Business services: can MSOs compete with the big guys?

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If it's true about still waters, then the growth of the business services segment within the wireline industry, particularly in the last year, fits the profile. While analysts were debating the pitfalls of cord-cutting and the looming bandwidth shortage, cable MSOs were steadily building their business services divisions and competing directly with traditional telcos for the businessman's dollar.

The result, thanks to years-long investment and some key acquisitions recently, is that 2012 is shaping up to be the year of the business services provider. This will be a key growth area for both cable operators and carriers, both of which are eyeing larger enterprise businesses, and the fierce competition that's just shaping up could result in both big technological gains and highly competitive pricing: a win-win for the business customer.

Here are a few reasons why business services will dominate the conversation in the first half of 2012:

Cloud becomes ubiquitous

A big factor in the rapid rise to competitiveness by cable MSOs is the growth of cloud services, writes Cassimir Medford of Business Agility in a recent article. "Cloud computing reduces IT to a utility, and cable operators are public utilities providers. Their main products--TV, phone, and Internet--are all infrastructure-based," Medford writes.

This increased service capability is fortuitous: As the numbers of traditional subscribers dwindle and demand for faster and better data networks continues to climb, cable operators and carriers alike are relying more than ever on their business services offerings.

HFC, DOCSIS 3 put cable on an even footing

FTTH seemed like the way to go just a few years ago. But the cost of installing fiber plant is quite prohibitive: Verizon (NYSE: VZ) is limiting its FiOS buildout to between 18-21 PoPs (points of presence), while AT&T (NYSE: T) continues to utilize its existing copper lines to reach its U-verse nodes via VDSL2. Meantime, cable is continuing to utilize its existing networks, taking advantage of technology upgrades like DOCSIS 3 and hybrid fiber/coax (HFC) to boost speeds to 54 Mbps and higher--competitive with the telcos and their fiber networks.

"The capability of the HFC plant is just so superior, and ... it also means we don't have to deal with (Ethernet), in terms of either selling past it or deciding how to balance it," said Karen Schmidt, executive director of Data Product Management and Strategy at Comcast (Nasdaq: CMCSA). "On our business class Internet side, we actually have a product that's 100 Megs down and our ups are actually 20 Meg in a few markets. So we've really been able to deliver great Internet access products on our HFC plant."

Cable already has a foothold

Business services aren't a new niche for cable operators. Like their carrier competitors, some cable companies have offered business-class services for several years.

"It's always been a very good opportunity for us," said Todd Smith, director of media relations for Cox Communications, which was the first MSO to enter the business services market in 1993 and is on track to cross $2 billion in sales by 2016. "What attracted us to it was that we were building out our network and serving residential customers, and we realized along the way that, hey, we're passing industrial parks, we're passing businesses that we don't serve today and we could probably serve a lot of these--especially small businesses--with very little enhancement to our network."

Comcast's Schmidt feels the cable giant is competitive because it has the best of both worlds. "I look at Comcast as having both the reach and the network of the really big ILEC players, and yet we have the advantage of having the clarity of purpose of the CLEC, without the disadvantages of needing to buy everything from everyone else," she said. "We've got our own really solid network to build it on. So I think we're kind of uniquely positioned versus both the telcos on the incumbent side and the CLECs."

Cable is willing to spend and build

It's clear to the largest cable MSOs that just using existing infrastructure is not enough to remain competitive in business services. And many are willing to invest in new network infrastructure, including fiber, at a time when carriers are pulling back and reining in spending.

Comcast's foray into wireless over the past couple years has given it an extra boost in business services--not so much in realizing the quad-play dream but in the high speed backhaul infrastructure it built out.

"We have a great amount of fiber both in our core network, in terms of reach, miles and coverage, but we also have extended that just by merit of what we built to serve mobile carriers," said Schmidt, who explained that wireless customers are among the most demanding in terms of performance.

Suddenlink Communications, which saw 25 percent growth year-over-year in its combined commercial voice and data revenues during Q3 2011, is continuing to target business services in its 2012 strategy. The MSO last year invested $120 million into its Texas market to enhance its service offerings there, and gained additional presence in Arizona, California, and Missouri communities when it acquired NPG Cable; this year, said Kevin Stephens, Senior VP of Commercial and Advertising Operations, Suddenlink will focus on "targeted investments that help us serve customers and potential customers within our current footprint." The MSO uses existing infrastructure for its business services, but as it attracts more enterprise business, Stephens said, "we frequently install custom facilities for medium and larger accounts."

Acquisition is another key component to building the business services portfolio. Time Warner Cable (NYSE: TWC) made one of the first notable buys in early 2011, acquiring Navisite, an enterprise hosting and cloud services provider, for $230 million. Comcast acquired Chicago-based CLEC Cimco and VoIP wholesaler NGT in mid-2010 to build its mid-sized business service offerings.

Perhaps even more telling is that MSOs are attempting to do more than just eat carriers' lunch: they want to be able to invest a larger percentage in CLECs. Currently restricted to purchasing just 10 percent of a competitive carrier, the NCTA last August petitioned the FCC to ease cross-ownership rules, a move that would likely spur more key acquisitions and better position cable operators in the enterprise-class business services segment.

Does regional vs. national matter?

If there's a hitch to cable's growth in business services, it may be within the very infrastructure that makes it possible to bring cloud services to the enterprise. MSOs are offering a range of services, from voice to data to video, that at the large business level need to meet much higher demand than residential or small business customers typically need.

Vikram Desai, president of EarthLink Advanced Services (Nasdaq: ELNK), said in a recent FierceTelecom interview that the cable companies' regional footprint could be a problem. "Imagine you're a business and you can get dial tone and data connectivity inside a cable operator's footprint, but what happens when you go outside that footprint? All of a sudden you're managing a complex situation," he said. "...Chances are (a customer's) phone set is some type of IP phone that's based on SIP goes into a server, and when the dial tone stops it's just not that easy to fix. That's just the voice. You need to also figure out the data communications and (if that is) a separate issue."

Technical issues are not the only concerns; multisite enterprises may also have to contend with a different cable operator in different regions. "If you don't have a single platform to do that you're back to managing the piece parts yourself. That means you'd be using Cablevision (NYSE: CVC) in the Northeast and Time Warner Cable somewhere else and you have to build up that IT organization and your overhead costs go up and your efficiency goes down," Desai said.

But based on cable MSOs' network builds and acquisitions in 2010 and 2011, the regional issue may not be as difficult to surmount as some think. In any case, it will not stop them from going head-to-head with other business service providers in 2012.