What’s On With Verizon’s Cable Deal?
Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A number of developments are taking place in the US telecom sector. But Verizon’s (NYSE: VZ) cable deal is still stuck. The FCC and the US Department of Justice are yet to shower their blessings on the contract. However, there was a buzz last week that the industry regulator is almost ready to give a go-ahead signal.
Verizon Wireless and one time big rival Comcast (NASDAQ: CMCSA) have already started cross marketing each other’s products and services. The two players would be giving a $300 gift card to its new customers for the purpose of supporting each other’s offerings at retails stores, online and on the phone. Verizon and Comcast engineers have already joined hands to create and offer product and services jointly under the new partnership. The top wireless operator has started offering Comcast’s and Time Warner’s cable services in market segments which aren’t served by Verizon's Fios broadband and TV services. While cable company Comcast is promoting the use of Verizon’s phones and tablets.
But the anti-competitive issue over the co-marketing deal still concerns the regulators and other carriers. However, Verizon emphasizes that the deal is extremely important for the carrier’s development.
Why is the deal so important?
The purchase of airwaves under the cable deal is crucial to Verizon to meet its LTE expansion plan. Carriers are increasingly adopting 4G as it offers higher speed and efficiency over 3G networks in managing data consumption. In addition, the maintenance cost is low too. Thus, upgrading the 3G network and installing the 4G LTE is extremely important for Verizon if it wants to continue to hold its top position, keeping AT&T (NYSE: T) and Sprint (NYSE: S) behind. So Verizon has been hugely spending on building its LTE infrastructure with its capital expenditure mounting year over year.
However, the deal has been facing quite a number of bumps and is still awaiting approval from the watchdogs.
What does the DOJ say?
Though Verizon has tried hard to dispel concerns regarding the deal, the Department of Justice is skeptical and fears that it could crush competition. Both the FCC and DOJ are apprehensive about the joint marketing agreement between the carrier and the cable companies.
In fact, both the components of the deal raise doubt regarding healthy competition. First, the spectrum transfer would result in the concentration of too many airwaves into the hands of the largest wireless carrier of the US, which is already blamed to be warehousing airwaves. Second, the cross-marketing deal could ruin competition in the landline internet service arena and leave Americans with a single option for broadband internet services. Verizon Wireless’ parent, Verizon Communication, might depend on the co-marketing deal instead of building its own high speed FiOS network. In fact, it has already slowed the process. Verizon’s labor union is worried that if the deal receives sanction and Verizon stops the deployment of its FiOS system, it could result in 72,000 job cuts.
Verizon has given it all to make the stakeholders believe that the deal is ‘in the best interests of customers’ and that no mal intentions are hidden. The carrier agreed to swap its AWS spectrum with T-Mobile. Earlier it also agreed to sell some of spectrum in the lower A and B block of the 700MHz spectrum range. Several smaller carriers such as Leap Wireless, MetroPCS (NYSE: TMUS) and U.S. Cellular might want to get some of it. U.S. Cellular has in fact shown its interest in these spectrum blocks and has expressed the same to FCC. The divesture is contingent upon the occurrence of license transfer of the cable operators.
But this divestiture effort isn’t relieving other carriers.
Fellow players apprehensive
MetroPCS says that though Verizon proposes to sell spectrum to T-Mobile, it will still have 20MHz of undeveloped spectrum and 40 MHz of unused spectrum in big markets, while Sprint shows its concern about the joint marketing agreement which would convert its relation with the cable companies from an enemy to an ally.
FCC’s take on the deal
Verizon has won the heart of the FCC, which seems to be preparing to recommend the sanction of the deal. The agency might impose several restrictions. It might ask Verizon to offer the data roaming service to competitors at a lower rate and give a shorter time to start working on building the network using the airwaves.
The decision on the deal is expected to come by the end of August. The effort made by Verizon to address the concern seems to have paid off as the FCC looks impressed.
To conclude
The carrier seems to have managed to appease the regulatory authority and is going to get its hands on the long awaited AWS spectrum soon. Though antitrust concerns haven’t been cleared, I believe the FCC is getting ready to give a green signal to the carrier.
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