Verizon stitches up rivals with shock cableco deal

The Department of Justice may worry that the disappearance of T-Mobile would reduce US wireless competition, but the real threat of a duopoly situation is seen in Verizon Wireless's latest spectrum buy. It will pay $3.6bn for the licences held by a consortium of cablecos called Spectrumco, a deal which - unlike AT&T's proposed purchase of TMo - should pass regulatory scrutiny because no competitors disappear. But not only does it make the ascendant Verizon even harder to catch in LTE - with AT&T hobbled by its TMo impasse - but it sees the major cable operators, Comcast and Time Warner Cable, shifting allegiance from Sprint. The decision to sell their AWS licences, acquired in 2006, is no surprise. The cablecos once dreamed of building their own wireless networks to support their need for a quad play offering to rival those of Verizon and AT&T. But they soon realized that the expense, risk and sheer spectrum capacity needed for 4G would be beyond them, and when Cox halted its 3G build-out earlier this year, it was clear that the cable majors would have to rely on partnerships for their wireless angle. The Spectrumco licences were one of the largest chunks of high value spectrum still likely to come to market, so they are a good win for Verizon, at a time when AT&T is prevented from bidding because of its ongoing TMo cases (Verizon has taken advantage of its rival's predicament several times, as when it engaged in a spectrum exchange with Leap last month). Not only does Verizon gain additional capacity for LTE without the pain and risk of a major acquisition like AT&T's, but it removes what could have been an option for a second tier player such as MetroPCS to increase its own self-sufficiency in mobile broadband. But even sweeter for Verizon is that Comcast, TWC and Brighthouse will also stop reselling Clearwire's 4G services in mid-2012, presumably to ride on the larger carrier's LTE network. Despite all the competitive issues between Verizon and the cablecos, they have mutual interests too, and there are extensive cross-marketing arrangements in their new deal. These will weaken the cornerstone of Sprint's strategy to survive as a major third player - its wholesale business, in which it has traded on the fact it did not have the same conflicts of interest with cable as Verizon or AT&T, with their extensive wireline broadband and TV interests. Details of the operating agreement between Verizon and the cablecos are sparse so far, but there are extensive options for the unlikely partners to sell one another's services. The cablecos will immediately be able to sell Verizon services as part of a quad play bundle, while Verizon Wireless will sell their broadband, TV and voice services in its retail stores. This deal can even include marketing cable services in areas where Verizon competes with its Fios offering. And from the end of 2015, the cablecos will be able to access all of the Verizon Wireless network at wholesale rates in order to support their own wireless services and brands, replacing the Sprint partnership. Verizon has played a blinder here, assuming its deal is ratified by the FCC. It gains spectrum licences which cover about 259m POPs at a time when AT&T was not in play, and so unable to outbid or push the price higher. It makes its own cable competitors reliant on its networks, weakens Sprint and Clearwire - and by implication LightSquared, which could have been another option for Comcast et al in the future - and reduces the pool of unused beachfront spectrum available to its competitors. It already looked doubtful that T-Mobile (assuming it does not get acquired by AT&T) or the regional players could amass sufficient spectrum capacity to go it alone and that has become even more unlikely now, at least until new auctions are held. As Craig Moffett of Sanford Bernstein said in a client note: "Pity poor T-Mobile. Verizon just ran off with the last pretty girl in the bar." Some spectrum assets remain in play - Cox's licences; many pockets of 700MHz spectrum held by smaller operators; potentially some of Clearwire's underestimated 2.5GHz holdings (these should now have gained in value, a crumb of comfort for the abandoned JV). But with its Leap and SpectrumCo deals, Verizon has certainly achieved something of the LTE capacity buffer AT&T was aiming for with the TMo bid. It had said it had enough spectrum to last until 2014 or 2015 anyway, but now has 110MHz nationwide, more than AT&T's 90MHz and almost as much as Clearwire, though in various bands. This gives it considerable flexibility to build out capacity for new services. Verizon's moves hasten what was probably inevitable anyway - as in other markets round the world, only two or three companies will actually build wireless networks, and the other brands will tap into their capacity on a virtual basis. Had Sprint executed more effectively, it was the obvious choice, with its huge spectrum reserves via Clearwire, to be the primary wholesaler, a role LightSquared also covets. But Verizon now seems to want more of that business for itself too. If the AT&T/TMo deal falls through, we might expect the latter to partner with its would-be parent or with Sprint or LightSquared; Leap and MetroPCS to join forces themselves and/or do deals with LightSquared (if that operator is green-lighted by the FCC; and the cablecos, however odd it may seem, to gravitate to Verizon. That means that Sprint has an unexpected rival for the affections of the cablecos, and they will almost certainly exit the Clearwire joint venture, which will add to the dilemma facing Sprint - how far to support the JV financially in order to secure its future and to gain access to a high capacity LTE network in future, to complement Sprint's own Network Vision. In initial reactions, consumer groups were divided over whether Verizon's moves were, in the end, as dangerous for competition as the AT&T/TMo merger they have opposed so vehemently. Some applauded the fact that some unused spectrum would now be built out to provide more mobile broadband services. "arold Fed, legal director for 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." But others believes smaller players from TMo down are now hugely disadvantaged in terms of access to spectrum and the choice of wholesale partners, and that competition between Verizon and the cablecos has been diluted by the co-marketing pacts and future wholesale options. "Today Verizon announced a deal to pay $3.6bn to buy spectrum from the largest cable companies, who had purchased it intending to enter the wireless business," Mark Cooper, director of research for the Consumer Federation of America, said in a statement. "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."