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2008 CABLE SHOW: Business Phone Service Signals Big Opportunity For Cable

NEW ORLEANS—Business telephone services represent a huge opportunity for cable companies, but operators were cautioned that the key to their success or failure will likely be customer service, according to a Tuesday panel discussion at the 2008 Cable Show.

Heavy Reading senior analyst Alan Breznick estimated that all business in the U.S spend about $130 billion on commercial phone and data services each year. The smaller business market—those with fewer than 100 employees and initially the main focus of cable operators—spends about $50 billion annually on phone and data services, Breznick said.

While cable operators have been selling data services to business for years, Breznick said the bulk of the business spend is on phone service. But with residential cable phone well under way, and a plant that passes the vast majority of businesses in their respective service territories already, Breznick said that the cable industry is in a strong position to capture a good percentage of that business.

While cable has been relatively slow to aggressively target the business market—the industry has roughly 1 million business customers, led by Time Warner Cable with 280,000 customers—the industry is beginning to gather steam, Breznick said.

“The key is if cable can step up to the plate and show that they can match or exceed the performance reliability of the phone companies,” Breznick said.

From a Wall Street perspective, the potential returns from commercial communications are huge.

Morgan Stanley media analyst Ben Swinburne estimated that cable companies could generate about $300 per month of revenue from each commercial phone and data customer, translating into a cash flow margin of between 50% and 60%.

Given the capital outlay for providing the service—about $1,000 for each customer added—Swinburne estimated there is about a six-month payback for commercial service.

While commercial phone and data represent a strong business, Swinburne added that cable companies also stand to real big returns from other business services like cellular backhaul. He estimated that Wall Street expects total commercial revenue from the sector to reach between $6 billion and $8 billion by 2012, with cash flow in the $3.5 billion to $4 billion range.

UBS Securities media analyst John Hodulik said that cable has a big advantage against incumbent telcos on the price front—currently he estimates telcos charge businesses about twice the residential phone rate.

Swinburne agreed, adding that he didn’t think the telcos would fight back by lowering their prices.

“You’ll see on the margin, more aggressive tactics [from the telcos], mainly locking people into longer contracts,” Swinburne said.

But Hodulik said the biggest advantage for cable operators will be on the customer service front. Very small businesses—those with less than 10 employees like pizza parlors and doctors offices—have been virtually ignored by the telcos.

“If cable can put a face in front of the customer and give great customer service, there is a lot of market share they can take,” Hodulik said.        

 For more news from NCTA's The Cable Show '08, click here.