Verizon's SMB play faces challenge from cable in non-FiOS markets

Sean Buckley, FierceTelecomVerizon (NYSE: VZ) FiOS once again was the star in the carrier's Q3 wireline portfolio, driving up revenues 13.4 percent to $2.8 billion, but it sees potential in extending the service to more small to medium businesses (SMBs).

Just how big is the SMB opportunity for wireline operators offering high speed services?

A recent Analysys Mason study forecast that U.S. SMB information and communication technology (ICT) services revenue--which includes traditional services and IT cloud services--will increase from $37.54 billion to $40.60 billion between 2013 and 2018, at a CAGR of 1.6 percent. Out of that figure, wireline data revenue will rise from $5.16 billion in 2013 to $5.54 billion in 2018 at a CAGR of 1.2 percent.

Today, Verizon's SMB success falls into two categories: areas where it offers its fiber-based FiOS service, and areas where it has not built to yet.

"Within FiOS we are gaining share in the small business environment, but the issue is we have to pass those small businesses with FiOS," said Fran Shammo, CFO and EVP during the company's Q3 earnings call. "Honestly, that has not been a focus of ours as most of it has been on residential homes within our footprint."

Steve Hilton, principal analyst for Analysys Mason, told FierceTelecom in an e-mail that FiOS can provide a great deal of bandwidth for SMBs that have an appetite for bandwidth, but don't need the features of a dedicated Ethernet connection.

"FiOS is a great solution for SMBs that want fast speeds and don't need dedicated access like Ethernet or leased lines," Hilton said. "And frankly a lot of new cloud application and infrastructure adopted by SMBs don't require the SLAs inherent in dedicated access."

The problem and potential opportunity for Verizon and FiOS resides in the markets where it currently only offers copper-based DSL and wireless service.

"Outside of FiOS, it is hard for me to compete with the speeds that cable can offer them through DOCSIS 3.0 technology," Shammo said. "So yes we are using Verizon Wireless, we are using Fusion where we can but it is hard to compete because Fusion can't supplement a hardwired broadband connection into a very populated area."

Part of the reason why it does not reach more SMBs with FiOS is because its fiber to the premises (FTTP) effort has been primarily focused on serving consumers, and for good reason. As Verizon's legacy voice revenues continue to decline, Q3 2013 FiOS revenues rose 4.3 percent to $3.7 billion, for example. 

Meanwhile, cable operators are continually invading Verizon's SMB territory as they build out more fiber infrastructure to backhaul their consumer services and serve more business and wireless backhaul customers. Initially leveraging their consumer data, voice and video service portfolio, cable operators have enhanced their SMB product suite with new services such as Ethernet, SIP trunking and cloud-based telephony.

"Cable operators like Comcast (Nasdaq: CMCSA), Time Warner Cable (NYSE: TWC), Cox, Cablevision (NYSE: CVC) continue their transition from being communications providers to being technology service providers to SMBs," said Hilton.

Cable has a number of higher speed tools it can use to get the attention of SMBs.

Besides their HFC-based DOCSIS 3.0 networks, which enable them to fill the Ethernet gap between 2-10 Mbps, they are using a mix of fiber-based GPON and EPON.

One of the advantages with EPON for fiber to the business (FTTB) applications is it creates a low barrier to entry. Many of the EPON systems now support DOCSIS Provisioning of Ethernet Passive Optical Network (DPoE), a set of CableLabs standards that support a DOCSIS service layer interface on existing Ethernet PON Media Access Control (MAC) and Physical layer (PHY) standards.

Two cable MSOs that have been very aggressive in targeting the SMB and increasingly the medium-sized business markets are Comcast and Time Warner Cable.

While these MSOs won't release their Q3 2013 earnings until Oct. 30 and Oct. 31, respectively, they both reported that--besides consumer broadband--business services rose dramatically in Q2 2013. Comcast reported that business services revenues rose 26.4 percent to $788 million, while Time Warner Cable's business revenues climbed 21.8 percent to $565 million.

Cable operators may lack all of the capabilities Verizon has to compete for large business accounts, but in the markets where it offers FiOS today, it is clear Verizon should develop packages tailored for this customer base.--Sean