Late in August, both the FCC and the Department of Justice gave their approval to a swap of spectrum involving Verizon Wireless and a number of other companies including Time Warner, Comcast, Bright House Networks, and Leap. Don’t glaze over [yet]. The spectrum purchase is valued at (…wait for it…) $3.9 billion, so perhaps that’s why it attracted some extra scrutiny and concessions from the Department of Justice and arguably the FCC. Wireless devices rely on separate and distinct portions of the wireless spectrum to transmit voice calls, data and video. Without sufficient spectrum, which is a limited and finite commodity (there is, after all, only so much capacity to support multiple demands from voice, data, and the ultimate spectrum pig, video), wireless access cannot be provided, plain and simple.
In an effort to utilize spectrum in the most efficient ways possible, some providers who had specific licenses granted by the FCC to use specific chunks of spectrum, transferred it to providers that could either use it more efficiently or pay a premium for it. As such, swaps like the one discussed here are de rigueur in this market where demand for wireless access is virtually—if not actually—insatiable. Most such spectrum transfers don’t attract a great deal of attention, but because of the amount of spectrum and the players involved, this one did. (Point of reference: Last year’s failed attempt by AT&T Wireless to acquire T-Mobile was as much about spectrum as anything else. When it failed, AT&T found itself both without sufficient spectrum to support services that it was selling, and, as a result, on the losing side of a lawsuit because of its promise to deliver a service that it did not have). But I digress.
The terms of the swap have raised more than eyebrows because of both the FCC’s involvement and the terms and conditions (not all of which are onerous) that some “interested parties” believe that the FCC has imposed on Verizon Wireless without the authority to do so. Specifically, there are some who argue that the terms imposed on Verizon Wireless un-level what was already an uneven playing field between providers of both communications services and content.
Not that long ago, the entities that controlled what was once called the “information superhighway” (remember that?) were all about gaining access to homes and businesses. As a result of regulatory changes, suddenly a single provider could offer telephone and internet access and even cable television. And once the internet and cable environments become as content-rich as they have become, both large and small providers wanted to control not only the “pipe” that delivered the content, but the content itself.
Before the FCC began the process of its own due diligence on the transaction, the Department of Justice with the parties had agreed to the terms of a consent decree between DOJ and SpectrumCo and Cox (joint venture between subsidiaries of Comcast, Time Warner Cable and Bright House Networks) requiring what the FCC has called “significant modifications” to the marketing cooperation agreements that existed between the parties whereby each was essentially cross marketing at least some of the products of the others.
Any time that consolidation or reshuffling occurs with the telecom world, the biggest players, whom may appear to be the most put-upon, are very quick to argue that limits placed on their actions (in this case, it’s Verizon, but all of the biggest players have been known to sing the same (often whiny) tune) inhibit innovation and investment. Regulators argue that such steps preserve the interests of consumers by preventing corporate behavior that is perceived to be both anti-competitive and anti-consumer.
What’s particularly notable about this spectrum swap deal is that conditions are imposed not only on Verizon Wireless, whose spectrum allocation is being modified, but also upon Verizon (the landline and FiOS side) itself. Both wings of Verizon’s very large house are bound by the terms of the FCC’s review. Spectrum must be swapped between Verizon Wireless and T-Mobile in relatively short order. Additionally, over the next few years, Verizon Wireless will be required to build out its network in areas where it is receiving new spectrum and where the business case for doing so is likely less robust than in those areas where it already has a strong commercially viable foothold. Verizon Wireless will be required to continue offering roaming arrangements, although subscribers in targeted areas will be able to negotiate the terms of the roaming arrangements on an individual basis. That’s right folks…if you subscribe to services in one of these targeted areas, you too may actually be able negotiate terms with Verizon Wireless. That’s just shy of remarkable.
If you haven’t totally glazed over yet, wireless and wireline policy, like all things, get political. In this case, the issue that has forced the 5 FCC commissioners to split down party lines has to do with whether or not the FCC actually has the authority to get involved (note how the word “regulate” has been avoided) in issues related to joint marketing agreements between players in the telecommunications space. In its formal opinion, the FCC suggests that “while the Commercial Agreements had the potential to offer consumer benefits, as initially conceived they raised potential competitive concerns with respect to:
As such, the FCC required some concessions (beyond those required by the DOJ) from both Verizon and Verizon Wireless before the spectrum swap could pass muster. While Republican commissioners and others on the right of the political spectrum (ha) believe that the FCC overstepped its bounds by imposing its will on these agreements, the prevailing sentiment is that because under 47 USC Section 310(d) requires that no “station license” (read: spectrum) maybe transferred … without a finding by the FCC that the “public interest, convenience and necessity will be served,” the FCC justified its “participation” in this matter by relying on this section. The full FCC decision is available here .
While in Western New York we are not directly affected by these changes, they are relevant because the argument against regulation suggesting that regulation stifles the dominant provider’s incentive to innovate may be correct in any industry and in any location. Ultimately, however, shareholder returns are often buoyed by innovation and efficiency regardless of the (perceived) roadblocks that stand in the way.