Verizon-SpectrumCo: How Do Ya Like Me Now?

Last week, Benton’s Headlines staff was distracted by breaking news from the Department of Justice that it was approving, with some changes, a nearly $4 billion deal between Verizon and some of the country’s largest cable companies. By this week’s end, the deal was approved by the Federal Communications Commission as well. Here’s a quick recap of how the week played out.

On August 16, the Department of Justice (DoJ) announced that it would require Verizon and four of the nation’s largest cable companies -- Comcast, Time Warner Cable, Bright House Networks and Cox Communications -- to make changes to a series of agreements concerning both the sale of bundled wireless and wireline services, and the formation of a technology research joint venture. The DoJ said that, if left unaltered, the agreements would have harmed competition by diminishing the companies’ incentive to compete, resulting in higher prices and lower quality for consumers.

Verizon agreed in December 2011 to buy $3.6 billion of unused wireless spectrum held by the nation's four largest cable providers. Verizon wants the spectrum to help build out its 4G network. In return, the cable companies will be able to buy access to Verizon's 4G services and bundle it with their own triple-play offerings (pay-TV, broadband Internet, and telephone service). The companies plan to cross-sell each other's services. Verizon will advertise and bundle cable services with its own wireless and landline services, and the cable companies can do the same for Verizon -- but not for Verizon's competitors.

DoJ also said that it would allow both Verizon’s proposed acquisitions of spectrum from the cable companies and T-Mobile USA’s contingent purchase of a significant portion of that spectrum from Verizon to go forward. DoJ said that the spectrum transactions facilitate active use of an important national resource and thereby promise substantial benefit to wireless consumers.

On August 16, DoJ’s Antitrust Division, joined by the New York State Attorney General’s Office, filed a civil antitrust lawsuit in the U.S. District Court for the District of Columbia to prevent Verizon, Comcast, Time Warner Cable, Bright House Networks and Cox Communications from enforcing a series of commercial agreements. At the same time, DoJ filed a proposed settlement that, if approved by the court, would resolve the concerns alleged in the lawsuit.

DoJ’s Competitive Impact Statement contains the department’s observations about the most anticompetitive consequences of the Verizon/Cable deal. The commercial agreements:

• Harm competition in the video, broadband, and wireless markets because they impair the ability and incentives for Verizon and the cable companies to compete aggressively against each other.
• Contractually require Verizon to have a financial incentive to market and sell the cable companies’ products through Verizon Wireless channels in the same local geographic markets where Verizon also sells FiOS.
• Unreasonably diminish competition between Verizon and the cable companies—competition that is critical to maintaining low prices, high quality, and continued innovation.
• Unreasonably diminish future incentives to compete for product and feature development pertaining to the integration of broadband, video, and wireless services.
• Unreasonably restrain the ability of the cable companies to offer wireless services on a resale basis.
• Unreasonably restrain competition due to ambiguities in certain terms regarding what Verizon can and cannot do to compete in the marketplace.
• The aspects of the JOE unreasonably reduce the companies’ incentives and ability to compete on product and feature development, and create an enhanced potential for anticompetitive coordination.

DoJ said the proposed settlement protects competition and consumers by removing provisions that would lessen the companies’ incentives to compete aggressively in the areas where Verizon’s FiOS services offer a critical competitive alternative to the cable companies’ video and broadband products. The proposed settlement also limits the duration of the companies’ collaboration to December 2016 in important respects, ensuring that they retain incentives to compete against one another .

The proposed settlement forbids Verizon Wireless from selling cable company products in FiOS areas and removes contractual restrictions on Verizon Wireless’s ability to sell FiOS, ensuring that Verizon’s incentives to compete aggressively against the cable companies remain unchanged. In addition, under the proposed settlement, Verizon Wireless’s ability to resell the cable companies’ services to customers in areas where Verizon sells DSL Internet service ends in December of 2016 (subject to potential renewal at the DoJ’s sole discretion), thereby preserving Verizon’s incentives to reconsider its decision to stop building out its FiOS network and otherwise innovate in its DSL territory. Finally, the proposed settlement limits the duration of the technology joint venture and other features of the agreements, ensuring that the agreements will not dampen the companies’ incentives to compete against one another going forward.

The proposed settlement also requires the commercial agreements to be amended so that:

• Verizon retains the ability to sell bundles of services that include DSL, Verizon Wireless and the video services of a direct broadcast satellite company (i.e., DirecTV or Dish Network);
• After five years, the cable companies are no longer barred from selling the wireless services of Verizon Wireless’s competitors, and may partner with other wireless providers;
• The cable companies can elect to resell Verizon Wireless services using their own brand at any time as provided for under the amended agreements; and
• Upon dissolution of the technology joint venture, all members receive a non-exclusive license to all the joint venture’s technology, and each may then choose to sublicense to other competitors.

The settlement also forbids any form of collusion and restricts the exchange of competitively sensitive information. Verizon and the cable companies would also be required to provide regular reports to the department to ensure that the collaboration does not harm competition going forward. [FYI, our friends at Public Knowledge provide a look at the DoJ’s conditions on the deal here.]

Public Interest Community Gives Conditions a Thumbs Down
Parul Desai, policy counsel for Consumers Union, publisher of Consumer Reports, said the DoJ's requirements are a step in the right direction. But she warned of future consequences of all these telecom heavyweights climbing into bed together. "Moving forward, it is critical that enforcement of these conditions is vigilant," she said. "Today's deal between two giant industries is still troubling. At best it protects the status quo for consumers. "It is hard to see how this improves competition or increases consumer choice in a market landscape already dominated by wireless duopolies and cable-Internet monopolies."

Public interest groups Free Press and Public Knowledge believe conditions on the deal will help consumers, but they said regulators did not go far enough. They called on the government to deal with the underlying problems of the broadband industry, where landline phone companies like Verizon are being beaten by cable companies, who can offer higher download speeds cheaply.

“Policymakers can no longer pretend that the broadband market is competitive,” said Gigi Sohn, president of Public Knowledge. “Congress and the FCC should pursue new policies to stimulate competition in wireline Internet access service — or resign themselves to regulating a broadband monopoly.”

“There is still no meaningful competition -- and that will mean higher prices for everyone,” said Joel Kelsey, a policy adviser with Free Press.

One of the key goals of the Telecommunications Act of 1996, which was the first major rewrite of federal communications law in 62 years, was to promote facilities-based competition for phone, television and Internet services. The hope was that communications companies including phone and cable companies would begin competing against each other. This has happened to a certain extent most notably of late with Verizon's introduction of its FiOS fiber Internet, video and phone service, which in some parts of the country is the only alternative consumers have to the broadband services offered by cable firms. With Verizon and the cable firms bid to join forces, critics worry that they will no longer actively compete against each other.

Research Director Mark Cooper of the Consumer Federation of America said approval of the joint venture between Verizon and cable “demonstrates that the primary pillar on which the Telecommunications Act of 1996 stood—intramodal and intermodal competition between broadband platforms—has collapsed in a short 16 years.”

“This deal will result in Verizon abandoning further investment in FiOS, its high speed network,” Candice Johnson, a spokeswoman for the Communications Workers of America, said. As a result, there will be no high-speed Internet competition in Baltimore, Boston, Buffalo, cities across upstate New York and most of Pennsylvania, Maryland, Massachusetts, Delaware and Virginia, she said.

Critics in Congress, Too
Sen. Al Franken (D-MN) was the most vocal critic of DoJ’s announcement and proposed settlement. He argued the conditions won't do enough to protect competition for broadband Internet service. “Most consumers, and especially those in rural areas in Minnesota and elsewhere, have few or no options for high-speed broadband service, which is one of the reasons I was so concerned about this deal," said Sen Franken, who serves on the Senate Judiciary Committee's sub-panel on antitrust issues. "Without meaningful competition for broadband, the cable companies will be able to charge whatever they want — and drive consumers to purchase expensive bundles of services they don’t want or need in order to get Internet service. The Department of Justice has addressed some of the worst parts of this transaction, but I don’t think it has gone far enough."

Sen. Herb Kohl (D-WI) -- chairman of the Senate subcommittee on Antitrust, Competition Policy and Consumer Rights -- said he is pleased with the changes the Justice Department required of the deal. He added that his subcommittee will "closely monitor" the implementation of the arrangements.

The subcommittee's top Republican, Sen. Mike Lee (R-UT), who had already expressed support for the original deal, said he is pleased the companies will be allowed to move forward. He said the deal will benefit consumers by "putting previously fallow spectrum to efficient use, expanding consumer choice through the introduction of a new bundled offering, and spurring innovation in the development of new technologies and products."

In the House, Rep. Jerrold Nadler (D-NY) said that, even with the conditions, he remain concerned that the deal will harm competition and cost jobs. "DOJ, the FCC and Congress must remain vigilant to ensure that our worst fears about this deal do not come to pass," he said.

Rep. Ed Markey (D-MA), a senior member of the House Commerce Committee, said, "As an author of the Telecommunications Act of 1996, I expressed concerns about the impact of this transaction on competition and consumer choice. While I remain focused on how this deal will affect these vital touchstones of the telecommunications marketplace, the FCC and the Justice Department have identified and mandated several key changes to significant issues that should help address harms to competition and consumers arising from the deal."

All Eyes Turn to FCC
With DoJ’s announcement, attention turned to the Federal Communications Commission. FCC Chairman Julius Genachowski released a statement saying it was time for the FCC, too, to wrap up its review.

“A rigorous review by the Federal Communications Commission and Department of Justice staffs revealed that the deal as proposed by Verizon Wireless and the cable company owners of SpectrumCo posed serious concerns, including in the wired and wireless broadband and video marketplaces. In response to the agencies’ objections, the parties have made a number of binding pro-competitive commitments and will also make fundamental changes to their agreements. Because of these substantial undertakings and in light of the Consent Decree the companies executed with the Justice Department today, I believe the Commission should now approve this transaction, and I will be circulating a draft order to my colleagues that would do so.

“Specifically, Verizon Wireless has undertaken an unprecedented divestiture of spectrum to one of its competitors, T-Mobile, and has committed to accelerate the build-out of its new spectrum and enhance its roaming obligations. In addition, the companies’ commercial agreements will be modified to, among other things, preserve Verizon's incentives to build out FiOS, increase wireless competition, and ensure that the proposed IP venture is pro-consumer and that its products cannot be used in anti-competitive ways.

“Approval of the substantially modified transaction will promote the public interest and benefit consumers in several ways. By advancing U.S. leadership in 4G LTE deployment, the transaction marks another step in our effort to promote the U.S. innovation economy and make state-of-the-art broadband available to more people in more places. The transaction will preserve incentives for deployment and spur innovation while guarding against anti-competitive conduct. And vitally, it will put approximately 20 megahertz of prime spectrum—spectrum that has gone unused for too long—quickly to work across the country, benefiting consumers and the marketplace.

By August 21, we started seeing reports that Chairman Genachowski had won the votes first of Republican colleagues Robert McDowell and Ajit Pai. By August 22, Broadcasting & cable reported that the FCC had voted 5-0 to approve the deal.

On August 23, the FCC announced that it had concluded its review of the Verizon Wireless-SpectrumCo deal and approved four significant spectrum transfer applications, subject to a number of binding commitments and conditions.

The FCC Order imposes as conditions the following four voluntary commitments made by Verizon Wireless:

Divested Spectrum

• Verizon Wireless must close its proposed spectrum transfer with T-Mobile within 45 days of its closing of the SpectrumCo, Cox, and Leap transactions.

Buildout

• Within three years, Verizon Wireless will provide signal coverage and offer service to at least 30 percent of the total population in the Economic Areas or the portions of Economic Areas in which it is acquiring AWS-1 license authorizations (calculated by summing the population for each of these areas); and
• Within seven years, Verizon Wireless will provide signal coverage and offer service to at least 70 percent of the population in each Economic Area in which it is acquiring AWS-1 license authorizations, or, where a portion of the Economic Area is acquired, to at least 70 percent of the population of the total acquired portion of the licensed Economic Area.

Roaming

• In the event the current data roaming rule is not available to requesting providers, Verizon Wireless will continue to offer roaming arrangements for commercial mobile data services on any of its spectrum in the areas where it is acquiring AWS-1 spectrum to other commercial mobile data service providers on commercially reasonable terms and conditions, and providers may negotiate the terms of their arrangements on an individualized basis. This commitment will remain in place for five years following the date of the Commission’s order.

Reporting

• Verizon must provide on a semi-annual basis, subject to an appropriate protective order, reports concerning trends in DSL subscribership following the implementation of the commercial agreements.

In addition, to assist in monitoring any effects the Commercial Agreements have on the marketplace and on the development of emerging product markets, the FCC Order directed the FCC’s Wireline Competition Bureau to open a docket (WC Docket No. 12-234) “for the public to file complaints or petitions alleging that the parties are acting in violation of the conditions imposed by this order or engaging in anti-competitive conduct relating to this transaction that implicates the public interest or otherwise violates the Act or FCC rules.” By this Public Notice, the FCC is informing the public that has been established for this purpose.

Comcast’s Executive Vice President and Chief Diversity Officer David Cohen writes that conditions on the transaction adopted by the Department of Justice and the FCC preserve “the most important goals of our agreements”:

• Comcast will be able to market Verizon Wireless products and services across our entire footprint under a renewable agent agreement (for the first five years, we will be exclusive to Verizon Wireless, but Verizon Wireless will not be able to enforce the exclusivity provisions after five years).
• Comcast and Verizon Wireless will be able to work together for at least five years in an R&D partnership to develop innovative technologies that integrate wireless and wireline products and services; after five years, we can continue that partnership with the agreement of the DOJ.
• Comcast has the right to opt into an MVNO (or reseller) agreement with Verizon Wireless at any time after six months' notice.
• Verizon Wireless will be able to market Comcast products and services throughout the vast majority of the Comcast footprint (everywhere outside the FiOS footprint) under a renewable agent agreement; after five years, Verizon Wireless can renew the agreement other than in the DSL footprint where DOJ approval is required.

Does this Deal Lead to More Deals?
Medley Global Advisors analyst Jeffrey Silva said he expects that this deal could lead to similar transactions down the road. "As distasteful as it is to many, my sense is such 'frenemy' relationships will be the rule rather than the exception going forward, and it will be up to policymakers to decide when and how to intervene where these pacts are deemed to have crossed the line," he said.

On August 17, the Wall Street Journal reported that the government's relative leniency in its requirements for giving a green light has sparked hopes of further wireless consolidation as carriers seek spectrum to build out next-generation 4G LTE networks. One theory is that Sprint, which needs more capacity to compete with Verizon and AT&T, will buy MetroPCS, which has some spectrum that is contiguous with Sprint’s. Leap Wireless International could also be a Sprint takeover candidate. Like Metro, its network uses the same technology, allowing for easier customer transfer. Metro's spectrum is more valuable than Leap's because it is in major cities. But Sprint's board already spurned Metro in February, making a reversal unlikely. Sprint could even make a run at T-Mobile -- there could be as much as $20 billion in synergies because T-Mobile hasn't started building an LTE network.

These deals would also come with considerable costs. Verizon is paying 69 cents per megahertz pop—an industry metric representing bandwidth per person in a coverage area—for the spectrum it is buying. But an acquirer would have to pay 83 cents and 87 cents for Metro and Leap, respectively, just to cover their net debt, according to BTIG.

But Public Knowledge’s John Bergmayer took an even longer view. He argued that the problem isn't any one transaction. The problem is that the majority of spectrum that becomes available ends up in the hands of AT&T or Verizon. AT&T and Verizon are able to out-bid any other potential buyer, not merely because they have so much money. Rather, AT&T and Verizon are willing to pay more for spectrum, and do more to get it, because spectrum is more valuable to them. First, they already have large networks, so due to economies of scale they can put new spectrum to work more cheaply than their competitors. This makes them more willing to pay for spectrum than any competitor that would have to spend a lot more to get a network off the ground. And, of course, it's worth good money for them to corner the market for a basic input their competitors need to operate -- imagine if McDonald's was able to buy up all of the hamburger buns in the country, or it Microsoft was able to corner the market on ones and zeros. As a given carrier has more and more spectrum the "foreclosure value" of buying up spectrum goes up.

Wireless and the State of US Broadband
Former White House Advisor Susan Crawford wrote a scathing commentary inspired by the likely approval of the deal by regulators. She argues that the approval of this deal will be yet another piece of evidence that this monopoly power remains unconstrained; if Verizon and Comcast were competing actively with one another in expanding wired connectivity, they wouldn’t be collaborating to create a “seamless environment” for their red-branded services.

People launching new high-bandwidth services should be worried, because their fates are dependent on how this “seamless environment” decides to treat them. Watch out, Netflix; if life gets too difficult for you, you may have to join the red team of ComcastVerizonNBCU.

Crawford argues that the U.S. should be making a national upgrade to reasonably-priced fiber access for all of us. Instead, Americans are paying more than people in many other countries for services that aren’t as good, even as inequality in communications leaves more people behind every day.

We’ll continue to keep our eye on wireless, broadband and all things telecommunications – and we’ll see you in the Headlines.