Comcast/TWC will create one of the largest local telecom providers, says group of telcos

A group of  telcos, including CenturyLink (NYSE: CTL) and FairPoint Communications, has told the FCC that if the Comcast (NASDAQ: CMCSA) and Time Warner Cable (NYSE: TWC) merger is approved, they should not be required to provide the combined company access to unbundled network elements (UNEs) to deliver voice services.

Competitive voice service providers purchase UNEs, which are part of a local loop that connects to a DSLAM, a voice switch or both, from the major telcos at regulated rates to deliver voice services over their networks to businesses and residential customers. One of the immediate benefits is that it allows them to deliver services without having to invest in building out their own copper, fiber or HFC infrastructure. Under the 1996 Telecommunications Act, traditional telcos have been mandated to offer UNEs on an unbundled basis at regulated total element long run incremental cost (TELRIC) rates. 

While the FCC hit the stop clock on reviewing the multi-billion dollar deal right before Christmas, if it does go through, the combined company would immediately become one of the largest local service providers in the United States, serving about 16 million residential voice customers.

The service providers wrote in their filing to the FCC that since the new company would have greater scale of capital and facilities, the new Comcast would have the ability to invest in the network element it needs to compete in the voice services market.  

"Given these realities, it makes little sense for Comcast and Time Warner Cable to continue to have access to UNEs at regulated TELRIC rates," the telcos wrote in the FCC filing. "Given the sheer scale of the combined companies' infrastructure and market capitalization, the post-merger entity would clearly have the scale and scope to invest in any facilities it needs without obtaining them from its competitors at regulated rates."

In backing up their argument, the service providers cited Comcast and Time Warner Cable's application for the merger where they said that "greater scale will lead to greater revenue without proportionally greater costs," which in turn will mean that "more investments can profitably be undertaken, increasing the firm's incentive to invest in innovative new services." Both of the applicants added that the approval of their merger "will leave the merged company even better suited to offer an array of advanced voice services in competition with ILECs and other providers."

The telcos also cited a previous FCC proceeding where the commission said that providing access to UNEs at TELRIC rates in markets where they can and do compete without access to those facilities "undermines sound policy." In its proceeding, the FCC concluded that "unbundling can create disincentives for incumbent LECs and competitive LECs to deploy innovative services and facilities, and is an especially intrusive form of economic regulation – one that is among the most difficult to administer."

Despite seeing their traditional video revenues continue to decline as more consumers switch to alternative over-the-top (OTT) sources to get content like Netflix and Hulu, it's  hard not to notice how voice services have become a growing revenue source for both Comcast and Time Warner Cable.

During the third quarter, Comcast reported $2.75 billion in voice service revenues, while Time Warner Cable reported $1.4 billion in voice revenues. Interestingly, Time Warner Cable reported that business services rose 21.9 percent where it sells traditional video, voice and data services.

For more:
- see the FCC filing (.pdf)

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