The Great Spectrum Swap

On June 25, Verizon Wireless announced an agreement with T-Mobile USA to exchange specific spectrum in the Advanced Wireless Services (AWS) band. The deal encompasses spectrum in 218 areas, and would improve T-Mobile’s spectrum position in 15 of the top 25 markets in the US, notably Philadelphia, Washington (DC), Detroit, Minneapolis, Seattle, Cleveland, Columbus (OH), Milwaukee, Charlotte (NC), Raleigh (NC), Greensboro (NC), Memphis, and Rochester (NY). Under the agreement, both companies also will receive additional spectrum depth in specific markets to meet Long Term Evolution (LTE or 4G) capacity needs and enable LTE expansion. The agreement includes a number of intra-market spectrum swaps that will result in better use of the AWS band for both companies. The agreement also includes exchanges of spectrum between the companies in numerous markets which result in an overall net transfer of spectrum from Verizon Wireless to T-Mobile and a cash payment from T-Mobile to Verizon Wireless. Financial terms of the agreement were not disclosed.

Since this agreement includes spectrum that will be purchased by Verizon Wireless in its transactions with SpectrumCo (1), Cox and Leap, this agreement is contingent on the closing of those transactions. The license transfers require Federal Communications Commission (FCC) approval which the companies expect later this summer. If that’s the case, T-Mobile hopes to put the spectrum to use as early as next year. By selling some spectrum to T-Mobile, the smallest national carrier, Verizon could boost its hopes of winning regulatory approval for its $3.6 billion deal with the cable companies.

Public interest groups oppose the Verizon-SpectrumCo-Cox-Leap deals saying that the cellphone company, already the nation's largest, doesn't need more spectrum and shouldn't be cozying up to competitors such as the cable companies.

T-Mobile has also been a critic of the proposed Verizon-SpectrumCo deal. (2) In fact, back on April 20, then-T-Mobile CEO Philipp Humm (he’s since resigned) visited the FCC and let regulators know that the carrier was not interested in buying any of the spectrum Verizon Wireless was interested in selling – in part to help win FCC approval of the SpectrumCo deal. At the time, GigaOm’s Kevin Fitchard guessed there were two reasons T-Mobile wasn’t interested: 1) the spectrum Verizon was selling just doesn’t fit with T-Mobile’s LTE plans, and 2) T-Mobile probably felt it had a shot at getting those same cable AWS licenses if it convinced the FCC to put the kibosh on Verizon’s sweetheart deal.

Why the change of heart? This week, Fitchard wrote: “It’s probably acknowledging reality. T-Mobile has been angling for those cable airwaves all along, which is why it has called for the Verizon-cable deal’s dissolution on anti-competitive grounds. But it likely realizes it has little chance of stopping the deal from going forward, so T-Mobile might as well deal directly with the airwaves’ eventual owner. You also could take the more cynical view that Verizon is simply buying a very vocal critic’s silence with some extraneous spectrum.”

Although we would never call him a cynic, Public Knowledge Senior Vice President Harold Feld did say just that:

“That Verizon Wireless feels the need to buy off T-Mobile to close its spectrum/marketing deals with the country's largest cable operators underscores just how bad this deal really is for American consumers and competition generally. As Public Knowledge has consistently pointed out, the true danger lies not only in the concentration of spectrum in the hands of the leading wireless provider, but with the cozy, cartel-like arrangements between Verizon, Comcast, and the other MSOs party to the deal. The proposed license transfer from Verizon Wireless to T-Mobile does nothing to address the ability of Verizon and its cable partners to use its marketing and research agreements to develop a patent portfolio capable of bringing the mobile patent wars from handsets to online video. Nor does it address the ability of these supposed competitors to block new forms of competition through Wi-Fi offload, Wi-Fi roaming, and control over the backhaul market. The parties cannot justify creating a web of anti-competitive agreements and tools for future anti-competitive collusion by divesting a handful of licenses.”

On June 25, T-Mobile sent the FCC a letter officially withdrawing its opposition to the Verizon-SpectrumCo deal. "Contingent upon regulatory approval of our agreement with Verizon, we believe Verizon’s transaction is in the public interest,” T-Mobile spokesperson Timothy O'Regan said.

Analysts said this week that the Verizon/T-Mobile deal will help alleviate concerns by regulators, who may be getting pressure from Congress to ensure that Verizon’s deal with cable companies doesn’t harm consumers. “We think (Verizon) was either proactive in reaching an agreement with [T-Mobile] or encouraged to do so,” said Kevin Smithen, an analyst at Macquarie Securities. “Either way, this is likely a win-win for both companies.” Bernstein Research analyst Craig Moffett also predicts the Verizon/T-Mobile announcement will help secure FCC approval for the deal. He pegged T-Mobile's cash payment at no more than $260 million and said the deal means T-Mobile would be getting spectrum covering about 60 million people, and Verizon about 22 million. "As a result of this transaction, T-Mobile USA will gain AWS spectrum in many regions of the Northeast where it has historically had a weak portfolio, and give up small portions of spectrum in California where it has ample spectrum holdings," he said. In addition to clearing a path for rapid approval of SpectrumCo, says Moffett, the deal, if approved, could also signal that the FCC is laying the groundwork for a 100 mHZ spectrum cap per market, creating "more plural" ownership of spectrum going forward.

The Alliance for Broadband Competition, a group that includes Sprint and was formed to oppose the Verizon/SpectrumCo purchase, said the Verizon/T-Mobile spectrum swap doesn't change the fact that the original deal is "a far-reaching non-compete agreement between two huge competitors."

"While it's nice that Verizon will cede a small portion of its vast spectrum holdings to T-Mobile, that does nothing to mitigate the fact that Verizon and Cable want to stop competing, stop investing, and stop innovating to the great detriment of consumers and the American economy," the Alliance said.

Cecilia Kang of the Washington Post reported that the Verizon/T-Mobile proposal is being viewed favorably by federal regulators. Over the past two weeks, Kang wrote, FCC officials have met with Verizon Wireless officials, expressing concern that the company’s deal with cable companies would give Verizon too much dominance in the wireless market. The company’s spectrum holdings would be far richer than other wireless carriers and make it difficult for competitors such as T-Mobile to compete. Verizon appeared to be working aggressively to appease concerns raised by regulators, and a person familiar with the FCC’s thinking said the move was a significant milestone in the regulatory review. “The announcement is significant and unprecedented,” said the person, who spoke on the condition of anonymity because the review is private.

Juliana Gruenwald of the National Journal wrote that the new deal helps alleviate regulators’ spectrum concerns, but Verizon has done little to quell concern over related marketing agreements between the wireless provider and the cable operators. The spectrum agreement with T-Mobile "removes a huge hurdle but it doesn't clear the plate," said Jeffrey Silva, a telecom analyst at Medley Global Advisors. "It doesn't clear all the concerns that the FCC and the Justice Department" have with the deals.

The Communications Workers of America, which represents thousands of Verizon wireline workers, has been among the loudest critics of the marketing agreements. CWA is pressing regulators to attach conditions to approval of the deal that would ensure that Verizon continues to compete with the cable firms for wired phone, Internet and video customers. Among the conditions CWA is seeking would bar Verizon Wireless and the cable companies from selling each other's services in areas where Verizon currently offers wired services. Silva said he suspects Justice is taking CWA's concerns seriously.

On June 26, the FCC released a Public Notice inviting comment, over the next two weeks, on the Verizon/T-Mobile transaction and the impact of the deal on Verizon-SpectrumCo. In light of this comment period, the FCC is stopping for 14 days the commission's informal 180-day clock for the proposed Verizon Wireless - SpectrumCo and Verizon Wireless - Cox transactions in WT Docket No. 12-4, effective June 26 and restarting on July 10, 2012, which will be Day 138.

Petitions to Deny the newly-announced transaction are due July 10, 2012; Oppositions are due July 17; Replies are due July 24.

Although many DC lawyers just lost their July 4 holiday, we’re skipping our weekly round-up next week. You’ll next see us Friday, July 13. ‘Til then, you can track developments in these transactions -- and we’ll see you in the Headlines.

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Notes

1. SpectrumCo is owned by cable operators Comcast (63.6 percent), Time Warner Cable (31.2 percent), and Bright House Networks (5.3 percent)
2. See for example:
Deutsche Telekom Asks FCC Chairman To Block Verizon-Cable Deal (5/7/2012)
T-Mobile fires back at Verizon on spectrum deal (4/29/2012)
T-Mobile is buying neither Verizon’s story, nor its spectrum (4/24/2012)
T-Mobile: Verizon doesn't need AWS spectrum it's trying to buy, because it hasn't used the AWS spectrum it already owns (4/24/2012)
T-Mobile accuses competitor Verizon of exaggerating need for more airwaves (4/12/2012)
T-Mobile to FCC: Public not served by Verizon obtaining more spectrum (3/27/2012)