“A Reordering of the Competitive Universe as We Know It”

December 2 – 9: “A Reordering of the Competitive Universe as We Know It” We're usually not so dramatic at Headlines, so we borrow our title this week from a quote from Craig Moffett, an analyst at Sanford C. Bernstein & Co. It is how he described the biggest news of the month to his client.

On December 2, SpectrumCo -- a joint venture between Comcast, Time Warner Cable, and Bright House Networks -- entered into an agreement to sell to Verizon Wireless the cable companies’ 122 Advanced Wireless Services (AWS) spectrum licenses for $3.6 billion. Comcast owns 63.6% of SpectrumCo and will receive approximately $2.3 billion from the sale. Time Warner Cable owns 31.2% of SpectrumCo and will receive approximately $1.1 billion. Bright House Networks owns 5.3% of SpectrumCo and will receive approximately $189 million.

Putting the deal in some perspective, perhaps, is a new paper by Darrell West of the Brookings Institution. He notes that the mobile economy is reshaping the global landscape. For the first time, people are able to reach the Internet in a relatively inexpensive and convenient manner. Regardless of geographic location, they can use mobile broadband for communications, education, health care, public safety, disaster preparedness, and economic development. Powerful mobile devices and sophisticated digital applications enable users to build businesses, access financial and health care records, conduct research, and complete transactions anywhere. He offers ten facts about mobile broadband:

  1. Smartphones Will Outnumber Personal Computers in 2012
  2. Mobile Broadband Is Growing Much Faster than Fixed Broadband
  3. More Than One-Third of Americans Own Smartphones and Use Them for a Wide Range of Services
  4. Mobile Technology Has Gone Global
  5. The Mobile Economy Is Creating Jobs and Driving Development in the United States and Around the World
  6. Mobile Applications Are Reshaping Education
  7. Mobile Helps Patients and Health Care Providers
  8. Mobile Alters the Way People Engage Politically
  9. Mobile Empowers Entrepreneurs and Overcomes Digital Disparities
  10. Mobile Is Vital to Public Safety and Emergency Preparedness

"Become Agents to Sell One Another's Products"

The companies also announced 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.

What the Deal Means for Cable

The deal means that cable companies are essentially killing plans to move into the cellular industry. Some insiders see this deal as an admission of failure by the cable industry even as it dominates growth in Internet services and wireline phones, previously controlled by traditional telephone companies. Miller Tabak & Co. analyst David C. Joyce said the sale is evidence that the "cable industry tacitly acknowledges that they cannot do wireless on their own." C|Net reported that Comcast and Time Warner would will slowly wind down their Clearwire business over the next six months, and plan to move their existing customers to other options.

"The biggest surprise is that it aligns the cable companies with Verizon, one of their fiercest competitors," said Mizuho analyst Michael Nelson. "The primary reason the cable companies formed this consortium and acquired this spectrum was to compete better with Verizon and AT&T."

What the Deal Means for Verizon Wireless

With this spectrum, Verizon can build what amounts to another LTE network parallel to its current 4G network at 700 MHZ. In areas where its current AWS holdings overlap with SpecrtumCo’s, Verizon will have a total of 60 MHz of spectrum, which would be enough to build mobile broadband networks with three times the capacity it has on LTE today. If it can get this deal by regulators, Verizon will seal its mobile broadband future for years to come.

The agreement comes at a time when consumer demand for wireless services and bandwidth is increasing rapidly. For Verizon, the deal is an important step toward ensuring that the needs and desires of its consumers for additional mobile services will not be thwarted by a spectrum shortage. While government action to free more spectrum is expected, this transaction ensures that the spectrum which is already available for mobile services is used to serve customers.

Verizon has an aggressive slate of 4G products in the works for next year -- including the vast majority of its smartphones. The carrier also plans to make more 4G devices affordable, further driving adoption. That'll be key to Verizon's effort to further extend its edge over the competition. The carrier was largely racing against itself when it came to 4G LTE this year, but 2012 will be different as rivals work quickly to roll out their own next-generation networks. Verizon, for its part, isn't so concerned. Verizon still holds an intimidating lead over its competition when it comes to 4G LTE deployment.

What Analysts Are Saying

“This is a strategic masterstroke for Verizon,” said Moffett. The agreement will lead to “a complete reordering of the competitive universe as we know it today.” It “amounts to a partnership between formerly mortal enemies, not just outside of Verizon’s FiOS territories, but even within them.” And the marketing agreements between Verizon and cable, he wrote, amount to “a partnership between formerly mortal enemies.” Moffett added that the purchase might be “the most significant deal the industry has ever seen. And that’s a pretty amazing thing to say for a deal where less than $4 billion changes hands.”

The partnership may make Verizon and cable operators more cooperative “frienemies,” said David Joyce, an analyst at Miller Tabak. “This might slow the competitive push from FiOS to drive down prices, which could help the cable companies,” said Joyce.

Where Federal Regulators Fit In

SpectrumCo’s sale and transfer of its advanced wireless spectrum to Verizon Wireless is subject to approval by the Federal Communications Commission. The Federal Communications Commission will “undertake a thorough, fair and fact-based review of the proposed transaction,” according to FCC spokesman Neil Grace.

The deal is also subject review under the Hart-Scott Rodino Act and other customary conditions. The Hart-Scott-Rodino Act established the federal premerger notification program, which provides the FTC and the Department of Justice with information about large mergers and acquisitions before they occur. The parties to certain proposed transactions must submit premerger notification to the FTC and DOJ. Premerger notification involves completing an HSR Form, also called a “Notification and Report Form for Certain Mergers and Acquisitions,” with information about each company’s business. The parties may not close their deal until the waiting period outlined in the HSR Act has passed, or the government has granted early termination of the waiting period.

Approval may require the sale of assets in certain markets, said Jeff Silva, senior policy director for telecommunications, media and technology at Medley Global Advisors LLC in Washington. “This deal is likely to eventually get approved with possible divestitures in any markets that the FCC and Justice Department find that Verizon would have excessive spectrum concentration,” he said. Experts point AT&T’s purchase of Qualcomm’s 700 MHz spectrum which the to the indicated it is willing to approve. There’s little chance the FCC would deny the same opportunity to Verizon.

The companies said that they do not think federal regulators can review their marketing agreement. They noted that AT&T has a similar cross-promotional deal with satellite company DirecTV. But antitrust experts said that either Justice or the FCC could expand its review and question how the marketing partnership would affect consumer choice.

“It’s fair to say this is going to get a hard and thorough review,” said the person familiar with the concerns of federal antitrust officials, who spoke on condition of anonymity because the review process is not publicly disclosed. “If not in the review, in an investigation.”

While consumers could eventually see their cable TV, Internet, home phone and cellphone services on a single monthly bill, some antitrust experts are worried about deal. They are especially concerned that Verizon — in its push to dominate wireless services and its new obligation to promote other cable companies — will lose interest in FiOS altogether. “A flag is raised when two rival networks move to start selling each other’s services,” said a person familiar with the concerns of federal antitrust officials. “They lose their desire, impetus, to compete. That is a big antitrust flag.”

Verizon said it remains committed to its FiOS service. “FiOS will continue to compete fiercely with cable, and we are committed to it for our customers,” said Verizon’s Peter Thonis. But, just days later, Verizon announced it plans to end its wireless LTE partnership with satellite provider DirectTV and will stop its buildout of FiOS television and Internet services in the next couple years. Moffett said the end of its partnership with DirectTV for a trial LTE service is “the first direct fall-out from Verizon’s ground-breaking deal” with cable companies. And even though McAdam insisted that Verizon will rigorously promote its FiOS video and Internet service in areas that compete with cable, the company said it doesn’t have plans to expand the expensive fiber network beyond what’s already been announced and scheduled for buildout over the next couple years.

Public Interest Concerns

Public Knowledge was one of the first groups to note the positive aspects of the deal. “On the one hand, it is good news that Verizon is paying $3.6 billion to buy useful spectrum from the cable company consortium. Spectrum is better held in the hands of those who will use it, as opposed to those who don't,” said PK Legal Director Harold Feld. "The transaction also shows how relatively cheaply more spectrum can be acquired by those who need it. The purchase price is about one-tenth of the amount AT&T wants to pay for T-Mobile to theoretically solve AT&T's spectrum shortage.”

But PK also raised some concerns. “At the same time,” Feld continued, “we have some questions and concerns about the transaction's side deal. Consumers have benefited from head-to-head competition between Comcast and Time Warner and Verizon FIOS. If this deal becomes a way for the companies to coordinate their product offerings to avoid competition, or a way to work together to exclude other competitors such as DISH from the mobile and wireless data market, that would obviously be a bad outcome. The Federal Communications Commission will need to review this transaction. Even with our general approval of spectrum being used, the Commission will also need to review the transaction against its 'spectrum screen,' which measures spectrum concentration rather than market share, to ensure that there is enough leftover spectrum in every market for vigorous competition.”

Mark Cooper, director of research for the Consumer Federation of America, said the deal deserves a hard look by Washington. “Verizon was supposed to be the great competitor for Comcast in the video space, while Comcast has been looking for a wireless play to match the Verizon bundle,” he said. “The deal signals bad news for consumers, who can expect higher prices for video, fewer choices and higher prices for wireless.” Broadcasting & Cable also noted Cooper’s objections. "The auctioning of spectrum has totally failed to promote competition in wireless," he said. Cooper said it was ironic that the announced deal came a day after House Republicans voted to foreclose the development of unlicensed spectrum that would give the public alternatives to paying Verizon -- or AT&T -- for cellular service. "With this purchase, almost 75 percent of the spectrum auctioned in the last decade has ended up in the hands of the top two wireless firms (AT&T and Verizon) and 90 percent with the top four firms," said Cooper. Given that spectrum is one of the barriers to entry for anyone planning a wireless network, and that getting the stuff approved for a mobile broadband network is daunting and expensive, it’s pretty clear U.S. policy hasn’t helped spread that wealth.

Stacey Higginbotham, writing for GigaOm, said the deal signals “the moment that the consumer benefits of the convergence of voice, video and data hit the wall.” Given that Verizon has both a broadband and a pay TV business, it had one of the best chances to push such a radical change in the pay TV business model. But now that it has some mysterious “agreements” with the cable guys, it’s unlikely that Verizon would try to infringe on their content businesses with its own over-the-top offering. That’s a bummer for consumers who might prefer a Verizon package over one from their local cable provider, but it’s also indicative of Verizon ceding the wireline market to cable companies.

Ex-Obama White House Aide Susan Crawford wrote, “This is the crystalline moment when the division of the marketplace becomes completely clear, even to people who haven’t been paying attention. Verizon and AT&T get wireless; cable gets wires; consumers are stuck. Wireless, like wired high-speed access already wholly dominated by the cable companies, is a natural monopoly service at this point, with incredibly high barriers to entry – so high that even current players, like T-Mobile, are having trouble making it. Clearwire has nowhere to go at this point. So we have the worst of all worlds: no competition, and no regulatory oversight.”

Wi-Fi, Higginbotham, writes, might be a potential competitive counterweight, but is “a pretty small hedge against the growing monopoly and duopoly in U.S. broadband... Maybe it was crazy to think consumers could get away with paying for a broadband connection for $45 a month, as opposed to paying around $170 for Internet, cable and voice. It might be technically possible, but the ISPs aren’t going to pass up on those profits unless competition forces them to. This latest deal may end up ensuring that competition continues to evade the U.S.” [For more on the role of unlicensed spectrum see Open Wireless vs. Licensed Spectrum: Evidence from Market Adoption]

The New Digital Divide

With all this type about wireless broadband, we don’t mean to short-change wired broadband, however. The USA Today this week offered an editorial noting that the “nation that invented the personal computer, television, the cellphone, the smart phone and — oh yes — the Internet, lags in creatively using all these things. In both land-line and mobile broadband, America is, at best, mediocre when measured on a variety of metrics such as penetration rates, Internet speeds and price.” And it puts the responsibility squarely on our telecommunications regulations:

In South Korea, consumers can get broadband service from a cable or telecom company. But they may also choose among myriad independent providers that are given access to the physical infrastructure. This competition keeps prices down and the quality of service high. If the U.S. were to take a similar tack, it would be a return to the way things once were. In the years of dial-up, phone and Internet service were two distinct things, with consumers getting multiple choices for the latter. A sweeping 1996 telecommunications law envisioned that state of affairs continuing after the move to broadband. But over time, cable and telecom companies worked the courts and Congress to make sure that this competitive world would never come to be. Today, in much of the country, consumers have little choice but to get their land-line service from a cable TV company, if they can get it at all. Wireless is a bit better. But the market has remained a near duopoly, with none of the smaller players emerging as a strong competitor to AT&T and Verizon. All this poses a problem. Being less connected than other countries in an age of information and technology could put the U.S. economy at a competitive disadvantage.

On December 3, the New York Times published a lengthy op-ed by Susan Crawford. She notes, “Increasingly, we are a country in which only the urban and suburban well-off have truly high-speed Internet access, while the rest — the poor and the working class — either cannot afford access or use restricted wireless access as their only connection to the Internet. As our jobs, entertainment, politics and even health care move online, millions are at risk of being left behind.” Hatty Lee observes the two Internets, too, in a piece for ColorLines. Crawford concludes: “The new digital divide raises important questions about social equity in an information-driven world. But it is also a matter of protecting our economic future. Thirty years from now, African-Americans and Latinos, who are at the greatest risk of being left behind in the Internet revolution, will be more than half of our work force. If we want to be competitive in the global economy, we need to make sure every American has truly high-speed wired access to the Internet for a reasonable cost.”

 

 

The FCC has its December open meeting next week and there’s lots more we’ll have our eye on. We’ll see you in the Headlines