SpectrumCo Agrees to Sell AWS Licenses to Verizon

One major difference is that the Qualcomm deal faced significant opposition from small carriers concerned about 700 MHz interoperability and that devices work across the lower 700 MHz band, including A-block spectrum bought by smaller players. Small carriers contend that without an interoperability requirement, they will have difficulty buying handsets at reasonable prices (CD Oct 8/10 p1). A deal involving AWS spectrum does not raise the same issues, industry officials said Friday.

"When the applications come before us, the FCC will undertake a thorough, fair and fact-based review of the proposed transaction,” an agency spokesman said Friday. The price is about 64 percent higher than the $2.3 billion SpectrumCo paid for the licenses at auction, excluding the licenses Cox Communications retained with it exited SpectrumCo in 2009. Cox has since started to build a wireless service, and said it will stop adding new subscribers to it.

Analysts said the deal is the first step in a complete reordering of the competitive landscape of the telecom sector, aligning Verizon Wireless with what were once considered competitors in the cable industry. Beyond the spectrum sale, the companies also agreed to market each other’s service, eventually giving the cable operators the ability to sell Verizon Wireless service on a wholesale basis. The companies said they also formed a joint venture to develop technology “to better integrate wireline and wireless products and services."

"Competitive carriers should be concerned about the impact of this deal,” said Steve Berry, president of the Rural Cellular Association. “Any transaction that proposes to concentrate more spectrum into the hands of duopolists raises competitive concerns, particularly for smaller carriers. The market is already too consolidated. Because spectrum is a finite critical input for wireless carriers, any spectrum deal needs to address competitive concerns including interoperability, data roaming, access to handsets and nondiscriminatory interconnection."

The Consumer Federation of America signaled it will fight the transaction, calling it bad for consumers. “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. That won’t happen with this deal,” CFA said. “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."

"It’s safe to say any deal that decreases the chance of competition between wireline and wireless broadband providers would be a bad deal for consumers,” said Free Press Policy Director Matt Wood. “Allowing companies with tremendous power in different segments of the market simply to resell one another’s services is a divide and conquer strategy, one that lets them cooperate to keep prices high for Internet, video and mobile data offerings."

Public Knowledge Legal Director Harold Feld said the transaction is positive to the extent that it puts the AWS spectrum into play. “The transaction also shows how relatively cheaply more spectrum can be acquired by those who need it,” he said. “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 Public Knowledge has questions about whether the agreement will prove anti-competitive. “Consumers have benefited from head-to-head competition between Comcast and Time Warner (the major partners in SpectrumCo) and Verizon FIOS,” he said. “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."

Medley Global Advisors analyst Jeff Silva said the deal likely will be approved by the FCC and Justice Department, though divestitures may be ordered in some markets. “It is possible federal regulators will consider Verizon-SpectrumCo on a parallel track with the proposed Verizon-Leap 700 MHz spectrum swap in the same way they reviewed AT&T/T-Mobile and AT&T/Qualcomm deals,” he wrote. “Favoring Verizon is, unlike AT&T/T-Mobile, the purchase of SpectrumCo’s cable wireless holdings does not implicate the removal of one of the four national wireless carriers from the market and thus is more likely to be limited to a market-by-market analysis.”

The selling price being higher than how much the spectrum cost at auction “tells me that auctioning spectrum before it’s really needed leads to lower auction receipts for the Treasury,” said John Hane, an attorney with Pillsbury Winthrop who represents broadcasters. The deal also makes it clear that the major cable operators involved with SpectrumCo won’t be building competitive facilities-based wireless networks, Hane said. That could portend less facilities-based competition in pay TV as well, he said. “This raises even more questions about Verizon’s long-term plans for its FiOS video service, he said. “If Verizon Wireless is re-selling Comcast, Bright House and Time Warner Cable, will Verizon launch or even maintain a competing service?"

The deal means cable operators “will almost certainly have to exit the Clearwire venture,” Sanford Bernstein analyst Craig Moffett wrote investors. Comcast said it expects to wind down the small number of subscribers it has with Clearwire. That raises “troubling questions about whether Sprint will have to take on additional equity in the venture, and potentially have to begin consolidating its money-losing income and debt-laden balance sheet,” Moffett wrote.

The spectrum licenses involved in the transaction have relatively light build-out requirements, a review of the rules adopted at the time of the AWS-1 auctions show. The licenses carry a 15-year term and licensees must meet a substantial service requirement before they can be renewed. That’s a much more relaxed standard than has been required in subsequent spectrum auctions, an attorney who works on wireless issues said. “It just requires the service be substantial under the FCC’s definition, which means good enough to warrant renewal."

The commission will also have to consider the deal relative to its current spectrum screen, which assesses spectrum concentration, Public Knowledge said. But of the 122 licenses, fewer than 20 would be implicated by the screen, a spokeswoman for Comcast said.

Wall Street analysts expect Verizon Wireless to use the cable spectrum for LTE service. The carrier probably planned to complete the spectrum deal before the potential breakup of the AT&T and T-Mobile acquisition, Jonathan Schildkraut of Evercore Partners told us. The price appears to be a little low, he said. But beyond the value of the spectrum it may also reflect the value of the future strategic alliance between the Verizon and the cable companies, he said.

The deal could drive up the value for other sources of spectrum, Credit Suisse’s Jonathan Chaplin said: There are only two major blocks of fallow spectrum out there: Clearwire’s and Dish Network’s. If the AT&T/T-Mobile deal fails, all the carriers that expected to get spectrum as a result of merger divestiture would need to look to Clearwire and Dish for capacity, he said. Chaplin said Verizon Wireless will have roughly 11 MHz of spectrum nationwide following the cable transaction. The cable spectrum would also be complimentary with the 20 MHz of AWS spectrum the carrier already has and could lead to significant throughput gains if the spectrum can be bonded in an LTE deployment, he said. He called the price “attractive.”

The announcement highlights “the importance of actual deployment of spectrum” that has already been allocated, an NAB spokesman said. “The agreement should be viewed as an extremely positive development in the debate over a ’spectrum crunch,'” he said. “Going forward, we're hopeful that other companies sitting on idle spectrum will be encouraged to deploy those valuable airwaves."

Comcast, which owns 63.6 percent of SpectrumCo, will receive about $2.3 billion from the sale, the companies said. Time Warner Cable, which owns 31.2 percent, will get about $1.1 billion and Bright House, which owns 5.3 percent, will get $189 million.