Win, Lose, or Draw? Verizon Partners with the CablecosWin, Lose, or Draw? Verizon Partners with the Cablecos

This looks like a savvy move on the part of Verizon, which has completely remixed the competitive picture.

In another step in the evolution of the telecom industry, Verizon Wireless announced it will pay Spectrumco, a consortium of cable TV companies, $3.6 billion for the wireless spectrum they hold. Comcast Corp. (CMCSA), the country's largest cable provider, will get $2.3 billion, Time Warner Cable Inc. (TWC) will get $1.1 billion, and Bright House Networks LLC will get $189 million. In return, Verizon will sell the cablecos' services through its retail stores, receiving a commission on each customer sign up, and the cablecos in turn can sell Verizon’s cellular services on a similar basis.

All told, it is an interesting strategic move for Verizon, and one that should face far fewer regulatory hurdles than AT&T's ill-fated plan to purchase T-Mobile USA. All of the mobile operators are looking to improve their spectrum positions with the move to 4G, and AT&T had cited that (along with a ludicrous promise of job creation) as part of their justification for acquiring T-Mobile.

The spectrum being sold to Verizon is in the Advanced Wireless Services (AWS) band that the FCC's Auction 66 in 2006. The main portion of the spectrum (AWS-1) is actually two bands: 1.710 to 1.755 GHz (45 MHz) and 22.110 to 2.155 GHz (45 MHz). These bands are not considered as "valuable" as the 700 MHz bands auctioned in the FCC’s Auction 73 in 2008. Those 700 MHz. frequencies lose less power over distance and have better building penetration characteristics so 700 MHz networks can be deployed for lower cost.

The FCC raised close to $14 billion in the AWS auctions, with T-Mobile being the biggest buyer; T-Mobile is currently using that spectrum for their HSPA+ network deployment which it refers to as "4G". If their acquisition plans had gone through, AT&T had planned to use that spectrum to augment their LTE network.

While T-Mobile had been the biggest buyer in the AWS auction, the cable companies saw the same auction as an opportunity to expand their franchise into the wireless area, looking for the coveted "quadruple play" to join the TV, Internet, and cable voice services they already offered. In 2006, Time Warner Cable paid $632.8 million for its spectrum and is selling it at a 74 percent premium; Comcast bought its spectrum for $1.29 billion, earning a 78 percent increase.

Knowing the cost and other challenges in entering the wireless market at this late stage, I had been puzzled why the cable operators would start investing in spectrum. It appears that after mulling it over for 5-years, they came to the same conclusion, but at least they made a decent return on the investment.

Strange Bedfellows
There are more angles to this deal than a bad plumbing job. First off, Verizon's wireline arm sells their fiber-based FiOS cable TV service in competition with its newfound "partners". Commenting in an article in Bloomberg, David Joyce, an analyst at Miller Tabak & Co. described the relationship between Verizon and the cabelecos as "Frienemies". Joyce is quoted as saying "This might slow the competitive push from FiOS to drive down prices, which could help the cable companies".

Verizon Wireless Chief Executive Officer Dan Mead countered by saying, "It's the nature of our business in wireless now.... You're competitors one minute and suppliers or partners the next."

There is also an impact on AT&T's planned acquisition of T-Mobile. With the acquisition stalled if not completely kaput, this takes one follow-on option off the table for both companies. One possible scenario to improve spectrum positions in the event the deal didn't come to pass had been to acquire the cablecos' spectrum. Now that's not going to happen, which will leave T-Mobile and AT&T in an even weaker position should they fail to execute on the merger.

Sprint is also affected. Comcast and Time Warner had both been reselling the WiMAX wireless service offered by Sprint's partner Clearwire; Comcast has 30,000 WiMAX customers and Time Warner has 27,000. Both will stop offering Clearwire's service within six months. Clearwire will probably be under the greatest pressure as Sprint has already announced their intention to start rolling out an LTE 4G offering in 2012. It also means that the cablecos will not be looking to Sprint as an MVNO partner.

Conclusion
On all fronts this looks like a savvy move on the part of Verizon. Even if they don't sell many additional lines through their cable partners (I can't see them bending over backwards to sell a competitive cable TV service), they have completely remixed the competitive picture. Of course, the deal still must win competitive approval, but since it crosses industry bounds, it appears to have a much stronger likelihood than AT&T/T-Mobile's horizontal combination. I can't say I saw this one coming.