Comcast Corporation (CMCSA) – the largest cable multi-service operator (MSO) in the U.S. – settled the three-year old dispute with international service provider, Level 3 Communications, Inc. (LVLT), through an agreement.
The dispute started in Dec. 2010, when Comcast asked for a higher fee from Level 3 Communications for its peering agreement.
Generally, peering service is offered free of cost. However, higher delivery of HD video content is gradually changing the peering pact between the Internet service providers as huge bandwidth is consumed to deliver such content.
So, when Level 3 Communications became the backbone service provider of streaming company Netflix, Inc. (NFLX), data transmission gradually increased. As a result, Comcast started demanding higher fees.
There is also another factor which we believe may have caused Comcast to hike its rates. Cheaper video streaming services from Netflix has resulted in continuous drop in Comcast’s video subscribers.
Hence, we believe that this might be a strategic move from Comcast to inflate the service charges of Netflix by demanding higher fees from its backbone service provider Level 3.
This agreement will benefit Comcast in two ways. Firstly, it will minimize the threat arising from Netflix’s cheaper streaming services. Secondly, it will ease network congestion.
During the last two years, Level 3 Communications has struck similar deals with the country’s second-largest cable operator, Time Warner Cable Inc. (TWC), and Cox Communication.
We believe that the agreement with Level 3 will not only improve Comcast’s top line but will also bring some changes to its business model.
Currently, Comcast Corporation carries a Zacks Rank #3 (Hold).
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