Boosting business services: How the FCC's CLEC decision affects competition

Samantha Bookman, FierceTelecomOn Monday, the Federal Communications Commission approved a request to grant cable operators limited forbearance from Section 652(b) of the Telecommunications Act of 1996, freeing MSOs like Time Warner Cable (NYSE: TWC), Comcast (Nasdaq: CMCSA) and Cox Communications to purchase CLECs (competitive local exchange carriers).

Previously, cable operators could purchase only 10 percent of a CLEC and could not have a managerial role in those providers. The FCC relaxed that rule for MSOs.

It's almost a given that this move will have a significant impact on the business services landscape. Cable operators, looking to replace subscribers lost to competing telcos and their triple-play service sets, have increasingly focused on business services as a revenue generator. Being able to pick up or merge with regional carriers will help them quickly expand their footprints.

That's great for competition in the short term. But long-term, will cable operators become the next near-monopoly behemoths? Will we see a situation similar to that of the current AT&T (NYSE: T)-Verizon (NYSE: VZ) duopoly in the United States? Or will the growth of one or two cable operators via consolidation turn them into effective competitors against that existing titanic duo?

Supporters of the rule relaxation are much more focused on being competitive today than on what the future may bring.

"When a cable operator purchases a competitive LEC, local competition is likely to increase and more infrastructure is likely to be deployed to serve the enterprise market," FCC Commissioner Ajit Pai said in an official statement following the ruling.

The FCC noted this directly in its order, saying that "mergers between cable operators and competitive LECs, both of which usually are non-dominant providers of telecommunications services, potentially serve many pro-competitive goals and appear consistent with the purpose and history of section 652. Streamlining the regulatory approval process for such transactions--without eliminating the important safeguards of the Commission's review of such mergers--can enhance facilities-based competition and spur technological innovation and investment that will benefit consumers."

Groups like the NCTA (National Cable & Telecommunications Association)--which initially petitioned the FCC last year--the ACA (American Cable Association) and the Broadband Coalition are equally enthusiastic about the change. "When competition thrives in the broadband marketplace, innovations occur benefiting businesses of all sizes... By opening the door to stronger more expansive companies in the broadband market, technologies like the cloud become more affordable and available to small and medium businesses," said Chip Pickering, spokesman for the Broadband Coalition, in a statement.

Alton Drew, a telecom policy analyst who advocates a free-market approach to broadband services, wrote in a blog post that the ruling won't have a negative impact on the broadband market landscape. "Provision of broadband by a well capitalized CLEC is better than getting shoddy service from a carrier that is on the brink of bankruptcy or considering leaving a market," he wrote. "Besides, cable companies were among the original CLECs. They had the technology to compete against the LECs and have proven the most successful of all CLECs in my opinion because they have their own facilities. As far as I'm concerned, failing to forebear application of section 652(b) to cable companies would have equated to preventing CLECs from merging with CLECs, versus the fear originally faced by Congress that cable companies would put CLECs out of business. They are one and the same."

Well, now that cable operators have what they want, where will they go with their newly gained ability to acquire and consolidate?

Comcast has already made a few growth-oriented moves. Its acquisitions of New Global Telecom and Cimco (a CLEC for which it had to obtain a waiver) were targeted toward growing its business services space. Given its ability to suck up companies of just about any size--its NBCUniversal merger, for example, in which it gained major traction in the content provider space--its next acquisition moves may be interesting in terms of size and scope.

Mega-consolidation may not be in the near-term strategy for Cox Business, which has been providing business services since 1993. An interview earlier this year with SVP Phil Meeks indicated that while the MSO's major competitors are the Big Three ILECs--AT&T, Verizon and CenturyLink (NYSE: CTL)--"our sweet spot in the marketplace is small businesses. Specifically, 85 percent of 280,000 customers are companies that have 19 and fewer employees."

While Cox Business is planning to expand into a $2 billion-plus business services provider by also looking for wholesale deals and targeting "large locals" like regional hospitals, acquisition and consolidation may not be necessary. That's because the MSO already has considerable infrastructure in place within its current service footprints.

For the short term, relaxing Section 652(b) is likely to be a big boost for cable operators, with benefits reaching business and residential customers in the form of more competitive pricing. In the long term? That remains to be seen.--Sam