Verizon and SpectrumCo Deal: What is its Fate?

Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Verizon (NYSE: VZ), the largest wireless service provider, proposes to acquire cable company joint venture SpectrumCo and Cox Communication in a $3.6 billion deal. The deal consists of two components. First, Verizon is to acquire 20MHz advanced wireless spectrum (AWS) from the consortium that includes Comcast (NASDAQ: CMCSA), Time Warner Cable (NYSE: TWC), Bright House Networks and separately, Cox. Second, as part of the deal, Verizon shall partner with the cable companies for joint marketing arrangements wherein they will market each other’s wireless and broadband services.

What’s worrying?
Both the components of the deal are bringing in serious concern about competition. With regards to spectrum, Verizon is the largest wireless provider in US with one of the best spectrum holding positions in the industry. The company claims that it needs additional spectrum to expand its 4G LTE network, but the carrier already possesses 20 MHz of unused AWS spectrum. Also, it will not be using the 20 MHz AWS spectrum acquired from the cable companies immediately. In case this deal materializes, Verizon would own 40 MHz of AWS spectrum in several major markets. T-Mobile pointed out the issue, saying that it seems as though Verizon is “warehousing” wireless spectrum. This is of high risk to fellow carriers particularly as others are struggling to add new spectrum to their current holdings.

The second part of the deal, which is to do with the co-marketing agreement, also invites apprehension. The marketing arrangement will allow Verizon, which teams with the cable operators, to offer special triple and quadruple-play packages. This means a consumer could call Comcast and ask for a combination of Comcast’s cable, internet, and digital phones together with Verizon’s mobile services. Reselling each other’s services would severely damage competition. Rivals T-Mobile and Sprint (NYSE: S) have expressed their anxiety about the deal, which they characterize as "a clear threat to competition.”

All eyes are set on the industry watchdogs. What will their decision be?

FCC’s scrutiny
The priority of the FCC agency at the moment is to provide spectrum to the carriers who are facing tremendous shortages to serve the growing wireless data demand. Wireless operators have been jostling for spectrum from quite some time for which the FCC has arranged an incentive auction. However, the auction is of little help at the moment, as the process would take years to bring new spectrum into the market. Thus, the FCC might have to approve Verizon’s deal.

But the regulator can’t let it go by without adequate scrutiny.

The agency is worried considering Verizon’s position of controlling the market once a green signal is passed. Herb Kohl, the chairman of the Senate antitrust subcommittee, has insisted on carefully scrutinizing the deal as it “raises serious competition concerns.” The FCC has already crossed the 180 days within which it was to review the deal and pass a final decision. It wants a further extension until Aug. 7, as the marketing agreement in the deal has added complications.

The FCC might need Verizon to divest a fraction of its spectrum. Although the company wishes to sell some spectrum in the 700 MHz band, the FCC might ask it to sell some AWS spectrum to restrict the carriers control in the market. A source says that FCC is considering this as an option.

How is Verizon justifying its need?
Verizon affirms that there are no intentions of gaining a spectrum monopoly and hurting competition. It pledges to sell some of its spectrum in the A and B blocks of the 700 MHz band, provided its deal with the cable companies is approved. The company recently revealed that it received responses from at least 36 entities interested in buying the spectrum.

Verizon, which acquired the A, B, and C blocks in the 700-MHz band during an FCC auction in 2008, said that it has used the upper C block to deploy its LTE network. The A and B blocks in the lower band of 700 MHz isn’t as good as the AWS spectrum. So the company desires to dispose of the A and B blocks and get access to the AWS spectrum of SpectrumCo to continue the LTE rollout.

Food for thought
A duopoly in the industry between Verizon and AT&T (NYSE: T) is a concern to the regulators and other carriers. The fear of damaging competition and ultimately hurting consumers, who are sure to experience pricier plans, are some of the disturbing thoughts. The question that FCC needs to solve is, whether or not to allow Verizon access to the cable companies' AWS spectrum, given that the wireless leader already owns 20MHz of unused AWS spectrum.

The agency, which had earlier blocked the AT&T and T-Mobile deal to preserve healthy competition, has to take a call again. Will history repeat itself?

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