The Federal Communications Commission just gave the final approval for Verizon Wireless to purchase the biggest hunk of spectrum outside of a full company merger in U.S. history. So what's it all mean?
In December, Verizon proposed buying 20 MHz of wireless spectrum from a consortium of cable operators known as SpectrumCo, which included Comcast, Time Warner Cable, and Bright House Communications. It also struck a separate but similar deal to buy spectrum from cable operator Cox Communications.
The deal was controversial for two main reasons. First, it would have allowed Verizon to effectively double its spectrum holdings in the AWS-1 block. Many feared this would give Verizon too much control of a scarce resource at a time when other wireless operators without as strong a spectrum position also need access airwaves to deploy competing 4G services.
The second issue many consumer advocates had with the deal concerned a commercial arrangement that would allow cable operators to resell and market Verizon Wireless services and also allow Verizon to resell and market cable service. This concerned regulators and consumer advocates because it might kill competition in the wired broadband market.
After working closely with regulators, Verizon struck a deal with T-Mobile to sell it some spectrum, alleviating those concerns. And it worked with the Department of Justice to alter its commercial agreement to help protect broadband competition.
While regulators say they are satisfied with the protections put in place via conditions placed on the deal, what does it all really mean for consumers? What is likely to change in the near term as well as in the long term?
CNET has put together this FAQ to help explain what you can expect.
Now that the FCC has approved the deal between Verizon and the SpectrumCo cable companies what happens next? Are there any other approvals necessary?
The FCC was the last regulatory agency that had to sign off on the deal. The Department of Justice announced its support of the amended deal last week. Now Verizon and the cable companies are free to proceed with their transaction.
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What does this mean for consumers? Will anything change right away?
There are several components to the deal as I mentioned in the introduction. There is the spectrum sale of 20 MHz of Advanced Wireless Services spectrum. And a commercial arrangement in which the companies will resell and market each others services. On the spectrum front, consumers won't likely see any changes right away.
But consumers may start to see joint marketing and the reselling of services from all the companies involved relatively soon. There are no restrictions on how soon these new marketing plans can go into effect.
When Verizon purchased Alltel, those customers were moved from Alltel's network to Verizon Wireless. Will something similar happen to consumers with this deal?
No. The spectrum that Verizon bought from the cable operators is unused. Cox and the SpectrumCo cable operators bought this spectrum in the 2006 FCC auction, and they never used it. Verizon had also bought some spectrum in the auction, and as part of the deal with the FCC to get the SpectrumCo transaction approved, Verizon agreed to sell some of its existing spectrum assets to T-Mobile. Verizon also was not yet using this wireless spectrum. So there are no subscribers currently on that spectrum that will be transferred to T-Mobile's network.
What are the long term implications of Verizon getting this additional spectrum?
Within seven years, 70 percent of the people living in the area where Verizon now owns that AWS spectrum will have access to Verizon's 4G LTE network. Many of these customers likely already have access to Verizon's 4G LTE network, but the addition of this spectrum will ensure that Verizon has enough network capacity to handle heavy data traffic loads.
So far, Verizon has used its 700 MHz spectrum to build its 4G LTE network, which is available in more than 370 markets, covering nearly 75 percent of the U.S. population. With the FCC estimating that the industry demand for mobile data by 2015 will be 25 to 50 times greater than it was in 2010, it will be very important to Verizon and other wireless carriers to have enough spectrum to keep up with demand for data-intensive activities like video chatting, streaming live video, downloading movies or large work files and more, on smartphones and tablets.
The lower frequencies of the 700MHz Verizon is currently using for its network are good for establishing coverage. Lower frequencies can travel longer distances and penetrate through obstacles better than higher frequency spectrum.
But higher frequency spectrum, such as the AWS spectrum Verizon acquired, offers more capacity. Signals at these frequencies don't travel as far, but they can pack in more data than the lower frequencies.
What this means for Verizon is that using a combination of lower frequency spectrum with higher frequency spectrum allows the carrier to offer good coverage indoors and outdoors and in rural areas. But the higher frequency spectrum also allows it to add additional capacity in dense areas like cities, where networks can get congested.
So the bottom-line is that this ultimately benefits Verizon Wireless customers, because it means that Verizon will be able to keep up with demand for 4G wireless services. That said, I wouldn't count on Verizon lowering prices or allowing people unlimited access to the network for a low flat-rate. Those days are over.
I've heard that if this deal goes through Verizon will have too much spectrum and thus control the market. Is that true?
This deal does give Verizon an additional 20 MHz of wireless spectrum. And the company already owned about 20 MHz of the same type of spectrum.
But in order to win approval from regulators to complete the deal, Verizon offered to sell some spectrum to T-Mobile. While Verizon and T-Mobile struck this deal independently, the FCC was pleased with the outcome and made the closing of the deal with T-Mobile a requirement in approving the SpectrumCo spectrum license transfers.
The FCC does have a limit to how much spectrum one carrier can own in any given market. That limit stands at one-third of the total spectrum ownership or about 145 MHz per carrier in most local markets. Paul Gallant, an analyst with Guggenheim, points out in his note to investors Friday, that the FCC appears to have retained the 145 MHz per-company limit. Many had thought the FCC might lower the cap.
Still, the FCC did require some concessions even though Verizon had crossed the one-third spectrum threshold. In fact, Gallant notes that the Verizon/SpectrumCo deal was below the cap in 90 percent of U.S. markets, and yet the agency still required Verizon to swap some spectrum with T-Mobile. And it put other conditions on the deal too. It is requiring Verizon to allow roaming from other carriers on its data network. And it required a speedier build-out timeline on the spectrum.
Why did the FCC require conditions even though it didn't meet the spectrum cap?Gallant explained in his note that "the FCC's main rationale for spectrum divestiture was that the AWS-1 block was one of the last greenfield sources of spectrum, so Verizon Wireless's control of more than 20 MHz of AWS in most cities would impair LTE competition and potentially lead to higher wireless prices nationwide."
What effect might these conditions have on the market?The fact that the FCC didn't change the spectrum cap means that other large companies may try to merge or purchase large blocks of spectrum as well. There has been a lot of talk about AT&T buying wireless spectrum from satellite TV provider Dish. And there's always a rumor that surfaces every few months that Sprint and T-Mobile may be considering a merger. The FCC has indicated through the Verizon/SpectrumCo deal that it's willing to approve these mega spectrum transfers. But there will likely be conditions, even if the combined entities don't officially cross the spectrum cap threshold.
The FCC also said in its order that it will soon start a rulemaking procedure to examine the spectrum concentration cap it has in place. The FCC would like to make sure that its spectrum framework is "clear and predictable" for companies who may be considering deals. And that is what the rulemaking will address. The FCC expects to open the rulemaking in the next few months and conclude it in mid 2013.
This means that there could be deals announced within the next year before new rules are in place since the FCC has indicated that the one-third spectrum cap is still useful in evaluating deals. But companies may have to concede to other conditions to get the deals done.
The result for consumers is that there is likely to be more consolidation over the next six months to a year. And depending on how the FCC reworks the spectrum caps, there could be even more deals a year from now.
Is consolidation good or bad for consumers?
This is the magic question. And the answer you will likely get to this question often depends on who you ask. In general it's believed that competition is better for consumer because it keeps prices low and spurs innovation. But how much competition is necessary to gain these effects?
A free-market proponent would say that it's silly and wasteful for several companies to build multiple infrastructures to essentially offer the same services. They would argue that fewer players actually use the industry resources more efficiently, which ultimately benefits consumers.
But people on the other side of this argument say that reducing the number of competitors often leads to higher prices for consumers and less innovation. Even if fewer companies can use resources more efficiently, it doesn't mean that those cost-savings will be passed on to consumers. Often, they are profits given to shareholders.
At the very least, market consolidation means less choice for consumers. And the fewer choices consumers have in providers, the less leverage they may have when dealing with a company that is providing subpar service.
But the reality is that building and running a wireless network is a capital intensive business. It depends on an expensive and scarce resource: wireless spectrum. And the truth is that not every competitor that is in the market today will survive, nor should they be propped up to survive via regulation. So there will be some consolidation. But the function of the regulator ie the FCC is to make sure that the policies in place are fair to all competitors regardless of size. And it also must work to ensure that enough competition exists to benefit consumers.
It's a balancing act for the FCC and other regulators. If the market consolidates too much, regulators will likely have to be more involved. But if enough competition remains, the regulator can use a much lighter touch.
What about the commercial arrangements between Verizon and the cable companies? Does this mean I can forget about competition in the home broadband market?
Both the FCC and the Department of Justice were concerned about these commercial deals. In the original agreement, cable operators would have been allowed to resell Verizon Wireless service and Verizon Wireless would have been able to resell and market cable TV, broadband, and voice services from the cable companies, even in markets where Verizon also sells its Fios TV and broadband service.
Regulators said they felt allowing Verizon to market and resell cable services in the same markets where it is offering Fios would hurt competition and might provide a disincentive for Verizon to push its own services.
So the DOJ worked out a deal with Verizon and the cable companies in which it's now forbidden for Verizon or the cable operators to resell each other's home broadband services in the Verizon Fios territory. But these companies can still market and resell services in places where Verizon only offers DSL service.
One of the conditions the FCC put on the deal is that Verizon will be required every six months to file reports with the agency about the DSL competitive market. And the FCC also established a system in which parties could file a complaint with the FCC if they thought the companies were acting in an anticompetitive manner.
Consumer advocates think the DOJ and FCC should have done more to protect competition in wireline broadband.
"While (the FCC's complaint system) may allow parties to bring attention to anticompetitive or otherwise illegal conduct, it does nothing to affirmatively prevent it," Gigi Sohn, head of Public Knowledge, said in a statement. "The JOE (joint marketing agreement) is still a vehicle that empowers former competitors to suppress new rivals. The FCC should have protected competition by blocking the commercial agreements altogether."
So what does this really mean for consumers?
It means that if you are a Comcast, Time Warner Cable, Cox or Bright House cable subscriber, you will soon be able to get wireless phone service that uses Verizon's network but is branded from one of the cable operators. You will also be able to subscribe to any of these cable services from Verizon Wireless stores, so long as they are not in an area that is also selling Verizon's Fios service.
There is a chance that the cable companies may cut you a break on the wireless service. And perhaps there will be promotions that save you money or you subscribe to cable service via a Verizon Wireless store.
But many consumer advocates fear that what's really been allowed to happen here is that in the few places where Verizon vigorously competed with the likes of Comcast and Time Warner, it will no longer push so hard to compete. And that is bad news for consumers.
In fact, far too many U.S. consumers don't have enough competition when it comes to broadband. And now consumer advocates fear that even with some of the restrictions put in place by the FCC and the DOJ that Verizon will have little incentive to build beyond its existing Fios footprint, where it could bring true broadband competition to millions more Americans.
In all fairness, Verizon has never said it would continue to expand Fios beyond the existing footprint. And even without this commercial arrangement, it's unclear if Verizon would have ever found it cost effective enough to continue building the fiber to the home infrastructure.
Still, if I were keeping a scorecard of pluses and minuses for competition, the approval of these commercial arrangements -- even in their altered form -- are a negative for consumers.