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Comcast: Business services is sweet spot in Time Warner Cable deal

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[April 02, 2014]  By Liana B. Baker

(Reuters)  Selling Internet and phone service to businesses is hardly the sexiest part of the cable industry, but it has got a definite allure for the architects of the $45.2 billion merger of Comcast and Time Warner Cable.

The two companies' sales to businesses of broadband Internet, voice lines and network services already total more than $5 billion, with the growth rate of 20 percent or more expected to be kept up at both the companies' business units.

If the merger is approved, the two companies' networks will run through 23 of the 25 largest cities  including New York, Los Angeles, Chicago, San Francisco and Dallas  giving the merged company a reach that rivals AT&T and Verizon in the $60 billion market for core telecom services such as Internet access and voice services, according to IDC.

The push to grab more business clients also reflects how cable companies are searching for new growth avenues as their traditional business, selling TV services to residential clients, matures.

"If the Time Warner Cable deal is meant to come about, and therefore we have a bigger footprint, then it opens up a great landscape to bring customers business solutions they never had before," Comcast's president of business services Bill Stemper said in an interview.

Unlike fickle residential customers who often defect for satellite and telephone competitors, businesses tend to sign long-term contracts with at least six months lead time.

Equally important, these contracts have richer margins than serving home customers. Comcast, for example, can bring in more than $50,000-$100,000 per month and potentially millions in revenue per year from a single customer like a large hospital.

Last year, Comcast generated $3.2 billion in business service sales, growing at a 26 percent rate, while revenue for residential cable increased 3 percent. The 22 percent growth in Time Warner Cable's $2.3 billion business service sales helped to offset a small 1.2 percent increase in its residential sales. That being said, this remains a small slice of revenue  about 10 percent for Time Warner Cable, and about 8 percent of Comcast's cable unit.

Both companies have a diverse roster of clients, with Comcast's ranging from potato chip maker Utz to Grady Health, a public health system in Georgia. Time Warner Cable's clients include Hospital Corporation of America and energy holding company SCANA Corp.

With Time Warner Cable's top markets New York and Los Angeles in the mix, Comcast can now serve new branches of clients it already has in Philadelphia and Chicago.

"That allows us to go to a business whether they're headquartered in New York or have a key linchpin site in New York, and speak to them about how these same services can serve more of these sites," Comcast's Stemper said.

So far, both cable operators generate most of their sales in small-to-medium sized businesses, companies with 20 or fewer employees. However, in the past few years they have made a push for bigger companies with as many as 500 employees.

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Indeed, executives at both companies have said the Comcast-Time Warner Cable merger will give it an entry to bigger customers, and a chance to get more business from the largest Fortune 500 companies, which could steal market share served by telecom providers such as AT&T, Verizon and CenturyLink.

"The combined entity offers a very compelling value proposition to large enterprise companies that require a nationwide provider of communication services," said Phil Meeks, Time Warner Cable's executive vice president and chief operating officer of business services.

Meeks said Time Warner Cable is also already serving some Fortune 500 companies through its cloud computing arm it acquired in 2011 called NaviSite.

Still, the combined Comcast/Time Warner Cable could face some major obstacles in moving beyond the small businesses clientele.

"The higher you move upmarket, the tougher it's going to be. The combined company will have a bigger regional footprint than AT&T and Verizon but AT&T and Verizon have developed a national structure that'll be hard to crack," IDC analyst Matt Davis said.

Verizon spokeswoman Janet Brumfield said the company has amassed what it believes is the greatest set of assets in the enterprise business, serving 96 percent of Fortune 1000 companies. AT&T declined to comment.

Meanwhile, Comcast and Time Warner Cable are looking at developing a presentation to existing and potential clients, but they can only start actually selling the services once the deal closes, Meeks said. They are also in pursuit of the same three sectors: healthcare, government and education.

The executives leading the business units, Stemper and Meeks, have similar backgrounds, both having worked at Cox Communications, one of the first cable companies to get into business services two decades years ago, and AT&T, which they are both now competing with.

Even without the deal, Stemper from Comcast said of annual business services revenue: "we see the ability to grow to the $4 billion, $5 billion and $6 billion-plus (range) in the road ahead."

(Reporting by Liana B. Baker in New York; editing by Ron Grover, Christian Plumb and Bernard Orr)

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