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Stocks Unaffected by Cable-Modem Ruling

Analysts were generally unconcerned with the Ninth Circuit Court of Appeals ruling Monday that could change the classification of cable-modem service -- possibly opening up the industry to increased federal regulation -- with most stating that the battle is far from over.

The Appeals Court overturned a ruling by the Federal Communications Commission that classified cable-modem service as an information service, and not a common-carrier telecommunications service. Being classified as a common carrier would have opened up cable operators to a whole host of new regulations.

In the long-awaited decision, a three-judge panel said an earlier decision by the court that cable-modem service was both an information service and a telecommunications service under federal law was binding on the agency.

"Once again, the regulatory classification of cable-modem service is unsettled," Merrill Lynch & Co. media analyst Jessica Reif Cohen wrote in a research report. "However, we believe it will be business as usual until the legal mess is sorted out, which is not a near-term event."

Cohen’s comments were basically the consensus among analysts who cover cable stocks, although some expected a slight pullback in cable issues on the day after the decision was rendered.

For the most part, however, MSO stocks were relatively stable, with Comcast Corp. (down 27 cents per share, or 1%, to $30.94 each) and AOL Time Warner Inc. (down 12 cents to $15.47) the only cable stocks that lost ground Tuesday.

Among the gainers, Insight Communications Co. Inc. had the biggest rise (23 cents to $10.36), followed by Cablevision Systems Corp. (17 cents to $20.42), Cox Communications Inc. (up 9 cents to $32.39), Charter Communications Inc. (up 5 cents to $4.50), Mediacom Communications Corp. (up 5 cents to $6.90) and Adelphia Communications Corp. (up 2 cents to 35 cents).

Most analysts expect the matter to drag out for months or even years, with the next step likely an en banc hearing that could reverse the Appeals Court decision.

According to the principle of stare decisis, Bear Stearns Cos. Inc, media analyst Ray Katz wrote in a research report, if a court has already ruled on an issue, then a three-judge panel in the same circuit cannot break precedent with that court’s prior ruling unless overruled by a subsequent en banc opinion or a contrary decision of the Supreme Court.

"The en banc court clearly has the authority to do what three-judge panels normally cannot -- namely, overrule prior decisions of three-judge panels," Katz wrote.

Katz was encouraged by what he called the "barely unanimous" decision of the Appeals Court, adding that one judge "all but said his ruling was reluctant, purely procedural, based on very narrow interpretation of procedural law [and] that he felt constrained by precedent to overrule the FCC."

FCC chairman Michael Powell issued a statement Tuesday saying that he would instruct commission staff to appeal the ruling.

Lehman Bros. Inc. cable and satellite analyst Vijay Jayant believes the ruling could have more of an impact on cable telephony.

"Given the uncertainty surrounding this ruling, we think cable’s VoIP [voice-over-Internet-protocol] telephony service will be reanalyzed/delayed by certain operators, the attractiveness of which continues to deteriorate," Jayant wrote.