Critics Get Their Say on Verizon/Cable Spectrum Sale

As we hope Headlines readers well know, on December 19, 2011, Verizon Wireless and SpectrumCo filed an application for the consent of the Federal Communications Commission (FCC) to the assignment of 122 Advanced Wireless Services (“AWS” -- the 1710-1755/2110-2155 MHz bands) licenses from SpectrumCo to Verizon Wireless. The 122 licenses cover 120 markets.

SpectrumCo was created in 2006 as a joint venture among subsidiaries of Comcast, Time Warner Cable, Cox Communications, Bright House Networks, and Sprint Nextel. SpectrumCo was the successful bidder for 137 wireless spectrum licenses in the FCC’s AWS auction, which concluded in September 2006. In 2007, Sprint withdrew from SpectrumCo, and the SpectrumCo members purchased Sprint’s interests for an amount equal to Sprint’s capital contribution to the joint venture. In 2009, Cox also withdrew from SpectrumCo, taking with it the share of the AWS spectrum to which it was entitled under the SpectrumCo agreement. Today, SpectrumCo is owned by Comcast (63.6 percent), Time Warner Cable (31.2 percent), and Bright House (5.3 percent).

SpectrumCo has determined as a business matter, based on a variety of marketplace factors in combination, that constructing and operating a standalone facilities-based wireless network with that spectrum would not provide a return that would warrant incurring the substantial costs and risks involved.

The parties claim that the transaction will transfer unused spectrum to meet Verizon Wireless' growing demand for mobile broadband.

We hope, too, that readers know we’ve been tracking the review of this transaction by regulators. You may know, too, that the Benton Foundation -- in a joint petition with Public Knowledge, Media Access Project, the New America Foundation Open Technology Initiative, Access Humboldt, Center for Rural Strategies, Future of Music Coalition, National Consumer Law Center, and Writers Guild of America West – has asked the FCC to block the transaction.

This past week was a first deadline for the public to tell the FCC about their concerns about the transaction.

Perhaps the best place to start is a long piece by Cassandra Heyne published by JSI Capital Advisors, an investment bank focused on the communications, digital media and information technology industries. Heyne notes that although the FCC was not inundated with thousands of furious consumer comments (as happened during the review of AT&T’s proposed acquisition of T-Mobile), this $3.6 billion deal is certainly not skating by unopposed.

Some strong opposition comes from seemingly unlikely sources, including AT&T/T-Mobile champion the Communications Workers of America and AT&T target T-Mobile. Expected opposition from the Rural Telecommunications Group (RTG), Sprint, Public Knowledge and Free Press outlines why the deal is anticompetitive and not in the public interest. As RTG expressed, this deal “trumpets the dawn of a new era in America -- the oligopolistic cartel of Big Cable + the Twin Bells.” Fear of excessive market power is clearly a theme carried over from the AT&T/T-Mobile deal. The Verizon/SpectrumCo deal has the potential to create “an unprecedented level of market power” in the quad-play arena, and “could hinder video and broadband competition, resulting in higher cable rates, less network investment and fewer jobs,” according to the Communications Workers of America and International Brotherhood of Electrical Workers (CWA/IBEW). Despite many familiar and predictable negative sentiments about mega-deals, the comments reveal some interesting positions both for and against these uncharted waters in cross-platform consolidation. Comments generally focused on the pros and cons of 1) the spectrum transfer and 2) the applicants’ commercial agreement.

The commercial agreement provide for the sale of various products and services. Through these agreements, the cable companies, on the one hand, and Verizon Wireless, on the other, will become agents to sell one another's products. That would allow, for example, a consumer to walk into a Comcast store and get a Verizon Wireless plan tacked on to his television, Internet and landline phone service. And, over time, the cable companies will have the option of selling Verizon Wireless’ service on a wholesale basis. Additionally, the cable companies and Verizon Wireless have formed an innovation technology joint venture for the development of technology to better integrate wireline and wireless products and services.

Supporting the transaction is Scott Wallsten, vice president for research and senior fellow at the Technology Policy Institute, who told the FCC, “By quickly moving spectrum currently lying fallow to an entity that plans to use it, this transaction epitomizes the importance of secondary markets. When secondary transactions are not possible, spectrum can languish for years while arrangements are made to auction it.” He argues the transaction could “accomplish precisely what the FCC envisioned when it began promoting secondary markets: quickly moving spectrum to more productive uses without the need for a long, complicated process of reclaiming and re-auctioning the spectrum.”

Wallsten also addresses the deal’s commercial agreements, arguing that mutually beneficial business arrangements between competitors can sometimes reduce production costs, facilitate the introduction of new services, and ease entry in new markets. The FCC does not typically regulate business agreements and the Free State Foundation argues that the FCC should “follow its precedents where it has refrained from imposing conditions where any public interest concerns involve broader industry-wide practices and do not directly arise out of the transactions under review.”

Here are key points from parties opposing the deal.

The New Jersey Rate Counsel, which advocates for consumers during rate-setting proceedings for public utilities, said the FCC should block the transaction because the deal would eliminate possible competitors and enrich sellers that hoarded airwaves.

Public Knowledge et al said

  • The transaction could have a disproportionate, negative impact on low-income users because of reduced competition for both wireless and wireline services.
  • The transfer…would only further the increasing domination of just two carriers over the wireless market.
  • The entire wireless industry needs to look at ways to increase spectrum efficiency -- not just spectrum assets -- by investing in new technologies such as “cell splitting, software defined radio, mesh networking, channel bonding, use of unlicensed frequencies, femotcells, and next generation standards.”
  • The FCC should allow Verizon to control these licenses only subject to ‘use it or share it’ provisions. (“If Verizon chooses not to fully make use of the public resource of spectrum it is entrusted with, it should not stand in the way of others who would, even -- or especially -- when those ‘others’ are potential Verizon competitors.”)

Free Press said the transaction would tilt the playing field toward a wireless/wireline cartel of cable and telco operators via separate joint marketing agreements.

The Rural Telecommunications Group argues the deal allows Verizon Wireless to increase its spectrum stockpile – and Verizon Wireless should be deploying 3G or 4G on its existing AWS spectrum.

Sprint Nextel, the No. 3 carrier, took a more measured stance. It didn't ask the FCC to block the deal outright, but said the agency should look closely at the wider implications of the deal.

T-Mobile said the transaction would create “excessive concentration” in the wireless market.

MetroPCS Communications, the fifth-largest cellphone company, said the parties had not provided enough information to prove that the acquisition was in the public interest.

Speaking to American Public Media’s Marketplace, former White House aide Susan Crawford tried to crystallize the concerns. Critics, she said, are “saying is the benefits of this transaction are way outweighed by harms to the public that would be caused. Because from their perspective, what Verizon's trying to do with this spectrum deal is just foreclose competition, make it impossible for any maverick new entrant to show up. Verizon said as recently as a month ago it's got plenty of spectrum; in fact, it's sitting on spectrum it's not using and T-Mobile is saying don't let this go through."

Crawford says T-Mobile’s goals in this protest and the AT&T deal are the same: “T-Mobile felt forced to do a deal with AT&T last year because it wasn't getting access to enough spectrum. Now T-Mobile is saying we're not getting access to enough spectrum. Basically a lot of spectrum has been taken off the table in the last couple of years, spectrum that T-Mobile feels it needed in order to compete effectively. This is its last ditch battle to make sure that there's something left for it to buy."

Verizon and the cable companies seem to be marking out territory here by agreeing to market each other’s services and stay off each other’s turf. “Implicitly they're saying, ‘Comcast you cover wired connections, and Verizon, you cover wireless,’” says Crawford.

GigaOm’s Stacey Higginbotham focused a piece this week, too, on the joint-operating entity (JOE) between Verizon and the cable companies. This JOE, she writes, is worrisome to those who realize that getting Verizon in a room once a month with the executives at the nation’s largest cable companies could lead to agreements about technology, deployment strategies and research and development that will be controlled by the large Internet service providers. The fear is that this organization will be able to slowly stifle new innovations for Internet services or even devices attached to wireline networks by creating technologies and standards that are only available to the JOE participants. Perhaps others might be able to license those technologies, but there’s no guarantee of that, or that the JOE would do so for a fair and reasonable amount.

Higginbotham suggests the FCC and the Department of Justice, which is also reviewing the deal, should strike the commercial agreements altogether. Barring that, the regulators should impose conditions such as dictating the terms under which the parties involved could license their patents, eliminating the exclusivity agreements that could hurt Sprint or smaller wireless operators further and ensuring that data roaming could occur on the new spectrum.

Others may argue to block the transaction entirely – even the spectrum sale – because of the market power it will give Verizon. And, they could say, there are other solutions for the largest carriers.

Kevin Fitchard, Higginbotham’s colleague at GigaOm, points to T-Mobile’s plans to build a 4G network. Though it is the spectrum-poorest operator of the four biggest wireless carriers, T-Mobile will wind up with a higher-capacity LTE network than Sprint and one with comparable capacity to AT&T, while still being able to milk a massive HSPA+ network for years to come. In the process, T-Mobile is calling into question the so-called spectrum crisis. While other operators are desperately searching for new airwaves, T-Mobile found its future growth spectrum sitting right under its nose -- T-Mobile is shutting down the majority of its 2G GSM capacity so it can focus almost entirely on 4G. Consumer groups and regulators, Fitchard writes, are almost certainly going to ask why AT&T and Verizon Wireless don’t do the same.

Writing for CNNMoney, David Goldman also points to four possible solutions to the looming spectrum crisis:

  • Reusing spectrum: One way to relieve capacity jams is "cell splitting," which involves either adding more cell sites or adding more radios to existing sites to increase the number of connections that a network can handle.
  • Make more efficient use of existing spectrum: If you imagine wireless spectrum as a highway, that road is getting jammed with trucks carrying big loads. New network technologies can get those trucks to drive much closer together, freeing up capacity.
  • Get people off the cell network: Another solution is to simply get customers to stop using so much spectrum. Offloading mobile traffic to Wi-Fi connections is an efficient way to lighten the load.
  • Add spectrum: There's vacant spectrum out there in the wild. The problem is that some of it is held by companies and government agencies that can't or won't make good use of it, and a whole lot of it is unsuitable for wireless broadband.

The next FCC deadline for public comment on the transaction is March 2, so expect to hear much more both pro and con on this deal.

The latest debate on this transaction is just one of three big stories we tracked this week. Check out our wrap up of the Spectrum Provisions in the Middle Class Tax Relief Act. We’ll see you soon with more on the White House privacy announcement. Here’s a quick look at next week’s agenda. We’ll see you in the Headlines.