Comcast-Time Warner Cable Merger to Create Fourth Largest Business Services Player

Feb 13, 2014

Today, the Time Warner Cable merger saga came to a tentative conclusion as Comcast agreed to purchase the company in a deal worth $45.2 billion, or $154 a share. There are many implications in this deal for consumer services, which accounted for 92% of Comcast Cable System’s (excluding media) revenue and 89% of Time Warner Cable’s (TWC’s) revenue (before the DukeNet acquisition). As such, consumer services will be the primary focus of regulatory and investor attention. However, combination of the business services segments will leapfrog Comcast into position as the country’s fourth largest business services provider, which has significant implications for the business services market.

A New Giant is Born

The new “super” Comcast can be viewed in three business services parts – Comcast business services, TWC’s business services and DukeNet. The Comcast business services segment includes Internet, Ethernet network, TV/programming and voice services for small, medium and large enterprises, as well as wholesale wireless backhaul services. All in, this unit generated $3.2 billion in revenue in 2013, up 26% per from a year ago. Approximately 80% of this revenue was generated from small businesses with less than 20 employees, with the remaining 20% coming from medium- and large-sized businesses. (Although they represent a smaller share of the pie, revenues from medium- and large-sized businesses are growing at a faster rate than those from small businesses.)

TWC derives a larger portion of its revenue from business services compared to Comcast. Its business services revenue was $2.3 billion last year, an increase of 17% from 2012 (including pro forma acquisitions). TWC has been a player in advanced business services longer than Comcast and has a higher portion of revenues attributable to medium and large businesses, and wholesale services. Wholesale services accounted for 11% of TWC’s business services revenue in 2013 – with 34% revenue growth over 2012 (pro forma).

Assuming the deal is approved, Comcast also will inherit TWC’s $572 million DukeNet acquisition, which added 8,700 rout miles to TWC’s network. DukeNet’s revenues were not disclosed, but based on TWC’s statements regarding combined revenues, DukeNet generated approximately $120 million last year. Wireless backhaul accounted for 70% of revenue, with the company increasing its tower count from approximately 2,000 in April of 2012 to 3,500 in September of 2013.

If we combine these pools of revenue, the new company generated $5.7B in business services revenue in 2013 on year-over-year revenue growth of 22%. Peeling out video as well as cloud and other services for an apples-to-apples comparison, the combined company will represent a 5% market share in business and wholesale telecom voice and data services in 2013 – a jump from 3.9% in 2012, according to updated Comcast and TWC estimates and ATLANTIC-ACM’s 2013 Sizing and Share Study. The new company’s retail business services share in 2013 will be 6.4%, led by business broadband Internet access services (including DSL, Cable Modem and FiOS/Uverse-type services) with 31% share. Its wholesale data services share will be 2.8%, up from 2.3% in 2012.

Implications for the Business Services Market

  • Small Business Services: Cable companies as a whole have experienced considerable revenue growth in business services. Comcast and TWC still have considerable room for growth in the small business market, where the bulk of their revenue already lies. The service choices for many small businesses are expensive T1 services with meager download speeds of 1.5MB, mediocre DSL services and cable modem business services, which are the fastest of the lot. Cable companies have been leveraging these superior speeds, along with aggressive marketing campaigns, to rapidly capture revenue. Combined, Comcast and TWC will have more marketing and operational clout and will be positioned to pursue market share even more aggressively. In order to compete, AT&T, Verizon and others will have to step-up network investments for fiber and faster DSL services.
  • Medium and Large Businesses: The merger’s largest impacts on business services will be felt in the medium and large business segment. Currently, cable companies focus almost exclusively on enterprises with regional locations that fall within their on-net footprints. For multilocation connectivity, larger customers rely on companies like AT&T, Verizon, CenturyLink, Level 3 and others with large, national footprints of connected buildings (and years of expertise in connecting and serving enterprises with large retail and/or office footprints). The “new” Comcast will have a larger on-net footprint, greatly increasing its potential customer base. As the company improves its technical, operational and sales capabilities, it will become positioned to fiercely compete for revenues further and further up market.
  • Wholesale/Wireless Backhaul: On the wholesale side, TWC, DukeNet and Comcast have collectively established a sizeable backhaul business by connecting their fiber networks to wireless towers and selling Ethernet backhaul services. With wireless data demand exploding, and wireless carrier small-cell buildouts ramping up, significant future revenue opportunity exists in wireless backhaul. The combined company will be able to make larger deals, which could come with lower bulk pricing and easier contract management for wireless carriers. Additionally, the general tendency for cable players to proactively build out their fiber networks will set them apart in making deals with wireless players.
  • High-end Business Services: Comcast itself will especially benefit from TWC’s expertise in high-end business services products. TWC is a leader in Ethernet service and one of a handful of providers earning MEF2.0 Certification in all six Ethernet product categories. TWC also has SIP trunking, data center services and other products that will benefit Comcast. The combined company also will experience larger gains from potential technology-based acquisitions of providers with innovative cloud-services offerings

The Bottom Line

This merger positions the combined company as the fourth-largest business services provider, behind AT&T, Verizon and CenturyLink with more tools to gain market position. At 5% market share, the new Comcast has a long runway ahead of it. Expect the new “Number Four” player to methodically gain small business customers and strategically add products and expertise to move up market.

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