My most recently acquired position in TALK took a bloodshed this week after a disastrous court ruling that weakened the fundmentals of FCC's Triennial Review Order, especially the portion regarding UNE-P, the price structure allowing cheap access to regional Bells' network that TALK's business model is relying on. TALK closed this week at $9.50, a 19% drop from last week's close of $11.70.
The ruling is yet another milestone in the political and legal battle between two camps. One camp includes the regional Bells (Verizon, BellSouth, SBC and Qwest), which will substantially benefit from the ruling because they don't need to offer their network to competitors at very cheap rates. The other group includes AT&T, MCI, TALK and other competitors, who relies on the cheap access to offer competitive bundling (local + long distance) solutions to consumers. WSJ provides an excellent summary of the background and implications of the ruling.
There are a lot of uncertainties moving forward. According to a Legg Mason report ("Legg: Telecom Regulation: Bells Win Ruling on UNE-P, Broadband") I read, the potential scenarios include:
1) States, CLECs and FCC, among others, can try an en banc hearing by the entire D.C. Circuit, or take this to the United States Supreme Court. The key is whether the ruling can be legally stayed within 60 days.
2) The five FCC commissioners have offered split opinions on the ruling. It may rewrite the rules and try another litigation round. Also, if the process takes long, the formation of the FCC may change after the election.
3) Even if the court ruling holds, how to resolve the pricing structure between ILECs and UNE-P providers are still and the pro-consumer states may still play an important role.
Anyway, the ruling is apparently a hit to TALK, even though TALK's business model is unlikely to be endangered in the next 12 to 18 months. In light of this development, I'm lowering my target price from $17 to $15 and will hold further investment into this issue.
More related stories:
BusinessWeek: For Whom the Bells Toll
NY Times: Appeals Court Favors Bells on Rates for Access