Investor's Business Daily, September 24th, 2007
Having signed up 11 million residential phone customers, cable TV firms have dealt telecom companies a serious blow. Now, they're revving up to do the same with small businesses.
Cable's push into business services opens a new front against AT&T T and Verizon Communications VZ. Cable's push also threatens Qwest Communications International Q and the smaller phone companies known as competitive local exchange carriers, or CLECs.
Cable TV companies already sell broadband Internet access to small businesses. Adding phone services lets them offer a voice-video-Internet product bundle that matches telecom companies.
But telecom companies say cable firms will face more hurdles serving businesses than they did serving consumers.
"It's a different degree of difficulty for them," said Ralph de la Vega, AT&T group president, regional telecommunications. "It's a much more complex sell than a consumer. The more up-market they go, the more difficult it will be. I like our cards a lot better."
Wall Street, though, is likely to cheer cable's push into the small-business market, as long as it doesn't result in a big jump in capital spending.
Cable firms promise to keep their costs low by first targeting businesses where their cable wiring already passes. This makes for easy hookups. Cable firms say they slowly will expand from there.
Cable firms can attack the small-business market without a big outlay, says Imran Shah, co-founder of IBB Consulting.
"There is low-hanging fruit out there," he said.
U.S. small businesses spent $16billion on wireline voice services last year. Credit rating agency Moody's estimates cable firms can grab 8% of business lines by 2011, up from 1% this year, and 30% of the lines of very small businesses.
One cable firm, privately held Cox Communications, already has 30% of the business market in Phoenix, says Bruce Leichtman, principal of LRG Research.
Cox began offering wireline phone services to businesses a few years ago. Other cable firms are just getting started.
Time Warner Cable TWC sells phone service to businesses in 11 markets, says spokesman Justin Venech. Comcast CMCSA hired Bill Stemper, head of Cox business services, to lead its effort last year.
Comcast has said it plans to spend $250 million in 2007 and $3billion over the next five years to boost its business sales. That includes hiring 600 salespeople.
Comcast's network can easily be linked to "many, many" small and midsize businesses, Stephen Burke, Comcast's chief operating officer, said at a Goldman Sachs investor conference last week. "That's a $15 billion business that (local phone companies) have," Burke said. "What we've said is, wouldn't it be nice if we could take 20% of that."
But as cable rolls out phone service, AT&T and Verizon roll out their fiber-based TV services. The big cable stocks are down this year, but AT&T and Verizon are up.
AT&T, formerly called SBC Communications, has 3 million small-business customers in the 22 states it serves, and another 200,000 out-of-region customers. AT&T says its second-quarter revenue from small and midsize businesses rose 6.3% from a year earlier. It doesn't disclose the revenue figure, but UBS says AT&T gets about 10% of its total revenue from small and midsize businesses. That would have been $2.95billion last quarter.
De la Vega says AT&T has been taking share from CLECs, which have struggled since the telecom boom went bust in 2001. Some 300 CLECs were formed after Congress passed the Telecommunications Act of 1996 to spur competition, but most have failed.
Moody's said surviving CLECs still hold 26% of the small and midsize business market, and have 17.4 million phone lines in service.
AT&T and Verizon, though, like their chances battling cable firms in the business market, pointing out how well they've done vs. CLECs.
"We've been competing head-to-head with CLECs for many years," said Michael McLaughlin, a Verizon business marketing director. "The bottom line is that we've had insurgents come in on different waves, but in spite of that we're still the market leader."
Verizon, he said, is still the dominant supplier of services to small businesses in its local markets.
Surviving CLECs are merging to cut costs and gain scale. Paetec Holding PAET acquired privately held McLeod-USA last week for $492million in stock.Earlier, Paetec merged with U.S. LEC. Paetec's shares are up 34% in 2007.
On its most recent earnings call last month, Paetec managers downplayed the cable threat.
"We see them at the low end, not across the spectrum," said Edward Butler, chief operating officer, on the call. He did say that cable firms are "starting to make some noise" in marketing to smaller business.
De la Vega said AT&T sells a wider array of products than CLECs or cable firms.
Cable firms also are offering wireless phone service as resellers for Sprint Nextel S , but Verizon's McLaughlin isn't worried.
"Cable is strictly making a price play for basic communication services to get share," McLaughlin said. "What we do is more sophisticated. We help their business grow."
