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By Tim McElgunn
The U.S. cable industry won’t see more mega-mergers anytime soon, but that doesn’t mean the deal-making is done. A group of industry outsiders are seeking to squeeze their smaller networks into areas served by other providers and to enter new markets and compete for customers.
For now, the next wave of consolidation in the cable space looks more like a ripple. But as these small companies gain customers and momentum, they and their financial backers are looking to roll up more small but advanced network operators and to expand the reach of their networks.
As those networks expand and penetration of the high-growth business services market grows, this new wave of consolidation could feature relatively small companies with fiber-rich infrastructure, business-class service offerings and experience in integrating networks and service offerings.
There are about 470 cable companies in the U.S. delivering a mix of residential and commercial video, high-speed data and voice services, but after the recent round of mergers and acquisitions, just six industry giants—companies with between 500,000 and 22 million subscribers each—serve more than 80 percent of all residential cable subscribers and a much higher percentage of cable-served businesses. Another 15 or so companies have between 30,000 and 300,000 subscribers.
A group of private capital investors—like TPG Capital—and overbuilders—service providers including Grande Communications, RCN, and Wave Broadband that build new networks into areas already served by other providers—are among those looking to expand their networks and enter new markets to compete for customers, particularly lucrative residential high-speed data subscribers and, increasingly, businesses.
With all signs pointing to a largely deregulatory environment for telecom following the presidential and congressional elections, these smaller companies will be seeking to scale up quickly to stay competitive. An anticipated reversal by the Trump administration of recently-released Federal Communications Commission rules for business data services (BDS) would have the greatest near-term impact on the sector.
Business data services are offered by telecom operators and large cable providers to connect wireless cell sites to backbone networks and to deliver high-speed broadband services to businesses, schools, and government facilities. A significant percentage of those connections are bought by companies that compete with the telcos for business customers but do not have their own networks.
In its rules, the FCC differentiated older, less capable business services—which are offered predominantly in markets without significant competition—from newer types of data networking offers. The FCC rules leave in place “price caps” on the older services, in an attempt to approximate the effects of competition, while applying “light-touch” regulation to newer service types.
John Butler, senior equity analyst for Bloomberg Intelligence, told Bloomberg BNA that under the new administration it is likely that “the BDS rules are going to go away.”
If that includes doing away with price caps, it will give the telephone companies that still control the bulk of BDS connections the ability to raise prices that they charge competitors for the connections needed to reach business customers. That will limit the amount of investment they can make in building their own networks.
If a Republican-led FCC eliminates those rules, competitors believe that their fiber networks will be better able to compete for customers, and that they will be better able to invest in extending fiber networks. As an industry that depends on high levels of capital investment, the telecommunications services business “has always favored scale,” BI’s Butler said. And, for companies looking to bulk up, it may be cheaper to buy fiber networks than to build them, he said.
Wave Broadband is an example of a small company that has both built and bought greater scale as it competes in markets along the West Coast. The company serves residential and commercial customers in parts of California, Oregon and Washington. In most of its markets, Wave is competing directly with large service providers, including AT&T Inc., Comcast Corp., CenturyLink Inc. and Frontier Communications, Inc.
Wave Broadband founder and CEO Steve Weed says that his company remains on the lookout for opportunities to expand through acquisitions as well as by building new fiber facilities. Wave derives about 20 percent of its revenue from business services, Weed told Bloomberg BNA in November, and has made a large number of small acquisitions to beef up the reach of its West Coast regional fiber backbone, metropolitan area and internet access network reach with a focus on commercial services. Backed by a profitable business and $400 million in financing, Wave has acquired 18 companies since its founding in 2001 and steadily expanded its fiber network.
Private equity firm TPG Capital is also looking for scale in its telecom investments. The company in August agreed to buy cable television providers RCN and Grande Communications for about $2.25 billion. TPG said it will combine the two companies once the deal closes in early 2017 “to create a top-10 U.S. cable company and a regional market-leading provider of next-generation, high-speed data to residential and business customers.” TPG said RCN and Grande will challenge existing phone and cable operators by expanding gigabit-per-second, high-speed data services delivered over fiber and hybrid fiber-coax connections.
The resulting company will serve approximately 370,000 customers in Austin, Boston, Chicago, Dallas, New York, Pennsylvania, San Antonio and Washington, D.C. That is likely still too small to attract the interest of larger peers, but will give it the resources to compete effectively in its limited footprint.
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