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Cable Players Shift Focus to SMB

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According to a report published by Moody's Investors Service, the cable industry continues to expand into the business services vertical and is expected to see particularly strength in the Small and Medium Business (SMB) segment. They expect that the cable industry’s revenues from business services to SMBs will touch $9 billion by 2014, up from $5.2 billion in 2011. This is expected to come as a result of market expansion, as telecom companies see their SMB revenues stagnate at current levels.

At the end of fiscal 2011, it was found that the SMB segment contributed a mere $5 billion or 6% of the $88 billion in sales generated by the cable industry. However, there could be a change in the revenue share given that business services are expected to grow so strongly (73% from 2011 to 2014, according to Moody’s estimates)

Cable companies have been less successful in the residential segment, where they have been losing video subscribers over the past few years to big telecom players like AT&T (T) and Verizon Communication Inc. (VZ).

These large telecom players continue to roll out their fiber optic cable network to provide broadband data and video services to their customers. During 2011, Verizon added 701,000 video subscribers while AT&T added 800,000 video subscribers.

Cable companies on the other hand, while gaining at the SMB segment have been losing residential customers to telecom carriers. For instance, Time Warner Cable (TWC) and Comcast Corporation (CMCSA), lost 129,000 and 460,000 video subscribers, respectively, in 2011.

So in order to counter the threat from these telecom companies, Time Warner Cable and Comcast are continuously deploying DOCSIS 3.0 wideband technology to provide faster network service of up to 50 mbps to its customers. Moreover, these large cable companies are also diversifying their product portfolio by offering improved services to their SMB customers including Voice over Internet Protocol (VoIP) services and faster wideband services. Last year, Time Warner Cable and Comcast generated business service revenues of $1.47 billion and $1.79 billion, respectively, representing year-over year growth of 32.7% and 41.4%, respectively. Both these companies together accounting for nearly 65.2% of the total SMB revenue contributed by the whole cable industry in 2011.

Moody's Investors Service also believes that as these cable companies continue to grow in confidence in the SMB segment, they will gradually shift their focus to large business units, thereby acquiring more assets to compete with large telecom players. Moreover, they also believe that increased competition in the SMB segment may result in slowdown of business service revenue growth for telecom carriers in the near future. The revenue for the telecom players in the SMB segment is anticipated to reach $65 billion by 2014.

Currently, Time Warner Cable, Comcast Corporation, AT&T and Verizon have a Zacks#3 Rank, implying a short-term Hold rating on the stock.

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