MSOs or telcos: Which has the SMB market advantage?

David Dines, ACG Research

David Dines, ACG Research

For several years MSOs have been experiencing a steady decline in their video subscribers. The competition is primarily from telcos and, more recently, from the popularity of online/over the top (OTT) video. As a result, MSOs have wisely put substantial effort into expanding their small and medium business (SMB) market to diversify their revenue stream. 

Historically, telcos have been the primary supplier of telecom services to this market.  Because of this advantage, MSOs need to figure out strategies and business models that will enable them to unseat the incumbent. The question is how effective will they be?

One has to applaud the MSOs' initiative. All of the major MSOs have "double downed" their efforts, particularly in Metro Ethernet (ME)--a linchpin in the strategy for medium sized businesses.  This makes sense, as the telephony business is more of a zero-sum game, where data market continues to experience robust growth. 

Comcast's Business Services is the largest of the majors and fastest growing (53 percent), but the lowest as a percentage of the total business (3 percent).  Comcast's commitment to the medium size business market is demonstrated by the announcement of its new ME service.

Cox Business Services and TWC Business class generated $1 billion of revenue. Cox leads all MSOs in the United States ME market, ranking fourth in the market. Other MSOs are also aggressively pursuing the SMB market and have announced expansion plans for their ME networks and marketing efforts directed at the market.

MSO

2010 Business Revenue ($ M)

Percent of Total Revenue

Annual Growth

Cablevision (Optimum Lightpath)

284

5%

11%

Charter

494

7%

11% (18% for small business)

Comcast

1,300

3%

53%

Cox

1,000

7%

Not disclosed

TWC

1,000

5%

21%

It appears that cable industry is serious about the SMB market, so its success will hinge on pricing, packaging, marketing, customer satisfaction and reputation. In the latter categories, a JD Powers survey shows that MSOs as a class are not viewed any more negatively than telcos. It is difficult to draw conclusions based on the vendor type. In the SMB market, MSOs take the top three spots:  Optimum LightPath, Cox and Comcast; while TWC scores the lowest with Verizon and AT&T falling to the bottom of the list.    Though the results are somewhat different for home-based businesses, Cox and Optimum retain the top two spots; Verizon and AT&T take the next two spots, and MSOs occupy the basement.

Therefore, the battle will be settled on pricing, packaging and marketing, which, traditionally, are not strong features for MSOs in the SMB market. Given the relatively robust growth MSOs are experiencing, they must be getting several things right. However, in the long run they will most likely be unable to unseat the incumbent telcos.  

What does all this mean for the market? Telcos will not let the MSOs take the business without a fight.  Expect counter moves with pricing, bundling and promotions. If we look historically at market transition battles between the telcos and MSOs, we notice that the markets reach maturity in five to 10 years with challengers' gains less than 30 percent share. Verizon, for example, has attained a 24 percent penetration rate (3.66 million FIOS TV subs and approximately 15 million homes passed) after four years. Similarly, after 12+ years of competition, the cable companies have 23.9 million cable telephony customers out of a total of 123.3 million homes (with high-speed cable capability) for 19 percent penetration.  Although it will be an uphill fight for the MSOs to unseat the incumbents, stay tuned for what promises to be a lively battle.

David Dines is Principal Analyst, Video Infrastructure at ACG Research. He can be contacted at [email protected]

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