Verizon Gets Paid for its Effort

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

Verizon Wireless (NYSE: VZ) finally received the go-ahead signal from the US Department of Justice on its $3.9 billion cable deal. The airwave acquisition would give the telecom giant the much needed additional capacity to cope with the robust demand for data services on mobile devices.

However, there are certain minor conditions that the carrier will have to meet in order to purchase the spectrum license from Comcast and the other cable operators. Right after the DOJ gave the green signal putting forward the conditions, FCC Chairman Julius Genachowski recommended the commission approve the deal particularly as the carrier had impressed the regulators with the effort that it put in.

So, what impressed the regulators?
The spectrum crunch environment is worsening with time. Verizon has been experiencing network congestion since the time it made Apple’s (NASDAQ: AAPL) iPhone available on its network. So is the case with AT&T (NYSE: T), which was the first wireless operator to provide the iPhone. But Verizon acted much smarter than its rival.

It knew that getting access to the cable companies’ airwaves is extremely essential to meet the rising requirement to enhance its network. The carrier was also aware that receiving regulators’ approval wouldn’t be that easy. So it struck a deal with smaller rival cum cable deal opponent T-Mobile to swap airwaves to clear the path for approval and reaffirm that it has no intentions of attaining a spectrum monopoly. This move of Verizon not only acted as a catalyst in the entire regulatory process, but it shall also improve the carrier's LTE coverage in its weak areas.

There is another thing that worked in favor of Verizon. The airwaves that the carrier seeks to acquire from the group of cable companies was purchased by the latter back at an auction in 2006. They bought the spectrum to start building their wireless business, but most of it still lies unused. This gave the FCC and DOJ all the more reasons to approve the spectrum transfer to Verizon so that it can put it to use.

The regulators who were earlier stringent and had blocked AT&T’s deal to acquire T-Mobile feared that it would hurt competition. But now they realized that the spectrum-tight environment is creating problems both for the carriers and consumers. Thus is it essential to assist carriers to improve their spectrum holding rather than blocking ways.

But there are conditions that Verizon will have to agree with so that competition remains healthy and the concern with respect to the co-marketing agreement is lessened.

What are the conditions?
One of the main concerns that the regulators have is regarding the joint marketing agreement between Verizon and the cable companies group. The DOJ has accordingly imposed conditions to make sure that competition isn’t hurt by providing broadband services in places where Verizon Communication’s FiOS high-speed broadband service is offered. So as part of the condition, the carrier cannot market the cable companies’ products or package deals in areas that are covered by FiOS. Also, the joint marketing agreement between Verizon and the cable companies will be valid only till 2016. In case they wish to extend the agreement, the DOJ would conduct another round of review then.

In addition, the FCC is giving Verizon a timeframe of seven years to build its high-speed LTE wireless network. The company will also have to comply with FCC’s data roaming rule as per which it would have to offer its roaming services to fellow players at a lower rate for five years.

Now that the watchdogs have given their consent to the carrier, it will be good news for the industry. This would definitely spark hopes in the carriers who are seeking for spectrum to build their 4G LTE network. So what’s there in the industry in the near term?

What to expect?
All this is going to have a positive impact on the industry. The regulators’ positive review in approving the deal will encourage other carriers as well to look in for spectrum deals and get into wireless consolidation to satisfy their airwaves requirement. While AT&T is already hunting for more spectrum from smaller players, the third largest carrier, Sprint (NYSE: S), could consider buying MetroPCS (NYSE: TMUS) or Leap Wireless to compete with its bigger rivals. MetroPCS could be a more likely potential takeover option for Sprint given the former’s presence in major cities. Sprint is growing a little stronger but it still has a long way to go before it can actually compete with the mighty Verizon and AT&T.

Food for thought
It’s party time for Verizon. But consumer advocates and the CWA union aren’t happy and feel that the conditions are too minor to protect consumer interest. In all this what really seems interesting is the way Verizon tackled the situation in receiving the consent from the same regulators who blocked AT&T’s T-Mobile deal. Here is what Verizon did which AT&T didn’t -- instead of approaching rivals and fearing the regulators of a duopoly, the lead telecom player went to the cable companies that possessed idle but valuable AWS spectrum. It also worked pretty hard to make the audience believe that the acquisition intentions are good and that competition will remain intact. This is why it entered into a spectrum swap deal with T-Mobile. While Verizon got paid for all its effort, it has also taught a lesson that AT&T will never forget.

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