Quick Thoughts: Verizon Blinks – What’s Behind its Spectrum Sale Offer?
– Verizon is willing to sell extra 700MHz licenses that it holds in major metro markets, contingent on approval of its deal for spectrum held by cable MSOs in a higher band but covering most of the US.
– Verizon must be convinced that the FCC or DoJ will block its deal, and the cross selling arrangement it signed along with it, if it doesn’t address spectrum concentration.
– The AWS spectrum may better facilitate transitioning Verizon customers from crowded 3G networks to more efficient LTE, and will offer a wider geographic area for mobility.
– Verizon’s A and B block licenses are too fragmented to support a new mobile competitor, but could augment a smaller network or be the basis for a residential broadband play.
The handwriting is on the wall. Since the rejection of the AT&T/T-Mobile deal, verbiage from the FCC has been strongly pro-competition and anti-incumbent. With a decision on Verizon’s planned purchase of 20MHz of AWS spectrum from a consortium of cable operators due long before a potential Republican reconfiguration of the FCC and DoJ, Big Red decided to bolster its case before the government could squelch it. This morning, Verizon announced that it would sell off its A and B block licenses that it had purchased in the 2008 700MHz auction, contingent upon closing the cable deal.
On face value, this seems to be more than a fair concession. The 700MHz band is far more attractive than the 1.7/2.1GHz AWS band – lower frequencies mean much greater transmission range, larger maximum cell sizes, better in building penetration and lower capital costs to build out coverage. Of course, Verizon’s A and B licenses are concentrated into urban markets – it has 24MHz in Los Angeles, Chicago, Miami, Denver, and San Antonio, and 12MHz in New York City, San Francisco, Detroit, Minneapolis, Dallas, Houston, Atlanta, Washington DC, Kansas City and Central Florida, with a smattering of smaller metro areas thrown in for good measure. In contrast, the 20MHz of AWS spectrum offered by the cable consortium offers blanket coverage for most of the country. The real question is why is Verizon willing to offer this quid pro quo before the FCC and DoJ issue their opinions?
- Verizon is convinced that the FCC, DoJ or both will oppose their deal on spectrum concentration grounds. The FCC’s public comments on U.S. wireless competition certainly suggest at least skepticism of the consumer impact of Verizon’s AWS spectrum purchase. Verizon, having discussed the merits of the deal directly with the FCC, the DoJ and Congressional leaders, clearly believes that the purchase will not be approved without addressing its concentrated spectrum holdings. Agreeing up front to divest the A and B band licenses would eliminate the most egregious areas of concentration.
- Verizon would rather have broad coverage at 1.7MHz than urban coverage at 700MHz. This would seem curious, as Verizon’s argument for more spectrum has been tied to concerns over data capacity constraints that would likely be concentrated in urban settings. Several factors may be in play here. First, it may be less costly to roll out LTE equipment in the AWS band, which is consistent with European spectrum assignments than in 700MHz, which is unique to the US market. Second, while I believe usage of high speed data will grow more static and concentrated at higher bandwidths, Verizon may project greater mobility, and thus, a greater importance of seamless coverage. Finally, the cable AWS licenses would be of much greater utility in launching a network from scratch than would the urban islands of Verizon’s excess 700MHz holdings. Taking the AWS spectrum out of play lowers the likelihood of fresh competition.
- Verizon’s national 700MHz C block is enough for its LTE build out, while AWS could be used for 3G services while subscribers are lured to 4G. One scenario could see Verizon use the AWS spectrum to relieve data congestion on 3G while it transitions its users to the more efficient LTE technology. The current LTE network, built on 22MHz national slice of the 700MHz band, is not congested, is far more efficient than 3G, and planned upgrades to the technology offer a map to capacity expansion without requiring significant spectrum additions. Rather, the large population of 3G smartphone users are the primary threat to network performance, particularly given the absence of an LTE iPhone. Using new spectrum to cheaply expand 3G capacity would buy time for a more orderly and complete transition of subscribers to LTE, which could then be implemented into 3G spectrum as the transition further eases congestion. This same scenario raised carrier demand for spectrum during the transition from first generation analog to 2G digital, and again during the transition to 3G.
- Verizon sees significant value in the cross-selling agreement with cable operators that it signed as part of the AWS spectrum deal. In most discussions of the spectrum deal, the agreement that Verizon and the involved cable operators would cross-sell each others’ products is treated as something of an afterthought. However, it is possible that removing cable operators as potential competitors and tying its wireless services into a bundled package with cable TV and internet, is a key element in a broader Verizon strategy, which could eventually involve coordinated wired/wireless data packages, cable connected femtocells to push coverage into homes without adequate signal and to off load crowded urban base stations, and smartphone television services. While the current FCC is likely concerned over the competitive impact of the cable/VZ tie up, its strongest regulatory case for blocking the deal is likely spectrum concentration. Thus, offering up the 700MHz blocks could further Verizon’s interests in snuggling closer to the MSOs.
For existing competitors, the 700MHz blocks will be intriguing. AT&T should be first in line, given that it has the largest A and B block holdings after Verizon and is still stinging from the failure of its T-Mobile deal. The real question is whether such a purchase would be considered anticompetitive. MetroPCS made a curious $310M purchase of the Boston area A block license during the 2008 auction, but has no other 700MHz band holdings. Combining this with Verizon’s spectrum could be an interesting urban play, but MetroPCS would likely need financial help to foot the spectrum bill and the eventual build out. US Cellular bought numerous small market licenses in the A and B blocks during the 2008 auctions, and agreed with Verizon to swap some 1.9GHz PCS spectrum in Illinois and Indiana for 700MHz licenses in several smaller markets. It could add new markets with a purchase of Verizon’s remaining licenses, but would be greatly expanding its geographical presence and straining its balance sheet in the process. Sprint and T-Mobile, neither of which currently holds 700MHz licenses, would have a difficult time integrating small islands in this band amidst broader networks operating at different frequencies.
The outside the box solution would be using the 700MHz spectrum for a primarily fixed broadband network. Verizon’s holdings are concentrated into large densely populated metropolitan areas. An enterprising buyer could cherry pick residential neighborhoods for wireless broadband coverage, perhaps using the soon to be available LTE Advanced equipment to expand the useful capacity per cell site by several fold. Given the threat that usage caps, tiered pricing, and speed throttling represent to powerful and deep pocketed Internet businesses, it may be a matter of time before their resources are brought to bear on the side of cheaper, better broadband.
For our full research notes, please visit our published research site.