Small and medium getting bigger

Cable industry making aggressive push in SME business market

The cable industry will continue to spend aggressively this year as it keeps rolling out the advanced service goodies, with products for small- and medium-size businesses a focus for most cable operators as they look for the next big growth push.

The big industry players' recent fourth-quarter earnings conference calls and investor conference appearances all featured at least some discussion of opportunities in the so-called small and medium enterprise, or SME, market, with many estimating there are easily billions of dollars to be gained for cable operators from this high-margin business, which really could start taking off as early as next year.

"We now think we've identified and are comfortable sizing a new market opportunity for Comcast, which is the small- and medium-sized business," Comcast Corp. chairman and CEO Brian Roberts said in his company's call in outlining the market potential. "We think in the next five years or so that we're going to be able to achieve a 20% market share. … If you take our market and our footprint that's available, that will generate an additional potential $2.5 billion in revenue, with about a 50% margin to generate another business line that can throw up $1.25 billion of (operating cash flow) when we reach those penetrations."

Roberts added that the capital Comcast will spend on pushing into the SME sector "can have a 25% or better internal rate of return" than investments in other advanced cable services and will "continue to position the company to grow not just in 2007 but for years to come."

Comcast executive vp and co-CFO John Alchin in the same call estimated that capital expenditures to press into the small- to medium-size business market will amount to about $250 million this year for his firm.

Indeed, Comcast recently started hiring several hundred customer-service and other personnel for its SME push.

Cablevision Systems already is pretty advanced in its commercial service rollout compared to its peers.

COO Tom Rutledge in his firm's recent quarterly earnings call said his team is "pleased with the early results of our entry into the small- and medium-size business market."

Cablevision estimates that its service network passes more than 600,000 businesses.

"For us, this is largely an untapped market that provides us with tremendous opportunity," Rutledge said. "While we're still in early stages of this business, we look forward to a successful 2007."

At a conference last week, he said Cablevision already is "in full battle mode" on the SME front.

While Rutledge declined to provide detailed guidance for the segment, he said this already is a "profitable business with high margins and relatively low capital."

Overall, most on Wall Street expect 2007 to see big cable operators lay the foundations for the SME business and start reaping the benefits next year.

However, Time Warner Cable might be somewhat slower than some of its peers as it is focused on integrating cable systems acquired from Adelphia Communications.

"We anticipate the ramp-up of TWC's SME initiatives to lag both Cablevision and Comcast as management initially focuses resources on the Adelphia integration," Merrill Lynch analyst Jessica Reif Cohen said in a recent report. "However, the SME opportunity is estimated to be a $12 billion-$15 billion opportunity in TWC's footprint and represents significant upside for the company."

Indeed, Deutsche Banc Securities analyst Doug Mitchelson in a recent note said the SME entry is a potential catalyst for TW and TWC shares.

TW chairman and CEO Richard Parsons in his company's fourth-quarter earnings conference call outlined TWC's SME plan like this: "In 2007, we will launch Time Warner Cable's Business Class Phone, an offering directed toward small- to medium-size businesses. Our management team believes the timing is right for this initiative, and we expect to launch this service in most of our legacy footprint during 2007." It will then be added to former Adelphia systems over time.

With cable investors always concerned about capital expenditure levels, Wall Street observers emphasize that while the addition of business subscribers does cost cable firms money, it is all success-based.

Said one Street observer: "This business will go from nothing right now to become pretty sizable soon."
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