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How Cable Industry Growth Could Benefit From FCC Special Access Investigation

Nov 18th 2015 at 12:08 AM

The previous article in this series noted that the FCC’s new “tariff” investigation of telephone companies’ data offerings to business customers (known as ‘special access’ services) would likely “boost the competitive prospects of Chairman Wheeler’s friends in the cable industry.” It’s not surprising that some readers sought an explanation of “why cable companies would benefit from special access regulation.” The uninitiated reader of the agency’s tariff investigation order would have no idea that cable companies are rapidly becoming a major competitive threat to telephone companies in the special access market or that FCC intervention could accelerate cable’s growth in that market.

The FCC order uses the word “cable” voluntarily only once—in footnote sixty-nine—which notes that “cable operators” are among the types of companies who buy special access services from telcos at government-regulated rates in order to resell them to business customers for a profit. The order mentions cable operators two more times, but only in reference to arguments made by telcos. Though the cable industry’s trade association, the National Cable and Telecommunications Association (NCTA), filed comments in the agency’s broader special access proceeding and individual cable operators submitted information in that proceeding, the FCC fails to mention NCTA or any of the major cable operators in its tariff investigation order.

Subsequent comments by the FCC chairman’s staff indicate the omission of cable operators from the FCC’s new investigation order was intentional. LightReading editor Carol Wilson recently reported that a member of Wheeler’s personal staff told a group of advocates for special access regulation that, “if these issues are portrayed as a battle of the really large, you are not going to win the debate.” It sounds like Wheeler didn’t want readers to know that, in the words of NCTA, “cable operators are making significant investments to provide commercial customers with services that are more robust and less expensive than the services offered by incumbent providers.”

It is difficult to reconcile the FCC’s decision to act as if cable operators don’t play a major role in the market for special access services with publicly available data. The 2014 annual reports of Comcast CMCSA +0.00%, Time Warner Cable TWC -0.54%, Charter and Cablevision (Cox, the fourth largest cable operator, is privately held) indicate that these four companies alone accounted for about 22% ($8.8 billion) of the $40 billion annual special access market in 2014 and are poised to continue taking market share from telco incumbents.

  • Comcast’s business services revenue increased 21.9% in 2014 and 26.4% in 2013. According to its 2014 annual report, Comcast “believe[s] the increases in the number of business customers are primarily the result of our efforts to gain market share from competitors by offering competitive services and pricing.”
  • Time Warner TWX -1.43% Cable’s revenue from its provision of business services increased 22.8% to $2.8 billion and represented 12.4% of its total revenue in 2014. It “expects continued strong growth in Business Services revenue driven by an increase in the number of customers (the result of continued penetration of buildings currently on its network and investment to connect new buildings to its network) and revenue per customer (due to growing product penetration, demand for higher-priced tiers of service and price increases).” It has established a target of growing its business services revenue from $2.8 billion in 2014 to $5 billion by 2018.
  • Cablevision’s business revenues increased 5% in 2014, “derived primarily from an increase in Ethernet revenue” and “partially offset by reduced traditional voice and data services” (i.e., the services telcos provide pursuant to government tariffs).
  • Charter increased the number of commercial customers it serves by 9.2% in 2014 (from 567,000 in 2103 to 619,000 in 2014) and its commercial services represented 11% of its total revenues.

These data indicate that, while the market for the tariffed services offered by telcos is stagnant or declining, cable operators view the deployment of new ethernet-based special access services as a significant source of revenue growth.

The cable industry’s ongoing investment in competitive ethernet services is unquestionably relevant to the regulation of special access services, including the tariffed offerings of telcos, but the FCC’s new tariff investigation largely ignores this data. The new investigation’s focus on the tariffed, antiquated copper-based network offerings of telcos is what the cable industry wanted. NCTA opposed the FCC’s broader data collection in its special access rulemaking and argued that the agency’s “primary focus should be assessing the need for new pricing flexibility triggers to replace the rules that were suspended in 2012” — i.e., the rules governing tariffed special access services provided by telcos. Though the issues raised in the tariff investigation are even narrower, the new investigation has the effect of focusing the agency on the same subset of tariffed telco services.

Narrowing the focus of special access regulation to telcos only could boost the competitive prospects of cable operators in several ways. First, cable operators themselves lease telco special access lines at government regulated rates and would benefit from any price reductions imposed by the FCC. Second, a variety of non-cable companies want the FCC to impose price regulation on all special access services, including ethernet-based services provided over new fiber facilities. To the extent the cable industry has a leading position in ethernet-based services, cable operators could be subject to price regulation if the FCC were to regulate the special access market more broadly. Finally, to the extent FCC regulation of tariffed special access offerings harms the ability of telcos to invest in new fiber facilities, it would boost cable operators’ efforts to take market share from the telcos.

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