SMBs: The Next Big Thing

Nov 28, 2001 12:00 PM

Historically, most of the emphasis and effort in the cable industry has been focused on the residential market. But with the broadband evolution and the high growth expectations of the capital markets, cable operators clearly are looking beyond the residential market at the lucrative and rapidly growing commercial data and voice services market.

Recent advances in technology, competition and demand are prompting industry players to recognize small and medium-sized business (SMB) customers as the next major growth opportunity. This overlooked and underserved market has the potential to create significant revenue that could far outdistance the residential market.

Defined as a company with fewer than 100 employees, SMBs number nearly 8 million within the United States today. Their annual data and voice spending ranges from $5000 per year for a small company with 5 to 10 employees to $45,000 a year for a larger company with 50 to 100 employees. The combined spending of SMBs for both telephone and data services exceeds $48 billion annually – an amount that surpasses the current revenue of the entire U.S. cable industry.  

SMBs pose a tremendous revenue and service opportunity, and cable MSOs are well positioned to address this market by leveraging their existing network infrastructure and strong, widely recognized brand.

Attractive SMB service offerings

In addition to offering the traditional high-speed broadband Internet services, operators have the potential to go after the lucrative T-1 replacement business. By providing a high-quality voice-over-IP (VoIP) service that meets the business customers’ expectations, cable operators can capture revenue from existing monthly telephone expenditures. The delivery of these services alone represents a huge untapped revenue opportunity for cable MSOs.

However, MSOs are not limited to delivering just Internet access, T-1 replacement and telephone service to their new business customers. For example, only a high-speed, low latency data network can offer these other compelling SMB applications:

• Storage area networking (SAN) -- An outsourced service that uses a high-speed network to provide shared access to data storage resources for archiving, file serving, backup and other applications

• Virtual private networking (VPN) -- A VPN provides the functionality of the Internet with the security of a private network for businesses with multiple locations or many telecommuters. Businesses can seamlessly interconnect the LANs at their various sites so employees can work together more efficiently regardless of physical location

• Application outsourcing -- A business will outsource many of its IT functions to a specialized application service provider that is linked to the company through a high-speed data connection. This eliminates costly and difficult internal IT management. Many experts believe outsourcing is the future of IT and will replace many internal applications

• Videoconferencing -- For virtual business meetings, live video, voice and data can be transmitted simultaneously between two sites or among many different sites

• Peer-to-peer computing -- Companies can share files easily across locations and use otherwise idle processing resources for challenging computing tasks, rather than purchasing additional hardware.

Overall, the unprecedented growth potential of revenue in the business market far exceeds that of the residential segment. Compared with the average spending of a basic cable TV household, the average spending of one SMB with ten employees yields the revenue equivalent of 29 basic cable subscribers. In addition to their revenue potential, commercial services have the potential to be more profitable than new residential services. For example, residential broadband customers expect to pay between $35 and $75 a month for standard high-speed Internet access, while SMBs expect to pay between $150 and $1500 a month, depending on connection speed and service contracts. A single commercial customer of broadband services generates 38 times the EBITDA (earnings before interest, taxes, depreciation and amortization) of a residential customer.

The endless demand for bandwidth

Throughout telecom history, the debate has raged about how much bandwidth is “enough.” However, there has never been much debate about how quickly bandwidth needs can increase. Today, businesses demand seamless data integration with their customers, suppliers and branch locations. In fact, the demand for bandwidth has been growing at a rate of 60 percent per year. As data capacity increases, businesses always find a way to use it and benefit from it.

The fast downstream speeds of today’s broadband connections have simply whetted appetites for equally fast upstream speeds and all of the services they will enable. To serve business customers, the network operator’s goal should be to make so much network capacity available that bandwidth is no longer a concern. The only way to deliver on that promise is to deliver a highly reliable, low latency network with “next generation” services using symmetrical data rates, in the range of 100 Mb/s to 1 Gb/s. 

Current broadband technology offerings

Unlike large businesses, whose substantial expenditures on telephone and telecommunications services attract multiple competitive providers and justify the installation of dedicated fiber pipelines, few SMBs generate enough revenue to warrant extensive capital investment, leaving them with limited options.

Today, SMBs must settle for an assortment of unsatisfactory solutions, from conventional dial-up to copper-based DSL and HFC cable modems. 

SMBs receive their telephone and data services in a number of different ways. The majority receives local phone service from a local telephone company, plus long-distance from long-distance carrier. Some 38 percent still use dial-up modems for their data services. Everyone recognizes that conventional dial-up is much too slow, but options often are not immediately available besides upgrading the speed. Among SMBs that still use dial-up, at least 41 percent say they intend to upgrade within a year.

Another 27 percent of SMBs use ISDN or T-1 for data services, an option that is unavoidable for businesses that require the capacity, security and reliability of a dedicated, high bandwidth connection. However, this option is unsatisfactory because the technologies are slow to provision, not easily scalable and cost-prohibitive for most SMBs.

DSL and cable modems are less expensive but still too slow, unreliable and lacking the quality of service (QoS) management capabilities needed to provide the security and performance guarantees that SMBs demand. In addition, their asymmetrical data rates may be reasonably effective for applications like Web browsing, but they cannot handle the demands of symmetrical applications like videoconferencing and remote storage.

Another alternative for SMBs is fiber optic deployment of Sonet or passive optical networking (PON) technology. This option offers high bandwidth but requires extensive new fiber construction to build a parallel network. In addition to the high cost of the optical equipment, fiber construction projects are particularly costly when the underground plant is involved. In fact, the average outside plant construction cost alone for a typical PON deployment using underground facilities exceeds $35,000 per customer, most of which is labor cost, which will likely increase over time. In addition to the cost barrier, extensive plant builds slow deployment and require engagement with municipal authorities and property owners.

The bottom line is that all current technologies for serving the SMB market are sub-optimal in terms of cost and/or performance, especially when it comes to delivering emerging services, such as VPNs, SANs, videoconferencing and VoIP. If current technologies are all inadequate, how can cable operators the deliver value to -- and profit from -- the SMB market?

Leveraging the HFC plant to reach SMBs

New technology positions cable operators to effectively and profitably address these customers. By leveraging the existing coaxial plant, rather than making expensive new plant builds, cable MSOs can effectively address the SMB market. The existing cable network in the U.S. currently reaches 60 to 70 percent of SMBs. These new business customers can be served immediately, without new trenching and new pole permissions or other permits required for installation.

By adding a distributed switched Gigabit Ethernet capability to the existing HFC infrastructure, MSOs can create “virtual fiber” networks. This innovative approach gives cable MSOs a sophisticated hardware and software solution for delivery of next-generation services to SMBs. Cable operators will be able to leverage their largest deployed asset, the existing HFC network, to meet current and future bandwidth, service and QoS requirements of a wide range of commercial customers without an extensive network upgrade or plant buildout.

In summary, the SMB market opens a wealth of opportunities for cable operators to generate new revenue streams and to stay involved in the bandwidth evolution. MSOs must aggressively pursue new technologies and new market segments that will effectively position them for the long-term play.

Ahmet Ozalp is vice president of strategic marketing at Narad Networks.

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