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Verizon's AWS Trump Card

Tue, 07/31/2012 - 11:13am
Maisie Ramsay

Just as AT&T's bid to take over T-Mobile USA was going down in fire, Verizon Wireless laid down its trump card: a $3.9 billion deal to buy a huge chunk of AWS spectrum from a group of cable operators.  

If approved by regulators, the transaction will give Verizon a solid block of nationwide spectrum to supplement its LTE network, currently running on its 700 MHz holdings. At the same time, Verizon forged cross-selling deals and a joint venture with the cable companies that could be key for its mobile video and Wi-Fi services. 

Think about it: Verizon is getting a substantial amount of spectrum for about the same amount AT&T paid T-Mobile in breakup fees.

The deal is still going through its paces at the FCC and has generated a fair amount of controversy. Some have complained that spectrum is being consolidated in the hands of too few, while others have questioned whether the cable tie-ups amount to a non-compete agreement.

As the clock winds down on the FCC's review, here's an overview of what's happened so far with the industry-changing deal, and what Verizon’s competitors have to say about it.

Verizon's AWS Strategy

The start of the AWS saga goes back six years, when Sprint, Comcast, Time Warner Cable, Cox Communications and Bright House Networks teamed together to shell out about $2.4 billion for 137 AWS licenses during the FCC's 2006 spectrum auction. The spectrum was supposed to mark the entry of the cable operators into the wireless space, but the plans never materialized. Sprint had only a small equity interest in the venture and it pulled out of the group in 2007. Cox eventually separated from SpectrumCo to pursue its own wireless ambitions, which failed. Save for Cox' fizzled 3G strategy, the spectrum lay unused. 

Fast-forward to December of last year, when Verizon announced it would pay $3.6 billion for the 122 AWS licenses held by the remaining SpectrumCo partners. Two weeks later, it announced a separate $315 million contract for the other 30 licenses owned by Cox. The spectrum matches up with Verizon’s existing AWS assets, which like the SpectrumCo licenses, have yet to be put to use.

The deals between Verizon and the cable operators didn't stop at spectrum. At the same time they agreed to the AWS sale, the companies formed a joint venture and marketing arrangements that allowed them to cross-sell each other's products and services in retail stores. 

Competitors React

Opposition to the deal was small compared to the outcry over AT&T's merger with T-Mobile, which had a number of operators and public interest groups up in arms. Still, some expressed concern that Verizon was gaining too much control over the nation's scarce spectrum resources, stifling other providers' ability to compete. T-Mobile soon emerged as one of the most vocal critics and asked the FCC to block the transaction on the grounds it was "contrary to the public interest" and would cause Verizon to have an "excessive concentration" of spectrum. Later, T-Mobile attacked Verizon over its spectrum efficiency claims, alleging Verizon is warehousing spectrum. Verizon pointed out in a rebuttal that some of the arguments T-Mobile made to defend the AT&T merger contradict its reasons for opposing the AWS transaction.

MetroPCS and the Rural Telecommunications Group also filed their opposition, citing similar arguments, as did Public Knowledge and a number of other public interest groups. The Communications Workers of America (CWA), a union representing 35,000 Verizon wireline workers, now warns that the marketing portion of the transaction will "harm competition, raise cable and broadband rates and reduce incentives for new video entrants to invest in their networks, leading to significant job loss." CWA, which has frequently butted heads with Verizon over union contracts, will continue to spar with the company over the course of the transaction.

Senate Showdown

Verizon and Comcast headed to Capitol Hill in March for a hearing before the Senate Judiciary Committee, where they defended the sale as necessary to meet growing demand for mobile broadband services. Verizon has told the FCC it will run into spectrum constraints in some markets as early as next year without the AWS assets, an argument it puts before the Senate.

Comcast Executive Vice President David Cohen told lawmakers the cable company tried to sell its AWS assets to "virtually every wireless carrier in the country" before settling on Verizon Wireless. Wisconsin Democrat Herb Kohl voiced concerns at the hearing that the marketing arrangements between Verizon and the cable operators could amount to a de-facto non-compete agreement. Kohl, an opponent to AT&T's buyout of T-Mobile, later asked the FCC and Justice Department (DOJ) to "carefully scrutinize" the transaction but stopped short of requesting the agencies to block it entirely.

Review Makes Progress

Verizon's first stumbling block came in May, when the FCC decided to prolong its review by three weeks after the operator and its cable partners missed a March 22 deadline to pony up documents about both the spectrum sale and the marketing arrangements. The delay pushed out the expected close date of the deal to late summer, instead of the mid-summer close date previously cited by company executives. The FCC's extension followed a request from Sprint, DirecTV, the Rural Cellular Association and others that the review be put on hold because of "delays and technical difficulties, including files that cannot be opened with software commonly used by law firms." Verizon and the four cable operators agreed to provide PDF versions of the files but the offer was not enough to stave off the delay.

Verizon Offers Up 700 MHz

As regulators continued to weigh the merits of the deal, Verizon attempted to tilt the scales in favor by offering to sell off all its lower 700 MHz A and B block licenses if the deal goes through. The company isn't using the spectrum for its LTE network, which runs on its upper C block licenses. T-Mobile scorned the offer, pointing out that the spectrum isn't useful because of significant interference issues from Channel 51 television broadcasts that could take years to resolve. The spectrum is also incompatible with Verizon and AT&T's LTE networks, an issue hampering the LTE deployments of regional providers with the same class of licenses. Even so, Verizon said by mid-summer it had reached out 59 prospective buyers. 

Appeasing T-Mobile

T-Mobile laid down its sword after Verizon agreed to a spectrum swap spanning 218 markets. The transfer gave T-Mobile more capacity for its LTE network with licenses covering 60 million people in several metropolitan markets including Philadelphia; Washington, D.C. and Detroit. Verizon benefitted from the deal in two ways: it removed T-Mobile as an opponent to the AWS deal and provided it with spectrum covering 22 million people. The remaining challengers to the transaction maintain that the transfer of spectrum to T-Mobile won't address competitive harms. The FCC decided another delay was necessary to examine the implications of the arrangement, adding another two weeks to its review.  

Moving Ahead with Marketing

The fact that the FCC is still reviewing the spectrum portion of the deal doesn't stop Verizon from pushing ahead with its marketing plans. By mid-May Verizon has kicked off cross-selling arrangements with Time Warner Cable, Cox Communications and Comcast. Bright House Networks is the only party in the transaction that hasn't started offering Verizon's products in its stores. Verizon CEO Lowell McAdam touted the side deals at a June investor conference, where he linked them to the company's mobile video plans.

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