New Markets Often are a Zero-Sum Game: Some Winners, Many Losers

One of the perhaps cruel ironies in the communications business is that a business strategy that works for some providers cannot work for all, in part because every segment of the market is limited. In any product segment or location, a few providers might make a nice business serving a particular customer segment with a particular set of products.

Consider the example of smaller business services, historically served by smaller independent providers as well as the leading communications providers in an area. Some of the larger independent telcos, including Frontier Communications and Windstream, for example, have dramatically changed their customer and revenue profile by focusing on business customers.

Cable companies are doing the same, targeting smaller businesses for bundles of voice and Internet access services, mobile backhaul services and enterprise services in a growing number of cases.

Recently, for example, Time Warner Cable acquired DukeNet Communications, a provider of regional fiber services in the Carolinas (North and South) and five other southern states.

DukeNet currently counts among its customers more than 3,500 cell sites as well as other businesses. That’s an example of the growing cable operator emphasis on business services.

From the first quarter of 2011 through the second quarter of 2013, Time Warner Cable grew business customer revenues at an average quarterly growth rate of 6.8 percent, from $312 million to $564 million.

At the same time, business segment revenues grew from seven percent of total revenue to 11 percent of total revenue.

On the other hand, that strategy cannot work for every other provider. The tier one carriers largely stand to lose customers to cable and other providers, for the simple reason that local telcos traditionally have served most of the small business customers in an area.

But some of the market share gained by cable providers, Windstream and Frontier Communications also will be taken from independent providers as well. Small business communications revenue, in other words, is a zero sum game.

There are only so many customers, willing to spend so much money for services, so gains by one provider come at the expense of another.

One might argue that the number of small businesses is growing, and that will increase the pool of potential customers to some extent. At the same time, many small businesses are finding that consumer services and apps now are good enough to supply many of those needs, so there are multiple forces at work.

For businesses that continue to buy “traditional” services, advances in cloud computing and declining costs for Internet access mean many mid-sized firms also can get higher performance while not spending more money.

The point is that a revenue growth strategy that works for some suppliers will not work for all suppliers. So even if a focus on business customers is proving to be a workable strategy for larger cable companies and larger independent telcos, it is not at all clear that works for the typical very-small telco, or even well for independent service providers that historically have served the small business market.

“Eat or be eaten” resonates in this instance because many of the near-term sources of incremental revenue require some scale. And that automatically means a focus on business customer services will fuel growth for some new providers with sufficient scale, but not all smaller providers who might otherwise consider that approach feasible.
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