Quick Thoughts: Verizon Goes Shopping
While AT&T twists in the wind in its quixotic press to gain approval for its acquisition of T-Mobile USA, Verizon has sprung a deal of its own, announcing agreement to buy roughly 20MHz of spectrum with a nearly national footprint held by cable operators (Spectrum Co.). This purchase, at $3.6B, is for less than 10% of AT&T’s tab for T-Mobile and its 53MHz and gives Verizon more headway to extend its already substantial lead in 4G LTE services.
From AT&T’s perspective, this is awful news. Fierce opposition to the structure of the T-Mobile deal by both the FCC and DoJ, both of whom must approve the transaction, will certainly send AT&T back to the drawing board to restructure and could scuttle the deal entirely. (N.B. I have long believed that the right answer is a comprehensive network sharing agreement, with T-Mobile transferring its network assets and spectrum licenses to AT&T, and signing a long term wholesale agreement that preserves T-Mobile as retail competitor with a competitive cost basis.) Meanwhile, T’s arch-rival scoops up spectrum that lets it expand its LTE lead while the rest of the field stands flat footed. Moreover, it removes the possibility that AT&T could turn to the cable operator spectrum if the deal does go sour. The only ray of hope is that Verizon’s actions shift the legal and regulatory focus from the loss of T-Mobile as a competitor toward a need to field a credible 4G alternative to VZ.
For Verizon, it is a coup. The Spectrum Co. holdings are in a reasonably attractive frequency range used for commercial wireless services in many parts of the world and already supported by leading network and device makers for 4G LTE. The 20MHz would double the amount of spectrum that Verizon has allocated for its LTE service, easing the costs of capacity expansion while doubling the potential throughput. The price paid is reasonable, particularly in light of the $39B price tag for T-Mobile. While the deal carries provisions for Verizon Wireless and its new Cable friends to co-market each others’ services, a similar arrangement with Sprint over the past several years has borne very little fruit. It would seem that Verizon will be able extend its first mover and scale advantage in mobile 4G services, with the very real threat that it could stimulate substantial churn of its rivals’ most valuable customers.
As for the Cable Companies, they get to split $3.6B and put their moldering spectrum assets into the hands of someone that won’t likely use them to aggressively compete for residential broadband – at least in the next few years. I’m not inclined to put much value in the agreement for Verizon Wireless to bundle and market cable products, but to the extent that the deal blunts the potential of direct competition, that is a very good thing.
For the FCC, this deal is likely to pass muster, but raises serious policy questions. If the AT&T merger is thwarted, how can the agency promote competition in wireless broadband? Can a solution be found that preserves consumer choice, but also allows scale and spectrum headroom for AT&T’s 4G network? Can a third or even fourth 4G network reach competitive scale? The long term answer needs to come from new spectrum auctions, currently held up by Congressional gridlock.
Clearwire’s ongoing funding soap opera is another wild card in this game. With 150 MHz of largely contiguous spectrum at frequency ranges that seriously limit the practical range of cell radios, Clearwire is at a great economic disadvantage with regard to providing blanket coverage, but at a great capacity advantage for serving many customers within a fixed geography. Eventually, we believe this spectrum will be turned to its obvious best use – fixed wireless broadband in direct competition with wireline networks. The Verizon-Spectrum Co. agreement takes options of the table for many players, but could, in the process, make Clearwire a more valuable property.
The same could be said for the wireless broadband plans of LightSquared and Dish Network. Verizon’s deal highlights the value of spectrum and, from a government perspective, the importance of stimulating competition in 4G.
For our full research notes, please visit our published research site.