My view: Verizon Wireless-Cable deal gets off light

Tom Paine

I see terms such as "stringent" or "tough" restrictions or "strict remedies" appearing in some of the headlines popping up about Department of Justice's blessing of the spectrum swap and joint marketing and technology development agreements between Verizon Wireless and a group of cable operators led by Comcast. In my view, the companies got everything they were after for now.

I'm a laissez-fare, anti-regulatory person generally who tends to oppose most antitrust enforcement in the technology area by the Federal government. For instance, IBM's virtual dominance of the computing market was ultimately dismantled by technological changes that would have happened anyway, and the same is largely true for Microsoft. I have no basic gripe about the spectrum sale. The cable consortium took a realistic look at the wireless market and determined they could not create another independent, viable competitor in that space, a view I agree with, so they decided to sell the spectrum rather than build it out. As a result, a vast quantity of prime spectrum will be available to meet soaring demand rather than being warehoused. Nor do I have a particular problem with the cable companies being able to resell Verizon Wireless service as part of a quad play.

But residential landline service still has an important utility element to it. And what does bother me is anything that threatens to further limit competition in broadband access. Many areas of the country only have one true choice for residential broadband service, some areas two, and very few have three. And many have relatively slow DSL as the only option, or in some rural areas not even that. (I don't consider satellite to be a realistic or competitive option for most.) And while some see wireless eventually replacing wired broadband for many applications, there will continue to be serious limits to wireless capacity. Wireless may ultimately surpass DSL, but it is unlikely in the forseeable future to match the types of gains in speed that Fiber To The Node (with Docsis) or Fiber To The Home (FiOS) networks will achieve.

The requirement that Verizon Wireless not sell the cable systems' services in areas where FiOS is already present is virtually meaningless; that's just asking a company not to compete against itself. Although Verizon management has often expressed a negative view of the economics of FiOS (something I don't necessarily accept, when looked at from the perspective of its impact on the entire enterprise value of Verizon's wireline business), certainly in areas where the capital costs are already sunk FiOS as a whole and even Video Service by itself must be cashflow positive. While I could envision a longer term scenario where Verizon might wish to get out of the video business (or perhaps even residential broadband all together) and sell the FiOS infrastructure to cable operators, that's not what was on the table right now.

Verizon has stated that it had already decided in 2009 not to expand FiOS further except for completing existing franchise agreements (and we will see how that works out in Philly), but we don't know for a fact that Verizon might not have considered further FiOS buildouts in the future. This deal essentially forecloses that possibility, making it more likely that much of Verizon's footprint will not have that other broadband choice. Unless you believe that Google Fiber or some other new competitor will emerge on a national level, which most analysts doubt.

The DOJ's language states that the joint marketing and technology ventures must be terminated after 4 years, but that really just means DOJ has the power to review them after four years. While that's nice, and makes long term planning for the joint ventures a bit cloudier, I'm not sure how meaningful it is. Its very difficult to unravel a fait accompli. I know I'm going against the grain of many in the financial community who believe that two complete, national high-speed residential broadband buildouts are economically impractical at this time, but I don't believe Verizon should be allowed such a incentive for not continuing to evolve as a competitor to Cable. This is not the outcome the Telecommunications Act of 1996 was expected to lead to. The precedent this agreement sets also opens the door for AT&T and other incumbent local carriers to reach their own agreements with cable operators in their areas.

Comcast has a tremendous lobbying organization and a great deal of political influence in Washington and with the White House right now. Just to be clear, I'm not implying anything undue, and in fact more Republicans will probably support this agreement than Democrats. Its just that I'm frankly surprised that DOJ (and apparently the FCC also) went so easy on it. The entire agreement between Verizon Wireless and the cable operators was carefully crafted to avoid many of possible legal challenges. Is there any room for state regulatory bodies to challenge the arrangement? I don't know, though I imagine what DOJ says takes precedence.

A couple of other outcomes from this might have a positive impact on the Philly area. One is that the technology joint venture between Verizon Wireless and and the cable operators will continue to develop. I've seen few details about it. The original announcement said it would be located in Philadelphia, but subsequent reports indicated it might be located in the New Brunswick area.

The other is that T-Mobile comes out of this a stronger competitor due to its acquiring AWS spectrum from Verizon Wireless, and this includes a big block in the Philly area. See my article from a few months on the spectrum dilemma T-Mobile faced as it moves to LTE.. This is a big part of the solution for them.