Comcast, Level 3's mega-mergers could shake up the Ethernet market, says VSG

Comcast's (NASDAQ: CMCSA) and Level 3's pending acquisitions of Time Warner Cable (NYSE: TWC) and TW Telecom could have a major effect on the status of the top U.S. Ethernet providers, reports Vertical Systems Group in its Mid-2014 U.S. Carrier Ethernet Leaderboard.

Comcast announced its intention to acquire Time Warner Cable in February, while Level 3 announced an agreement to acquire TW Telecom in June. 

"Four of the top nine providers are engaging in merger activity," said Rosemary Cochran, principal of Vertical Systems Group, in an interview with FierceTelecom. "We're not speculating whether these deals will close this year or next year, but those are likely to definitely shake up the Leaderboard."

Cochran added that "when you start consolidating, some interesting things can happen, but it's too early to tell and depends on who is standing in what position at the end of the year."

When the deals are completed, these service providers will immediately enhance their Ethernet footprints and service sets.

The TW Telecom deal will enhance Level 3's Ethernet capabilities with an enhanced on-net building footprint. As of the end of the second quarter, TW Telecom had 21,332 buildings, giving it 35,000 unique locations globally.

Likewise, Comcast will gain 860,000 on-net buildings from Time Warner Cable. It will also gain the 8,700-mile regional fiber-based network from TWC's acquisition of DukeNet.

Even before these deals have closed, Level 3 and Comcast made shifts during the first half of this year. Although there was no movement on the leaderboard among the top five Ethernet service providers--AT&T (NYSE: T), Verizon (NYSE: VZ), TW Telecom, CenturyLink (NYSE: CTL) and Time Warner Cable--Level 3 and Comcast both experienced port-share gains.

"At the bottom four there was a complete shuffle," Cochran said. "Comcast moved up from eighth to sixth place, so they are right after Time Warner Cable, and Level 3 moved ahead of XO, while Comcast bumped Cox."

In the Challenge Tier, which includes all providers with between 1 percent and 4 percent share of the U.S. retail Ethernet market, Integra and Megapath saw gains in the first half of this year.

These competitive service providers have been expanding their Ethernet footprints by expanding their on-net fiber footprints and their Ethernet over Copper (EoC) offerings to satisfy customer needs where their fiber does not reach today.

Megapath extended its EoC footprint in 2013 to 700 COs nationwide, enabling it to reach nearly 11 million businesses in all 50 major markets, with speeds up to 135x135 Mbps.

Meanwhile, Integra announced earlier this year that it expanded its EoC network to another 43 fiber-fed ILEC Local Serving Offices (LSOs), enabling it to reach more than 460,000 businesses in over 140,000 commercial buildings.

"In the Challenge Tier, Integra and Megapath moved up," Cochran said. "If you look at Integra and Megapath, they target certain types of customers and bundle different types of services, which is separating out who their target customers are and the segments they go after."

Despite the moves of the competitive providers, AT&T and Verizon retain their top-Ethernet-provider positions in terms of port share.

One of the elements that incumbent telcos and global providers like Level 3 bring to the table is their ability to provide Ethernet-access IP/VPNs, which is a key requirement for large corporate clients.

"The incumbents have the big VPN bases, which are very difficult to move," Cochran said. "If you look at this list, only some of these players, such as Level 3, Verizon and AT&T, are international, so that's a market and a different set of customer requirements you can address."

From an overall Ethernet perspective, growth of Ethernet continues to ramp up as customers migrate to the cloud and replace legacy T-1 and TDM services with Ethernet.

Cochran said the Ethernet market is moving into a steady growth period.

"The thing that we have seen over time is the hockey-stick growth," she said. "Now we're in a healthy growth period relative to other markets, and the key there is that there were more customer ports installed [in the first half of this year] than any other time."

For more:
- see the release

Related articles:
U.S. fiber penetration reaches 39.3 percent of buildings, says VSG
CenturyLink, Windstream take bigger bite out of incumbent Ethernet market, says VSG
VSG: tw telecom, XO, Level 3 take dominant competitive Ethernet position
Vertical Systems Group: TWC, Cox, Comcast grow Ethernet service presence

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