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August 22, 2012

DOJ Changes to Verizon Cable Spectrum Buy - Is DOJ Really Helping Consumers or Hurting Them?

We all know the back story. In December 2011, Verizon Wireless agreed to acquire a significant portfolio of wireless spectrum licenses from a consortium of cable companies—spectrum that today is unused but that Verizon would put to use to build out its 4G/LTE wireless infrastructure. In June 2012, Verizon Wireless also announced an agreement to transfer a significant amount of that spectrum to T-Mobile USA, the smallest of the four nationwide mobile wireless competitors. The spectrum acquisition deal was of course followed by the expected reviews of various governmental agencies - the Federal Communications Commission (FCC), the Department of Justice (DOJ) and in this particular case, the New York State Attorney General as well. And so we waited.

Back on August 16, 2012 DOJ announced that it would sign off on Verizon's desire to acquire spectrum from Comcast and several other cable companies, but noted as well that it would only do so following some significant modifications to the original deal structure. These modifications will supposedly ensure that markets serviced between the various vendors involved in the deal will remain competitive - or rather the changes seek to ensure that the deal does not diminish any company's incentive to compete. The DOJ stated that without structural changes to the deal there would be inevitable harm to competition - resulting in those two oldest of chestnuts for consumers: higher prices and lower quality of services.

The modifications DOJ is demanding will require Verizon, Comcast, Time Warner Cable, Bright House Networks and Cox Communications to limit the scope and duration of a series of agreements between them concerning both the sale of bundled wireless and wireline services, and the formation of a technology research joint venture. Key aspects of the joint venture would be required to end in December 2016.

DOJ also noted 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. Generally speaking, DOJ acknowledged that overall the spectrum transactions facilitate active use of an important national resource and thereby promise substantial benefit to wireless consumers.

The department said the proposed settlement - by preventing the companies from selling each other's products - 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.

In the Name of Competition

Here are some interesting paragraphs from the DOJ document:

  • Verizon and the cable companies are direct competitors in many local markets throughout the United States where Verizon offers video, voice and broadband service. The series of commercial agreements between Verizon and the cable companies would have threatened this competition. The series of commercial agreements between Verizon and the cable companies would have threatened this competition. Most notably, the agreements, as originally structured, would have required Verizon Wireless to sell the cable companies’ services on an “equivalent basis” with FiOS where FiOS is available, thereby reducing Verizon’s ability and incentive to sell its own services aggressively.
  • The agreements also create a new technology research joint venture through which Verizon Wireless, Comcast, Time Warner Cable and Bright House Networks would collaborate to develop new technologies that integrate wireless and wireline products. The department’s complaint alleges that the potentially unlimited duration of this collaboration is unreasonable and could threaten long-term competition, and also alleges that certain restrictions in the agreements unnecessarily hinder the ability of the companies to innovate outside the joint venture.
  • 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 department’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.

While thinking on these three particular paragraphs of otherwise useful thoughts on market competitiveness, we began to think about just how large Verizon's FiOS network really is relative to the cable operators and why Verizon would sign a variety of deals that would limit its own interest in legitimately compete.

DOJ's Recommendations May Instead Harm Competitiveness!

In doing some research on Verizon's FiOS market size, we came across a fascinating blog post by Bruce Kushnick, Executive Director, New Networks Institute, in which he outlines with substantial detail why DOJ's modifications will actually drive competitiveness entirely out of the marketplace and essentially result in serious harm to much of Verizon's own subscriber base. The title Kushnick chose for his post makes this very clear: "DOJ, New York AG and Verizon to the Majority of Verizon Customers: Drop Dead"

The arguments presented in the post are too intricate to simply highlight here - we recommend reading the post in its entirety. Here is one interesting nugget of information (and what led us to discover Kushinck's post in the first place): Verizon has approximately five million FiOS users. The number that has been tossed about for a long time now is a FiOS base of 18 million users, but that number is not real - even though DOJ (according to Kushnick) actually tried to distort reality to come up with a similar number - DOJ separately recorded the subscribers for each of FiOS's three services (voice, video, broadband), but failed to note that over 90 percent of subscribers had the triple play package, meaning that at best Verizon only has about 33 percent of the total actual subscribers DOJ claims they have.

There are other anomalies to getting to 18 million users - one of them is to count every potential home that falls within or "passes by" connectivity of FiOS - meaning that if the fiber passes by 10 doors yet none of these doors represents an actual FiOS subscriber, Verion will still claim them as FiOS-enabled. Interesting!

Though Kushnick is particularly harsh with his words (it is a blog post, so he is entitled), he isn't off the mark. The original DOJ announcement last week struck us as being awfully full of pats on the DOJ back over what struck us as a rather superficial evaluation of the actual ground games going on. We not only thought, but continue to think in exactly the same terms relative to AT&T and its defunct T-Mobile deal, a deal we were hugely in favor of.

Read the entire Kushnick post - let us know what you think.

To find out more about Verizon visit the company at Mobility Tech Conference & Expo, collocated with ITEXPO West 2012 taking place Oct. 2-5 2012, in Austin, TX. Stuart Elby, VP, Network Architecture and Enterprise Technology will be a speaker at the event. For more information on ITEXPO West 2012, click here.

Edited by Brooke Neuman

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