Verizon Parts with DirecTV on LTE, to Focus on AWS License

"We feel good about it from another perspective, because as we have talked with the FCC, we have found that one of the problems was there is a lot of spectrum that has been warehoused and this takes spectrum with no plans for commercial service and gets into the hands of somebody who will use it and allow additional investment and development,” McAdam said. Verizon is “just beginning dialog” with the FCC on the proposed sale, he said.

Verizon is moving to shift funding from LTE with DirecTV to the new venture, McAdam told us. DirecTV last fall tested fixed-line LTE with Verizon through a small number of homes in Pennsylvania using a device that attached to a satellite dish to receive a 4G signal from a cellular tower, company officials have said. There had been rumors DirecTV was planning such a package for introduction at year-end, but DirecTV CEO Michael White declined to comment in a conference in November, saying the company was “in the middle of putting something together for next year.”

The LTE test with DirecTV was “extremely successful” largely because it “operated the spectrum extremely efficiently,” Verizon Chief Financial Officer Francis Shammo said in an earnings call. But Verizon needed to focus its efforts on the new venture with Comcast and others, McAdam told us. “One of our hallmarks is focus and we're focused on getting Comcast up and running and I can’t do both so we made our choice,” McAdam said. A DirecTV spokesman declined to comment.

Verizon’s decision to acquire the AWS licenses and cross-sell services with Comcast, Time Warner and Bright House stemmed from initial plans 18-24 months ago to develop a quad play package for FiOS, which already delivers voice, video and data, McAdam said. Verizon was “well down the road” to developing a package that would include LTE when it began discussions with Comcast because it “gave us a nationwide play,” McAdam said. Along with the cable operators, Verizon will try to enlist software developers to create applications, drawing on those already working with iPhone and Android products, he said.

The new AWS licenses would give Verizon “significant breathing room” by securing additional capacity for its services for the next four to five years, McAdam said. But “it’s not the end game for us because we need to push to have more spectrum available across the industry,” he said. The FCC needs to get available spectrum “into the right hands” and away from venture capital firms and smaller carriers that “can’t afford to build it out,” McAdam said. “If we can pass through a streamlined process at the FCC, I think you will get it into the hands of people that can do something."

Despite parting with DirecTV on LTE, Verizon is expected to continue reselling the satellite service, possibly leading Verizon to weigh spinning off the FiOS business in the future. As a standalone business, FiOS would be better positioned to sell a variety of cable and satellite services, leaving the wireless operations to focus on LTE and other technologies, analysts said. A Verizon spokesman said are no plans to spin off FiOS and that such a move would “not make strategic sense.” Verizon will continue reselling DirecTV service, he said.

"I'm assuming they keep selling all the services” including DirecTV, said Aryeh Bourkoff, vice chairman and head of UBS investment banking for the Americas. “One of the most interesting things about the AWS deal is the FiOS piece because the cable companies and FiOS will continue to compete. That may move Verizon in the direction” of spinning off FiOS to better sell services. John Hodulik with UBS said he would be very surprised if Verizon split wireline from wireless. Verizon officials’ recent comments regarding the products and example of having wireless devices sync with the set-top box show that the two entities are actually getting closer together, he said. Jonathan Schildkraut with Evercore disagreed, saying it could be a big positive for Verizon, which could more aggressively partner with multiple local network operators. Additionally, a spin-off would allow for integration with video-on-demand on a global basis, he said. However, such a split would be complicated given the existing financial commitments at Verizon, he said. There might also be issues regarding dumping a unionized workforce in favor of focusing on a non-unionized business, he said. The move would need to be carefully structured and could involve “levering up Verizon Wireless and making a significant cash contribution to wireline,” he said.

As Verizon expands 4G from its current 165 markets and nearly 200 million POPs, it may end up with some “stranded” 3G capacity, part of which may be shifted for use in other industries including medical and energy, McAdam said. Verizon isn’t “seeing a ton more usage” from 4G customers than those that had 3G, he said. But that will likely change as more 4G-equipped tablets use video and new software applications are added to the mix, McAdam said. “We want to precede the customer base so that when these integrated applications come out we are not starting from scratch but already have four to 10 million devices out there,” he said. As part of the 4G rollout, Verizon will start testing mobile payment services in mid-2012 with a goal of starting deployment by year-end and generating revenue from transaction fees in 2013, he said.