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Verizon Wireless and CableCos Agree to $3.6B Spectrum Swap

Wednesday, December 7, 2011

Verizon Wireless announced Dec. 2 that it has agreed to buy wireless spectrum from Comcast, Time Warner Cable (TWC), and Bright House Networks for $3.6 billion, a deal with potential to move the company far ahead of the rest of the wireless industry in rolling out fourth-generation mobile broadband networks and to fundamentally alter how U.S. consumers buy internet, video, and wireless services.

If the deal is consummated—an eventuality the FCC must pass upon—Verizon will obtain 20 MHz of spectrum in the Advanced Wireless Services (AWS) band that covers much of the U.S. to add to its current holdings of 20 MHz of AWS spectrum in the eastern U.S. None of that AWS spectrum is currently in use, giving Verizon a huge advantage in terms of flexibility going forward. Verizon said the purchase would add access to 259 million potential customers for its LTE wireless service.

The company is now deploying an LTE wireless broadband network on 700 MHz spectrum, where it holds licenses covering effectively the entire country. It purchased 13 AWS spectrum licenses in the Northeast, Southeast, Great Lakes, Mississippi Valley, and Louisiana in the 1996 auction in which SpectrumCo acquired its AWS holdings.

The 122 spectrum licenses that Verizon is seeking to acquire were originally purchased in the 2006 auction for $2.4 billion by a joint venture of Comcast, Time Warner Cable, Bright House, Cox Communications, and Sprint Nextel Corp., known as SpectrumCo. They cover most of the continental U.S.

Sprint Nextel abandoned the venture in 2007. Cox decided to go it alone to deploy an LTE network with the spectrum it controlled. It ended its wireless efforts in November 2011, citing a "lack of wireless scale necessary to compete in the marketplace." It still holds that spectrum.

Verizon Wireless will pay the remaining members of SpectrumCo $3.6 billion, divided according to the size of the initial investments. Comcast will receive $2.3 billion, TWC $1.1 billion, and Bright House $189 million.

Cross-Marketing Agreement, JV.

In addition to the cash payments, the companies have agreed to a cross-marketing agreement that is slated to evolve into MVNO arrangements between the individual cable operators and Verizon Wireless after four years.

The MSOs and Verizon Wireless have also formed a joint venture to develop innovative integrated wireline and wireless products and services. The technology venture is to be based in Philadelphia, where Comcast has its headquarters. Verizon Wireless will own 50 percent of the joint venture and Comcast, Time Warner Cable, and Bright House will jointly own the other 50 percent.

Under the terms of the cross-marketing agreement, the three MSOs will offer Verizon Wireless branded voice and data services as part of their bundled offerings and Verizon Wireless retail outlets in the various MSO territories will promote cable bundles along with their LTE offerings.

During the first phase of the alliance, customers will be passed along to the appropriate provider in exchange for a fee. Each will handle its own billing and customer service functions. At the point that the deal converts into wholesale agreements between the cable operators and Verizon Wireless, the MSOs will no longer market the services as Verizon Wireless, instead rolling the wireless piece into MSO-branded bundles with integrated billing and in-house customer service covering all aspects of the bundle, including frontline support for the wireless component. Verizon Wireless will be able to sell service bundles under its own brand.

Deal Affects Services, Alliances.

There is no question that this deal marks a transition point in the U.S. communications market. It will have an immediate impact not only on the participants, but also on their current partners and competitors and, of course, consumers.

For Verizon Wireless, the deal stands to help it maintain its lead in LTE broadband wireless, even if the unraveling merger between AT&T and T-Mobile is somehow saved. Verizon will end up with 110MHz of LTE-compatible spectrum nationwide. The increased airspace will allow the company to handle the rapid, and accelerating, growth in demand for LTE services driven by smartphones and tablets. In markets where capacity demand is lower, Verizon Wireless will be able to ramp up speeds for its customers or even use LTE to deliver broadband access in competition with cable operators and incumbent telcos.

According to the companies, there will be no restrictions placed on where the combined services are marketed, so cable quad-plays theoretically may compete directly with VZW parent company Verizon's own FiOS+wireless offerings. Current partners of both Verizon Wireless and the cable operators cannot be happy with the announcement.

Sprint Nextel and Clearwire, which together provide cable operators' current wireless capabilities, immediately lose any benefits of those agreements going forward. According to cable company representatives, Comcast and TWC will stop selling Clearwire services in approximately six months. BrightHouse has not been reselling the WiMAX service.

It is not likely that Clearwire will receive any further investment from the cable companies, either, but that is probably not news to the WiMAX provider.

One probable benefit for Clearwire, however, is that this transaction will make its spectrum holdings much more valuable. With AT&T's attempted merger with T-Mobile looking less and less likely, AT&T Mobility faces a severe shortage of wavelengths on which to build a nationwide LTE network. With the AWS spectrum off the market, AT&T may have to turn to Clearwire (and potentially to LightSquared or DISH Network and its pending wireless acquisitions) to find the wireless broadband assets it must absolutely have in order to compete.

Neither Clearwire nor Sprint have yet made any public comment on the deal.

Satellite video providers, which have long partnered with Verizon to deliver joint video and data offerings will now be pushed to accelerate their own wireless strategies. DISH Network has already begun working with cable operator Charter to build joint DBS video/cable broadband services, but Charter is not part of SpectrumCo and cannot add a wireless component to the mix. DISH is in the process of acquiring its own wireless licenses, which could potentially be used to build a competing broadband wireless network or sold to VZW and cable operator competitors.

Consumer Groups Wary.

While financial analysts and the market appear to like the deal, consumer advocates have more mixed reviews.

Public Knowledge, which is typically very skeptical of any transaction that decreases competition in any market, focused in this case on the benefits of freeing spectrum that the cable operators have "warehoused" since 2006 without any real plan to deploy a network. "It is good news that Verizon is paying $3.6 billion to buy useful spectrum from the cable company consortium," Harold Feld, legal director of Public Knowledge said in a statement. "Spectrum is better held in the hands of those who will use it, as opposed to those who don't."

Addressing the marketing and bundling aspects of the deal, however, Feld cautioned, "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."

In a statement issued by the Consumer Federation of America, on the other hand, director of research Mark Cooper said, "Today Verizon announced a deal to pay $3.6 billion to buy spectrum from the largest cable companies, who had purchased it intending to enter the wireless business. Instead, they will launch a venture to jointly develop and market products with the cable companies, effectively ending any prospect for serious head-to-head competition in the cable-telco space. The deal signals bad news for consumers."

Cable Company Post-Sale Plans.

As noted, it was never clear that the cable operators that remained in SpectrumCo saw the spectrum as anything more than a very good investment. Cox, which bought out its share of the SpectrumCo holdings to pursue an independent wireless strategy, was the only cable operator to make an effort to build its own wireless network. Its failure to find a viable business model led it to abandon both its 4G deployment effort and an MVNO arrangement with Sprint for 3G. Cox cited "the lack of wireless scale necessary to compete in the marketplace, the acceleration of competitive 4G networks as well as the inability to access iconic wireless devices." That failure likely ended any lingering potential that the SpectrumCo partners would pursue their own network builds.

The cable operators state that they plan to continue competing aggressively with Verizon FiOS where systems overlap, noting that their agreements are with Verizon Wireless and not its telco majority owner, but there will be some alignment of financial, if not strategic, interests between the MSOs and Verizon Communications and some incentive to reduce the intensity of competition for bundled customers. One operator who will not see any benefit in that regards is Cablevision, which faces with most intense FiOS competition of any cable operator and has no stake in SpectrumCo.

Cablevision has built out a WiFi-based network to address its customers demand for some level of wireless access to its data services. That solution, however, is currently restricted to specific areas within Cablevision's NYC-area market plus reciprocal access to the relatively limited WiFi network footprints of Comcast and Time Warner Cable and does not include mobile services. It is unclear whether this deal will create strains between Cablevision and its WiFi collaborators. A Verizon Wireless customer that signs up for TWC or Comcast data services will gain access to those cable operators' Wi-Fi hotspots as well as to Cablevision's WiFi network. Without a stake in the new deal, Cablevision may not view that as particularly positive.

As to the investment, SpectrumCo as a whole stands to realize approximately 54 percent return on its 2006 spectrum purchase. Individual returns will vary, with both Comcast and Time Warner Cable seeing better than 70 percent return while junior partner BrightHouse will pull in significantly less of a premium on its initial investment.

Agency Review Ahead.

The transfer of the spectrum licenses from SpectrumCo to Verizon Wireless must be approved by the Federal Communications Commission to determine whether the additional spectrum increases Verizon Wireless' spectrum holdings in individual markets to anti-competitive levels. The review comes at a time when the FCC appears to have turned cold on consolidation, with AT&T's massive merger application withdrawn under fire and its purchase of 700 MHz spectrum from Qualcomm apparently on hold; Verizon could be called upon to divest some of the spectrum, or refused entirely. The review should take six to 12 months to complete.

And even regulatory approval of the spectrum purchase agreement does not guarantee success for the other aspects of the deal. U.S. cable operators have been involved in a number of cooperative deals, joint ventures, and partnerships—a number of them aimed at adding a wireless piece to their product offerings. To date, the industry has found itself unable to drive any of those wireless collaborations to fruition, with its most recent failures highlighted by the SpectrumCo partners abandoning both a potential independent wireless strategy and a wireless partnership with Clearwire and Sprint.

The four-year co-marketing phase of this deal will help the parties determine if this time will be different. It also indicates that the cable operators are once again hedging their bets.

By TimMcElgunn with reporting by Paul Barbagallo.  

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