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The Cloud Hanging Over Cable Stocks


Cablevision, Comcast, and Time Warner Cable are down as the government's heavy hand of regulation moves closer to reality.

Last week, FCC Chairman Julius Genachowski arrived at the annual cable industry confab and proclaimed to the assembled masses, "I'm from the government and I'm here to [expletive] you."

Since announcing that the FCC will reclassify broadband as a Title II (i.e. telecommunications) service a week or so ago, Genachowski has placed a cloud over cable stocks. Cablevision (CVC), Comcast (CMCSA), and Time Warner Cable (TWC) are down anywhere from 6%-11% as the government's heavy hand of regulation moves closer to reality. As noted in last week's Wall Street Journal article describing the chairman's address to the meeting, Genachowski believes that the US lags in broadband adoption and that we haven't linked that adoption with economic growth.

The hubris of Washington regulators never fails to amaze. He stands in front of a group of executives who risked big bucks and changed this country's information infrastructure in a very positive way over the last 15 years. Now he's decided the government knows best with the creation of a straw man that doesn't hold up to scrutiny. When that happens, you need to question the real motives behind the messenger. More importantly, this has grave implications for the service providers as well as the telecom equipment OEMs that have helped create the infrastructure we have today.

The advent of broadband access arose commercially in the mid-1990s. Cable companies began replacing their infrastructure with high-speed fiber rings through neighborhoods with coax simply occupying the last mile. At the same time, development and standardization of data access via cable modems took place at the industry's R&D consortium in Colorado, Cable Labs. If you look at the graph below, you'll get an idea of the investment that's taken place to bring broadband to the masses over the last 15 years.

Some of you Cablevision subscribers may be wondering what you're carrier has been doing in recent years, but there's no questioning the commitment by Comcast. My sense is that Time Warner Cable would pretty much look the same were the data available beyond 2003.

Every dollar spent was at risk as there were no assurances that customers would subscribe to the service or that it would perform as advertised. When the telcos of the world finally realized the threat they faced, they fought tooth and nail as only a phone company could -- their lawyers pushed the FCC to classify the new data access as a telecommunications service. After that battle was lost, the phone companies rolled out digital subscriber line (DSL) service aggressively and consumers actually had choices.

Fast-forward to the mid-2000s and Verizon (VZ) does the competition one better with FiOS, its fiber-to-the-home alternative. Today we're on the cusp of mobile broadband via our wireless networks.

Maybe no other company has been the beneficiary of these market trends than Cisco (CSCO). If you think of it as a proxy for the telecom equipment industry, the graph below demonstrates just what success broadband and other technologies have meant to the markets.

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No positions in stocks mentioned.
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