Verizon Spectrum Deals Pass Regulatory Hurdles, Similar Transactions Likely

The Justice Department and FCC Thursday laid out terms for allowing Verizon Wireless to buy AWS licenses from SpectrumCo and Cox, along with the marketing and other business agreements announced at the same time as the spectrum sales. As expected, DOJ’s focus was almost exclusively on the commercial agreements. FCC Chairman Julius Genachowski concurrently circulated a draft order approving the Verizon/cable transactions as well as Verizon’s proposed spectrum swaps with T-Mobile and Leap Wireless. He said the T-Mobile deal removes many of the concerns about the spectrum sale. Opponents of the transactions were quick to say the conditions don’t go far enough. Jobs will be lost, the Communications Workers of America warned.

"The pro-competitive, pro-consumer conditions are quite substantial,” said Rick Kaplan, former Wireless Bureau chief, who oversaw the FCC’s review. He emphasized that the transaction is very different than AT&T’s proposed buy of T-Mobile, which DOJ sued to block last year. “The deals are apples and oranges. This deal is a spectrum-only deal with a series of related commercial agreements,” he said. “That deal concerned two of the top four competitors actually merging that, in our view, would have changed the balance of wireless competition."

"We've required a substantial amount of reporting as to the activities of the companies and how the business is going to shape up,” said Joseph Wayland, acting chief of the DOJ Antitrust Division, on a call with reporters. “We always have the ability under our agreements to require the parties to provide us with information about their activities. ... We can always take action if we see that there are anti-competitive activities by the parties."

Verizon Wireless offered a brief statement Thursday. “As evidenced by the consent decree, we believe we have addressed the Department of Justice’s concerns,” said William Petersen, general counsel. “We now believe the consumer benefits of the transaction will be promptly realized, and look forward to the conclusion of the FCC review so that we can move forward with meeting the unprecedented consumer demand for innovative 4G LTE mobile and data driven products and services.” The approval is likely to lead immediately to more secondary market transactions, analysts said. Verizon said in April that if the deals are approved, it will offer for sale all of the 700 MHz A- and B-block licenses it bought in a 2008 auction of former TV spectrum (CD April 19 p1).

In a late concession, Verizon Wireless filed a letter at the FCC Wednesday (http://xrl.us/bnkyte) agreeing to continue to offer data roaming in areas covered by the licenses it is buying for five years. An FCC official said the agency had unsuccessfully sought a condition under which Verizon would agree to drop its legal challenge to the commission’s data roaming order. “As Verizon Wireless previously explained here and in the separate data roaming proceedings, it has in fact entered into data roaming agreements on commercially reasonable terms and there is no problem to be solved,” the letter said. “Verizon Wireless also remains a net payor of roaming fees, and has every incentive and intends to continue to negotiate commercially reasonable roaming agreements."

Verizon Wireless also agreed to aggressive build-out deadlines for the AWS licenses it is obtaining, beyond a current requirement that a carrier offer substantial service by 2021. Verizon agreed to 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 licenses within three years, and service to 70 percent within seven years. The timeline “parallels the Commission’s recent proposal for the AWS-4 spectrum,” the letter noted. DOJ’s Antitrust Division, joined by the New York State Attorney General’s Office, meanwhile, filed a civil antitrust lawsuit in U.S. District Court in Washington, D.C., seeking to block Verizon, Comcast, Time Warner Cable, Bright House Networks and Cox Communications from enforcing the commercial agreements. DOJ also filed a proposed settlement that would resolve the concerns raised in the lawsuit.

The settlement (http://xrl.us/bnkys8) forbids Verizon Wireless’s sale of cable company products in FiOS areas, including areas where service is only authorized, 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,” DOJ said. Verizon Wireless’s ability to resell the cable companies’ services to customers in areas where Verizon sells DSL ends in December 2016, though they could be renewed, “thereby preserving Verizon’s incentives to reconsider its decision to stop building out its FiOS network and otherwise innovate in its DSL territory,” Justice said. The 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,” DOJ said.

The settlement also amends the agreement between Verizon Wireless and the cable companies to require that Verizon retains rights to sell bundles of services including DSL, wireless and the video services of a DBS company. After five years, the cable companies will be allowed to sell offerings from Verizon Wireless’s competitors, and may partner with other wireless providers.

More Deals to Come?

Government signoff on the transactions probably presages more secondary market spectrum deals over the next year, said Medley Global Advisors analyst Jeff Silva. “Even with conditions/concessions, Verizon emerges as the big winner and will solidify its status as the number one wireless carrier -- especially in view of the limited spectrum supply and relentless wireless demand that’s driving growth for Verizon and other carriers generally,” he told us. “I think, too, that Justice, and likely upcoming conditional approval by the FCC, give the market and Wall Street valuable information about the level of competition desired by the administration and what is required to win government clearance of major transactions like Verizon/cable. The calculus could obviously change if the White House changes hands after November’s elections."

"We view the rapid approval of the SpectrumCo transaction as a positive for Verizon and the wireless industry,” said Wells Fargo analyst Jennifer Fritzsche. “The approval of this transaction gives Verizon and T-­Mobile necessary spectrum for their 4G strategies and the elimination of this overhang is likely to incent the rest of the wireless industry to move forward with 4G spectrum initiatives. As we have written, if history is any guide spectrum transactions tend to come in clusters. We expect the approval of this deal to stimulate more spectrum moves (purchases, sales and/or swaps) with other industry players."

Rep. Ed Markey, D-Mass., commended Justice and the FCC for mandating several “key” changes, in an email Thursday. He agreed with the agencies’ limitations on the scope and duration of the joint marketing agreements and curbs on provisions that he said could have reduced incentive for Verizon to expand its FiOS services. And the spectrum transfer from Verizon to T-Mobile “will expand choice for consumers looking for an alternative to the larger carriers,” he said. Markey had formerly raised concerns that the deal could negatively impact marketplace competition and consumer choice.

Opponents Unsatisfied

Opponents said the concessions Verizon Wireless offered don’t address their concerns. CWA, which was one of the most vociferous critics, was not pleased. “The weak conditions on cross-marketing that DOJ has set in place will do little to continue competition,” the union said. “Instead, this deal will result in Verizon abandoning further investment in FiOS, its high speed network. For communities like Baltimore, Boston, Buffalo, cities across upstate New York and most of Pennsylvania, Maryland, Massachusetts, Delaware, and Virginia, there will be no high-speed Internet competition -- none."

CWA questioned whether DOJ or FCC will be able to police the marketing restrictions imposed. “The cable monopoly with high-speed linked to content bundles that drive average prices higher is not the answer. No other 21st Century nation has chosen this path,” CWA said. “Not only have regulators lost their focus on competition, but they again show that jobs get no consideration in telecommunications policy. Without incentives or direction for Verizon to continue to build out FiOS, thousands of good paying jobs will be lost."

The deal early on looked like a “giant heap of lemons,” to competitors, said Carri Bennet, general counsel of the Rural Telecommunications Group. “The DOJ’s attempt to make lemonade out of this lemon of a deal, while laudable, remains to be seen. Starting today, the only way that Verizon and the Cable Companies can be kept in check is for DOJ to continuously and relentlessly monitor and enforce the conditions imposed. Over time, should these conditions fail, DOJ must use its authority to modify the Final Judgment or completely unwind the deals so that consumer choice is restored for all Americans, including those in rural markets."

"By allowing Verizon and the cable companies to sell each other’s services, the DOJ and the FCC are acknowledging what has been clear for some time -- that broadband competition policy in the United States has failed,” said Public Knowledge President Gigi Sohn. “The proposed conditions on this transaction attempt to alleviate some of the harms that will arise from a lack of competition, and policymakers deserve credit for trying to make the best of a bad deal. However, it is not enough for the anti-competitive cross-selling agreement to be limited in time or scope -- it should not happen at all."

"The DOJ and FCC may have mitigated some of the most immediate consumer harms this deal would have caused, but that’s not the end of the story,” said Free Press Policy Director Joel Kelsey. “Whatever has been done to address the worst parts of this agreement, it’s clear now that Congress and the FCC still need to confront the monopoly environment most consumers now face when choosing broadband service. ... The swap of spectrum from [Verizon] to T-Mobile that Verizon agreed to in order to get this deal done is a good consumer outcome that will help provide consumers with a lower-price quality alternative to Verizon and AT&T. But that improvement doesn’t erase all the problems with this deal."

The joint venture shows 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,” said Mark Cooper, director of research at the Consumer Federation of America. “We view the open-ended nature of the monitoring requirements as a strength, not a weakness. The 20th century practice of writing rigid rules with long lists of practices that are forbidden will not work in the digital economy, where diversity and dynamic change are the engines of innovation and progress. ... However, the proof of the pudding will be in the eating. The agencies must construe the scope of the oversight broadly and be vigilant in exercising their authority to protect consumers and competition from the abuse of market power."

DOJ’s conditions “will help to make these joint marketing agreements work better for consumers. But moving forward, it is critical that enforcement of these conditions is vigilant,” said Parul Desai, policy counsel for Consumers Union. “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."

"As a 40 year-old trade association, CCIA has unfortunately seen deals approved before with limitations that were often not ever really enforced,” said Computer & Communications Industry Association President Ed Black. “In recent decades CCIA has been encouraged as the government tried to promote competition with the Bell breakup of the 1980s and with the pro-competitive aspects of the 1996 Telecom Act. Approval of this deal, unfortunately, seems to represent abandonment of hope for the telecom competition envisioned late last century."

The FCC should require non-discriminatory roaming by other providers, both on Verizon’s AWS spectrum and on its cable partners’ Wi-Fi offload network, said Michael Calbrese, director of Wireless Future Project at the New America Foundation’s Open Technology Institute. “Verizon should not be allowed to combine preferential access to the cable industry Wi-Fi network with its mobile broadband service using AWS spectrum,” he said. “The FCC also should add a ‘use it or share it’ license condition to the modest buildout requirements agreed to by Verizon, allowing AWS spectrum to be used at least temporarily by other providers in small town and rural America where Verizon will not be required to build out even after seven years, and perhaps never."

But TechFreedom President Berin Szoka said approval is good news for consumers. “The more spectrum is put to use, the more we'll ease the coming ’spectrum crunch,'” he said. “The DOJ seems to have agreed that, because of the under-utilization of the spectrum in its current hands, and, with its imposed conditions, the lack of incentive or ability of the parties to raise prices, consumers will benefit from this transfer.”