Telco Pushback Could Slow Biz Services Growth

Chart image courtesy of ShutterstockUndoubtedly, the cable industry - especially the tier 1 operator segment - has made significant progress in pushing its business services agenda during the past couple of years.Deals - such as the Comcast/Beneficial Bank contract announced in September, which BTR explored last week - are not uncommon. The good news for cable operators is that they continue to find customers in their sweet spot, which is small and slightly bigger than small size businesses that are liberally sprinkled throughout their essentially residential service areas.While that side of the business is continuing apace, the industry is stepping up its courting of enterprises and the higher side of the medium-sized business market. In some cases - especially in relation to larger enterprises - the cable industry is making its play by offering carrier Ethernet services that are independent of the operator's coaxial infrastructure.It's a great, two-pronged approach. There may be a rude awakening ahead on the enterprise initiatives, however, as traditional carriers who suddenly see their core business threatened begin to push back, according to Fran Caulfield, research director at The Insight Research Corp.Caulfield is the author of Cable TV Enterprise Services, 2012-2017, which was published in September. The good news, according to Insight, is that cable will generate more than $7 billion in annualized revenue this year and experience a high growth rate. However, that revenue and the fast proportional growth will be challenged as competition increases.Broadband Technology Report Senior Editor Carl Weinschenk spoke with the Caulfield about the state of the cable industry's business initiatives.BTR:Your report suggests that cable's business initiatives may encounter headwinds as they move forward. Why?Caulfield: I think that while they have been successful, it is hard to maintain the acceleration of growth in revenue. Typically in business services market, which we track in aggregate, it is not a growing business. It is moving sideways, in some respects. It is flat or moderate growth at 1% tops for the wireline telcos. [Cable] is growing 25% to 30% on an annual basis in a market that is virtually flat. That indicates they need to take market share from players such as AT&T and Verizon, or you can't maintain 25% to 30% growth.BTR:You suggest that the landscape and atmosphere will change as cable is recognized as a legitimate threat, especially to telcos' core enterprise accounts. Could you elaborate?Caulfield: The big telcos will respond. They haven't yet. Our assessment is an industry projection of those responses. They can respond in a couple of ways. One is being more price competitive to hold onto the customers they have, and the other is [to improve] the overall performance of business services. By nature, these services demand greater performance, higher bandwidth, greater QoS and more support responsiveness. Telcos know how to do. Not that cable can't, but telcos have a lot of resources to throw at it.BTR: Do the telephone companies have an equivalent to the more modern Ethernet-based services the cable industry is offering, or are they offering customers legacy technology?Caulfield: The telcos have "me too" Ethernet services .... There could be some shifting ... a lot of legacy business services still are on private line or frame relay packet-type platforms that are coming to the end of their lifespan. There is an opportunity to [win customers] when those companies are changing over.BTR:What will this mean for cable once telcos begin more aggressively defending their core business segment?Caulfield: I think it will set up in the form of slower growth and lower margins on services. They face a pretty significant cash flow issue because it takes a lot of money to invest in these services, especially if you go after midsize and enterprise companies who require last-mile buildout.BTR: Overall, how are cable operators doing in their business initiatives?Caulfield: I think they are doing well. This is more about calibrating the expectations to lower than the current trajectory.BTR:What about the tier 2 and 3 players?Caulfield: I see tier 2 and 3 operators also expanding into business services. They have a lot of the same tools and exclusive footprint in their areas from the cable side.BTR: Is cable prepared for businesses' growing interest in wireless services?Caulfield: They've looked at wireless more than a few times, but backed down because of prohibitive infrastructure costs both for spectrum and the build out .... It's 2012, and they still don't have answer for wireless ... but business customers increasingly rely on wireless. They are not participating in that one growth area, and it does ... come into play in business services.Carl Weinschenk is the Senior Editor of Broadband Technology Report. Contact him at [email protected].