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Comcast Wins All the Battles but Risks Losing the War Against Internet Core

Tickers in this article: CMCSA CTL GOOG NFLX RAX T TST TWC VZ YHOO

NEW YORK (TheStreet) -- Comcast  seems to win all the battles when it's really losing the war.

The war in question is between the Internet Core, represented by Google and Netflix , and the Internet Edge, represented by companies such as Comcast and Time Warner Cable  as well as the phone companies AT&T , Verizon , and CenturyLink .  

Internet Core companies operate by sending bits out of a data center and therefore are more nimble and with lower costs than Internet Edge companies, which manage the actual connections and the physical network needed to run them. While such concepts can be a blur for customers who can buy content from both, Edge companies are finding it more and more difficult to get paid for the transmission of content. 

Comcast certainly won another battle this quarter. Revenue was up 3.5%, cash flow was up 7%, operating income was up 10.7%, and earnings per share were up 16.9%, beating analyst estimates at 76 cents per share.

The stock rose and now trades at a Google-like price-earnings multiple of 19.4. But the casualties of the ongoing war were also disclosed with Tuesday's release. The number of video customers kept falling with a drop of 144,000 to 22.46 millions. The number of Internet-only customers rose by 203,000, but these accounts have lower Average Revenue per User than video accounts. 

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The net neutrality fight is over who pays for bits that travel from the core companies to the edge ones. Under the traditional doctrine of "peering," bit traffic is designed to be two-way as in a traditional phone call, or the sender of bits is supposed to pay for use of the recipient's network. The Federal Communication Commission (FCC) has been trying to find a way to enforce peering rules in an age where people want video streams and think their Internet Service Provider (ISP) bill pays the full costs of delivery, which it does not. Millions of people complained against the FCC proposal fearing that it may put an end to the "open Internet age," but what the regulator is trying to do is simply have core companies paying for the "last mile" delivery.

This is especially important when it comes to edge networks, which cost more to maintain and upgrade than core networks. To upgrade a core network you may have to run a new fiber line, or you may just have to upgrade the electronics in a data center so that the fiber between centers recognizes more "colors" and thus has more capacity. To upgrade an edge network you have to run trucks -- most edge networks still lack fiber to the home that could be remotely upgraded. Maintenance also means costly truck runs.