Yesterday's news that Comcast Business will take on the large enterprise market with a new division prompted an interesting report to be issued by Cowen's Colby Synesael. He suggested that this move is another step down the path to a future where Comcast would buy a national network operator like Level 3 Communications.
Does the idea of a Comcast purchase of Level 3 hold water? It certainly makes a lot more sense today than it ever has, but the key thing is that this is a long term thought (as the report indicated) and not a current trading opportunity. A lot of things have to happen before Comcast is likely to make such a move:
- Comcast has to get comfortable with the large enterprise telecom and infrastructure markets. It's a customer base they don't have much experience with, having launched their attack from the SMB on up. Their reputation with such customers is minimal, unless you count the fact that they likely serve residential services to many of the executives making the decisions -- which probably isn't a net positive given their customer satisfaction levels on the consumer side.
- They have to get used to going off net. As the Cowen report noted, this is the first time Comcast has competed meaningfully outside its own footprint. It's going to take some time before anyone knows how effectively they will be able to use those wholesale agreements with their cable MSO brethren. How that coordination will operate in terms of installation times and SLAs and such in the real world won't be clear for years.
- Once they really start scaling off-net, they have to decide they want to actually own deep infrastructure outside their own cable footprint. That will certainly become necessary eventually if they are successful in the large enterprise market for the same reason it does for anyone else - control over both the network one delivers services over and the costs of doing so. But that also means competing directly not just with AT&T and Verizon but with those cable brethren too.
- The debate over network neutrality needs to reach a happier place. It might take a little time for net neutrality protagonists to put the pieces together, but if one of the biggest eyeball networks were to buy the largest internet backbone along with not just a huge share of the fiber itself but one of the few globally scaled CDNs, the combined entity would control enough pipes to do far more than erect a toll booth. Not that they necessarily would, but the mere potential for mischief would cause a significant regulatory fight today.
- Comcast has to be ready to go international. As big as Comcast is, they don't think too hard about anything outside US borders because they have never needed to. Level 3's international presence, especially in South America and Europe, are a key piece of the company's future.
All of these are logical steps down an evolutionary path for Comcast and the industry. And with the FCC essentially capping the size of Comcast's cable marketshare and clearly unlikely to let them expand much further in content, there aren't too many other growth paths open to them.
But each step is likely to be slowly and deliberately taken -- just look how unhurriedly Comcast took on the SMB marketplace. It will be many years, even a decade, before this story plays out. And a lot can happen in 5-10 years in this sector. By then, Level 3 will also likely look a lot different than it does today, and the entire thought experiment will have to be done again in some new context.
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