Verizon Wireless Acquisition of SpectrumCo (cable company) Spectrum

On December 19, 2011, Verizon Wireless and SpectrumCo filed an application for the consent of the Federal Communications Commission to the assignment of 122 Advanced Wireless Services (“AWS” -- the 1710-1755/2110-2155 MHz bands) licenses from SpectrumCo to Verizon Wireless. The 122 licenses cover 120 markets because in two markets, SpectrumCo holds two AWS licenses. In each market, SpectrumCo has 20 MHz of spectrum, except in Houston, where it has 30 MHz of spectrum.

SpectrumCo was created in 2006 as a joint venture among subsidiaries of Comcast, Time Warner Cable, Cox Communications, Bright House Networks, and Sprint Nextel. SpectrumCo was the successful bidder for 137 wireless spectrum licenses in the FCC’s AWS auction, which concluded in September 2006. In 2007, Sprint withdrew from SpectrumCo, and the SpectrumCo members purchased Sprint’s interests for an amount equal to Sprint’s capital contribution to the joint venture. In 2009, Cox also withdrew from SpectrumCo, taking with it the share of the AWS spectrum to which it was entitled under the SpectrumCo agreement. Today, SpectrumCo is owned by Comcast (63.6 percent), Time Warner Cable (31.2 percent), and Bright House (5.3 percent).

SpectrumCo has determined as a business matter, based on a variety of marketplace factors in combination, that constructing and operating a standalone facilities-based wireless network with that spectrum would not provide a return that would warrant incurring the substantial costs and risks involved.

• the financial resources required to build a wireless network are enormous – SpectrumCo estimated that “the capital expenditures and cumulative negative net operating costs would be approximately $10 - $11 billion.”
• SpectrumCo assessed the possibility of market entry with the 20 MHz of spectrum it had won at auction, SpectrumCo concluded that this might be sufficient to initially deploy an LTE wireless network. SpectrumCo concluded that, if it were successful in attracting a significant number of customers (including from its owners’ base of cable customers), it ultimately would have to incur further costs to acquire additional spectrum to serve those customers and their rapidly expanding demand for mobile services in a sustainable way
• SpectrumCo concluded that entering as a facilities-based provider would involve other costs and complexities. For example, to be competitive with other providers, SpectrumCo would need to purchase from manufacturers the devices most attractive to consumers at cost-effective prices, and would need to incur the cost of providing a sufficient subsidy for any such devices.
• In addition, SpectrumCo would need to secure nationwide roaming agreements.

The parties emphasize that the transaction involves transferring only spectrum and no other assets, facilities, or customers. The transaction will move spectrum that is not currently being used to serve consumers to a provider that will make efficient use of that spectrum to serve the public. The transaction will not reduce the number of choices for wireless services that consumers have in each of the licensed areas. The applicants, then, assume that there will be no anti-competitive effects of the transaction and, therefore, the Federal Communications Commission’s review should be limited.

Verizon Wireless also argues that the transaction will not exceed FCC spectrum screens:

• because the transaction would affect no change in market share, two of the three screens the FCC uses to identify markets where there may be potential competitive harm –which both pertain to changes to the post-transaction Herfindahl-Herschman Index (“HHI”) – simply do not apply
• the remain spectrum screen is not triggered in 105 of the 120 markets included in the transaction. The screen is 145 MHz in nearly all markets nationally, and Verizon Wireless would remain below this level in 2,230 of the 2,276 of the counties covered by the SpectrumCo licenses – or in 97.7 percent of the covered counties.
• In remaining markets, Verizon Wireless argues, screen overages are minor

For Verizon Wireless, the transaction will enable the company to add network capacity to meet growing demand.

Although not mentioned in the application, when the transaction was announced, the parties also said that they have entered into several agreements, providing for the sale of various products and services. Through these agreements, the cable companies, on the one hand, and Verizon Wireless, on the other, will become agents to sell one another's products and, over time, the cable companies will have the option of selling Verizon Wireless’ service on a wholesale basis. Additionally, the cable companies and Verizon Wireless have formed an innovation technology joint venture for the development of technology to better integrate wireline and wireless products and services. That would allow, for example, a consumer to walk into a Comcast store and get a Verizon Wireless plan tacked on to his television, Internet and landline phone service.