What Comcast-Cimco Deal Means for Agents, CLECs

The ongoing weak economy has proven one fact in telecom: Businesses – SMBs and enterprises alike – turn to IP services when forced to crimp spending. The trend has especially been a boon for the CLECs and agents that focus on SMBs. Such a boon, in fact, that cable wants finally wants in on the action. The test case of this interest – Comcast Corp.’s (CMCSA) takeover of Cimco Communications – has yet to reveal what that really means for competitive service providers. The bigger unknown is how cable-CLEC pairings will affect channel partners.

Several years ago, analysts predicted it wouldn’t be long before cable started jockeying for SMB market share. Those forecasts have yet to pan out as a meaningful trend; however, the largest cable company in the United States has made good in a small way. In October, Comcast bought Chicago-based CLEC Cimco, which specializes in IP services for SMBs. Cable operators need additional revenue sources, analysts say, and SMBs relying on digital networks are among the best targets. Indeed, the numbers support cable’s increased interest in this segment. By the end of 2009, for example, IP Centrex and hosted unified communications service revenue alone will have shot up 26 percent, year over year, according to Infonetics Research. That’s among the reasons why Comcast snapped up Cimco. And agents and CLECs had better pay attention.

Cable + CLECs + Agents = ?

For agents, watching how Comcast treats the channel may well indicate the destiny of the indirect sales channel. Steve Hilton, a vice president at Yankee Group, has high hopes.

“Some day Comcast will need an indirect channel across its footprint: Consider the Cimco channel as Comcast taking Intro to Indirect Channels 101,” he said.

The cable company, Hilton added, will “relish” the chance to see the indirect channel in action.

“Comcast will learn as much about the Cimco indirect channel processes, incentives, training, recruitment, etc. as possible,” he said. “And then it will apply it to its own indirect and direct channel efforts.”

The impact of the Comcast-Cimco on agents remains unclear then, and the same goes for CLECs.

There’s disagreement about whether Comcast’s move will spark copycat M&A. On the one hand, Comcast is the first operator to fulfill observers’ projections, perhaps indicating that its peers are ready to take the same risk. Cable MSOs are “frantically looking for additional revenue sources,” said Mike Jude, a program manager at Stratecast. SMBs represent a segment where cable can “make more money without a whole lot of additional infrastructure investment,” he added.

On the other hand, cable executives know SMBs have high expectations, so they may need more time to ensure their networks and employees can handle the demand. “You can’t make mistakes in serving larger-sized SMBs,” said Hilton. “MSOs want to take very careful steps in building their more advanced telecommunications businesses. Improper acquisitions would be distracting and possibly harmful in the longer term.”

Either way, Comcast is setting a precedent, and its integration and treatment of Cimco will speak volumes about how cable MSOs view their smaller rivals, and channel partners.

To that point, Cimco did not return a request for an interview. The company probably has been instructed by Comcast not to talk about the deal – the terms of which have not been disclosed – until the merger is complete. Thus, there was no insight into how Comcast intends to absorb Cimco, from retaining its executives and corporate culture to its plans for the indirect channel. Likewise, when asked for an interview, Comcast would only provide a prepared statement from Bill Stemper, president of Comcast Business Services.

“Cimco is a strong, well-respected company that presents us with an opportunity to accelerate our growth in the mid-market commercial business,” Stemper said. “They have built their business on providing superior service to companies with 20-250 employees and we look forward to integrating their expertise into our offerings.”

Pitfalls and Positives

Hilton said the one of the worst moves Comcast could make would be to impose its residential-centric processes and channel dynamics on Cimco (that goes for any cable-CLEC takeover, really).

“This would be a disaster,” he said.

Comcast needs to “act like a surgeon with a fine scalpel, not a chainsaw,” as it decides what changes to make in Cimco’s back-office, its channels and so on, Hilton added.

Jude agreed.

“The challenge to Comcast is how to serve this demographic that expects really focused customer service,” he said.

There could be some advantages, though. For one, having Comcast as a parent means Cimco will have access to deeper pockets, Jude said. Buying a CLEC in a valuable region such as Chicago shows cable companies “are willing to put their money where their mouth is.” Presumably, that means shelling out the money to make operations and marketing even better.

Besides, Hilton pointed out, “there are good chocolate cakes and then there are fabulous chocolate cakes. Comcast is going to learn the Cimco recipe for success … and bake it into its own B2B culture.”

Comcast executives, he added, “have the aptitude and intellect to get the job done.”

And in some ways, a cable-CLEC combination may be a natural part of the telecom industry’s evolution. MSOs, like their telco competitors, will be around for another 100 years, said Hilton. They “aren’t looking to be acquired out of the game like the CLECs.”

That’s because cable operators run multibillion-dollar operations, he explained, “and will provide much more challenging competition that the CLECs.” So as the communications world converges, then, so will the disparate providers.

‘Proof of Concept’

To be sure, the Comcast-Cimco combination will be one for CLECs to watch.

“I think this is a proof of concept,” Jude said. “There are many different ways for a cable company to approach the SMB space, and acquiring a CLEC is just one way.”

But keep in mind, Comcast’s timing could impact the success of the Cimco integration. That’s because Comcast is trying to land a 51 percent stake in media and entertainment giant NBC Universal. If Comcast succeeds, its focus will be torn in separate directions. That could hurt the Cimco integration, in which case the Comcast-Cimco deal might not serve as a reliable indicator of performance for similar mergers.

Comcast also will function as a test case as it goes up-market. The operator already serves business with up to 20 employees. Now, with Cimco, that number will jump to 250 or fewer. That’s a formula for pretty intense cable competition for SMB dollars. And CLECs, particularly in Comcast’s territory, should raise their radar screens, said Jude.

“If I were a CLEC,” he said, “I would kind of worry.”