditional ILEC footprint, for example. The telco said that EoHFC will "be used to fulfill a significant percentage of CenturyLink's Ethernet access orders" at a lower cost than Ethernet over Fiber.

Given the amount of competition that exists between telcos and CLECs in the business and wholesale markets, cable operators argue that if the FCC regulated lower speed services it would be departing from precedent to impose rate regulation. Additionally, regulating Ethernet pricing could actually reduce competitive options particularly for small businesses.

A number of cable operators told the FCC that if the regulator were to impose new pricing regulations on Ethernet services under 50 Mbps, it could potentially eliminate a competitive option for SMBs. This is because cable would not be able to prove a business case to expand the availability of these lower speed services to more SMB locations. 

The FCC took its BDS proposal off its November meeting agenda following the election of Republican Donald Trump. Outgoing Democrat FCC Chairman Tom Wheeler wanted to regulate lower speed Ethernet and transport services. At this point, it’s still unclear what a new FCC appointed by Trump will do with the current BDS proposal.

Earlier, a number of large cable MSOs told the FCC that they initially understated their capabilities to serve the retail and wholesale Ethernet services market. According to updated filings made by Charter Communications, Comcast, and Cox, there are 22 times more Ethernet-capable locations than the data on which the FCC based its May 2 further notice of proposed rulemaking (FNPRM).

Charter said in an FCC filing (PDF) that the FCC should refrain from regulating Ethernet pricing as it would drive cable MSOs to rethink offering lower speed offerings.

At that time, Charter revealed that legacy Time Warner Cable's average regional per-month price for 10-Mbps Ethernet service has dropped by about 23% from 2013 to the first quarter of 2016. Similarly, the monthly price for legacy Time Warner Cable's 5-Mbps Ethernet service dropped by about 29% during the same period.

Meanwhile, Cox petitioned the FCC to keep Ethernet over Hybrid Fiber Coax (EoHFC) out of the proposed BDS rules being considered by the FCC, arguing that the technology is best-effort and doesn’t meet the SLA requirements for wholesale-type broadband services required by many businesses.

But regional operators are just as concerned about BDS reform.

David Isenberg, VP of Atlantic Broadband, a regional provider that also has been growing its stake in the business and wholesale market segments, is just as concerned about the effects of BDS regulation.

“I struggle to understand the rationale of regulating a market where you have new entrants willingly investing and competing with the incumbents,” Isenberg said an interview with FierceTelecom. “From our perspective, it looks like a healthy market and we’re examples of that. We spend millions of dollars each year building fiber to people who don’t have good solutions and they’re thrilled with the value and the access that they’re getting.”

Isenberg added that “in some of these cases we struggle to make the business cases work and some of them are on the bubble and this could make it harder.”

Dan Templin, SVP of Mediacom Business, agreed. Over the past three years alone in the markets it serves, Mediacom’s standard fiber-based 10 Mbps customer has seen average prices decline by 28%.

If the FCC were to impose a requirement that there needed to be more than two competitors in a market, it could potentially hamper Mediacom’s ability to grow because the service provider offers service where the only other choice is an incumbent telco today.

“Customers are getting more capacity, prices are coming down even though it’s just us as the new competitor and the incumbent,” Templin said. “If you define four or more as competitive, it becomes an extant threat to competitive expansion because we’d have to reconsider where we’d want to build.”

Templin added that while new rules would not prevent it from building overall, they could limit their reach.

“If the prices become artificially set and they say with a 50 Mbps service you can’t charge more than X, it limits the number of locations we’re going to build out to if you can’t make an economic return,” Templin said. “If there’s no economic return, the reality is we’re not going to build as far, which is in direct conflict with their stated intent and Mediacom’s intent to be a leader in rural broadband.”

Reed said that cable is expanding its presence in the lower speed Ethernet services space, leveraging a mix of fiber and HFC-based offerings.

“Cable is rapidly increasing their portion of the market, especially on the low-speed Ethernet side,” Reed said. “They have their high speed fiber and low speed coax circuits and we think on Ethernet over Coax that’s picking up in popularity.”

Reed added that “where the ILECs had the majority of share in the low speed space that’s starting to shift and we think that’s really driven prices down on the business data services space.”

Regardless of what the future of BDS may hold, it’s clear that cable operators have become a growing alternative threat in the business sector. While it will take cable time to match the ILECs’ reach, they will continue to find areas of growth in this dynamic market segment.