Cable operators may finally get more freedom to acquire CLECs to expand their business service capabilities, according to a Stifel Nicolaus report, which said that the Federal Communications Commission (FCC) may relax rules that govern these deals.
In the report, analyst Christopher C. King wrote that the regulator will soon give cable operators relief from a provision in the Telecommunications Act of 1996 known as Section 652 restricts a cable operator's ownership in a local exchange carrier (LEC) to 10 percent.
If the regulations were to be relaxed, cable operators like Comcast (Nasdaq: CMCSA), Cox, or Time Warner Cable (NYSE: TWC), arguably three of the most aggressive cable operators offering business services, could either buy or merge with CLECs such as tw telecom (Nasdaq: TWTC) or XO Communications.
This report follows a petition that the National Telecommunications & Cable Association (NTCA) made last August with the FCC that said CLECs and cable operators should not be subject to the Telecom Act's cross-ownership prohibitions.
King wrote that it's likely the FCC will approve the NCTA's request for forbearance request from Section 652, adding that the FCC and state regulators would examine deal to see if they are in the public interest.
"We can't rule out that some critic would challenge the FCC's decision in court," the analyst wrote, "but our sense is the prospects would be uphill, leaving cable and the CLECs with a less-stringent review process."
Cable operators in recent years have gained increased market share in the business services market, offering a suite of their traditional HFC-based data and voice services to SMBs and offering Ethernet to larger businesses that are located inside of their cable footprint.
One of the advantages that cable operators have in the business market is that they don't have to cannibalize existing T1 or TDM-based voice revenues as they offer IP-based SIP Trunking and Ethernet.
Comcast Business, a newcomer to the business services market that immediately enhanced its business service play by acquiring both Cimco and NGT Telecom in addition to its own fiber builds, continues to find a strong audience for its Ethernet and SIP Trunking services with a growing base of school districts and other medium-sized businesses in its territory.
While Comcast is a relatively new player in the business market, fellow cable operators Cox Communications and Time Warner Cable, through its Time Warner Business Class division, have found a growing niche in the lucrative Ethernet services market. Both of these MSOs have, for a number of years, maintained a spot in the top seven Ethernet service providers on Vertical Systems Group's mid-year Business Ethernet Leaderboard, a report that measures port shares sold.
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