My Insanely Long Field Guide To The Verizon/SpectrumCo/Cox Deal.

The more I look, poke and prod at the VZ/SpectrumCo/Cox deal the more convinced I am that this becomes one of the defining moments in telecom for 2012 – possibly for the foreseeable future. If AT&T/T-Mo represented the last stand for traditional antitrust , VZ/SpectrumCo represents the new frontier. Where AT&T was a frontal assault on antitrust by accumulating marketshare and spectrum, this hits antitrust up its blind side with collaborative agreements and fundamental questions about when can competitors decide to abandon entire markets to one another. Just about everything single issue in telecom – spectrum aggregation, video distribution, the nature of competition in the age of convergence, the interaction of antitrust and patent technology –  all come together in one package so amazingly complicated and wonky that average Americans will fall asleep while you explain it to them.

So, with the help of some incredibly lame innuendos to spice things up a bit, I attempt to explain below . . . . .

How Did Comcast, TWC and BH, aka ‘Spectrumco,’ Get Spectrum? And What Does Cox Have to Do With It?

For those just tuning in, “Spectrumco” is a consortium of Comcast, Time Warner Cable, and Bright House. It also used to include Cox, but they went off on their own for reasons I shall explain in a moment. Some years back, when the DBS guys tried to break into the wireless broadband and cellular biz, the biggest cable companies decided that was not a great idea for them and perhaps they ought to (a) enter the spectrum auction to block their video competitors from getting a new distribution pipe, and (b) pick up some wireless licenses of their own as part of their competition with the telcos.  So they formed a joint venture called “Spectrumco” to bid in the FCC’s “Advanced Wireless Services” (AWS) Auction. Spectrumco achieved both goals quite handily, ending up with a whole bunch of AWS licenses and keeping DIRECTV and DISH out of the wireless business.

Problem was, Comcast (the dominant partner in Spectrumco) didn’t really know what to do with the spectrum. Cox, however, wanted to actually try to get into the mobile phone business. So in the 2008 “Spectrum Summer of Love,” in a complicated hook-up involving all 4 cable operators, Sprint, Clearwire, Intel, and Google, Cox split off with a bunch of the AWS licenses (and the 700 MHz licenses they won in that auction), Sprint and Clearwire shacked up in their current love/hate relationship, and Comcast, Time Warner Cable, and Bright House held on to most of the AWS spectrum (along with a passive interest in Clearwire). Man, those were freaky times in Spectrumville! It was like Woodstock, only with less acid and no cool music. But I digress . . . .

Where Does Verizon Fit Into All This?

Anyway, flash forward to 2011. Comcast et al. still don’t have a wireless strategy or a plan to use this really valuable spectrum. Meanwhile, after several years of really trying to break into the mobile telephone biz, Cox was coming to the realization that some of us have known for years — it is damn hard and expensive to break into the wireless business at this point. While the rest of us were consumed in the AT&T/T-Mobile fight, Verizon sidled up to Spectrumco and said: “Hey, nice unused spectrum ya got there. I see you still don’t know what the heck to do with it. I could put that to some excellent use now that I finally have iPhones.” And before you could say “dangerous levels of spectrum concentration,” the former mortal enemies had become  total BFFs — just like Stephen Colbert and Jimmy Fallon, but in reverse. In fact, Verizon Wireless and cable multisystem operators (“MSOs” as we say in telecom) are so into each other now that they simultaneously entered into agreements to become exclusive resellers of each other’s products and to jointly develop a whole bunch of new technologies together.  The companies insist these three side agreements are totally, completely and utterly unrelated to the spectrum sale and that unrelated side agreements are just the natural love child of freaky four-way spectrum hook ups.

A few weeks later, Verizon graciously offered to buy out Cox’s AWS spectrum so that Cox could get out of the wireless business. And, in what can only be an amazing coincidence for utterly independent agreements that should in no way make anyone think that the major cable players are colluding with their Telco/Wireless chief rival, Verizon and Spectrumco offered to let Cox in on the same three agreements to become exclusive resllers and become a member of the “Joint Operating Entity” (JOE) to develop all these cool new technologies.

So you see, it’s all totally innocent, and does not in the least look like a cartel agreeing not to compete, dividing up markets, and setting up a Joint Operating Entity so they can continue to meet and discuss their business plans on an ongoing basis while developing a patent portfolio to use against competitors like DISH and T-Mobile. In fact, these three side agreements are so harmless and so completely independent of the spectrum sale that Verizon and the MSOs initially refused to give them to the FCC. When they finally did agree to put them in the record under protest, they cut a whole bunch of stuff out. Because really, as Verizon and the cable MSOs said in their response, what one mega-corp says to four of its largest competitors is really no one’s business.

And The Problem Is?

Needless to say, some people see this as an anticompetitive alliance between the major competitors for broadband, video and voice services rather than the product of spectrum free love. Until now, Verizon/Verizon Wireless competed with the MSOs for broadband and voice customers and — where FIOS is available — traditional cable video. Comcast et al. were beating the snot out of Verizon in broadband and video and stealing Verizon’s landline customers, but Verizon owned the largest wireless business and the MSOs had nothing on that front. So Verizon ruled the air, the cable guys won the ground war, and — as smart phones and tablets blur the lines on all these services — consumers waited for both sides to compete for their love and subscription dollars.

Instead, under these agreements, Verizon will actually resell the cable MSO video services they used to (and in theory still do) compete against, while the MSOs will resell Verizon’s mobile wireless service. On top of that, they will get together as part of the “JOE” to discuss each other’s business, facilitating further cooperation. Finally, the technology developed by these one-time-rivals will be used to disadvantage competitors, much the same way Comcast is currently using its TV Everywhere certification to keep HBO On The Go off devices that facilitate ‘cord-cutting’, like Roku.

Verizon Wireless and the cable guys have a very reasoned response to these bigoted defenders of “traditional competition.” Stop living in the past, man! Sure, “traditional competition” used to mean one telco monopoly competing against one cable monopoly in a franchise area as God and the other believers in “facilities based competition” intended. But times change, and massive multi-billion dollar corporations are people too, darn it! What one monopoly does with another monopoly is nobody’s business. Certainly not the business of “big government” like the Department of Justice Antitrust Division (DOJ) and the Federal Communications Commission (FCC), with all their ‘traditional values’ about how competition protects consumers by keeping prices down and spurring innovation. Everyone knows that two monopolies colluding together can be just as nurturing and good for consumers as all that “traditional competition” stuff.  So if the biggest providers want to get together in a freaky five-way, with a bunch of secret agreements that divide up the markets between us and does who knows what else because we refuse to share them with the FCC, who are you to judge?

 I Know You Promised To Be Funny After Last Time, But Could You Please Stop The Lame Spectrum Innuendos?

Fine . . . .

Now, What Are The Issues Here?

We can divide the substantive issues into three main categories: (a) Spectrum concentration issues that come from pumping up one of the top two wireless carriers with even more primo spectrum; (b) whether the side deals represent an illegal division of relevant markets between competing firms or, even worse, the formation of an actual cartel (a term I do not use lightly); and, (c) all kind of angsty, big picture stuff about whether the whole theory of the Telecom Act of 1996 really works and we can have facilities based competition, or whether Susan Crawford is right and we are doomed to a dystopian future where a cable monopoly controls our broadband and thus our digital future — except for the mobile part which will be controlled by an AT&T/Verizon Duopoly. But since they will be part of the new Communication Cartel, that won’t really matter.

A. The Spectrum Concentration Issues

You know this is ridiculously insane when the spectrum concentration stuff is the easy part to explain.

As I noted in my last lengthy post on the subject, for various reasons having to do with economics and stuff, the two largest wireless companies continue to gobble up more and more of the spectrum capacity needed to provide wireless service. So all the competing companies have raised concerns that allowing Verizon, the biggest wireless company in terms of market share and possesor, promises to make this competitive situation worse.

But Verizon has some powerful arguments on their side. For one thing, unlike AT&T, they actually invest in their network and build stuff. This is why, despite having less spectrum than AT&T, they have a far superior network (at least in the high rate of return areas). By contrast, it’s pretty clear that Comcast ‘n friends are unlikely to build out anything anytime soon. So while maybe from a competition perspective it would be better for T-Mo to get the spectrum instead of VZ, it still makes the world a better place by moving the spectrum from unproductive to productive use. Also, while I and other folks have complained SINCE 2008 WHEN I FILED MY FLIPPING PETITION FOR RECON ON THE SUBJECT that the current spectrum screen is too low (pssst . . . FCC, if you lost it, you can find it OVER HERE!), the transaction does not violate the spectrum screen in a massive way. So, says Verizon, why not let us have the spectrum and put it to good use?

I confess, I have a soft-spot for this argument — so much so that I was willing to give it serious consideration back when the deal was first announced (as deal supporters never tire of reminding me). At the end of the day, however, as we at PK concluded in our Petition to Deny, the marginal benefit of moving this spectrum from the unproductive cable guys to Verizon does not equal out against the harm to competition. Verizon readily admits it can meet its short term needs (give them credit for honesty on this one, unlike certain other large wireless carriers with slightly less market share who spent an entire earnings call whining about how mean the FCC is), we have new spectrum in the pipeline for auction and new technologies and strategies for dealing with increasing capacity demand, and the spectrum crunch as a function of rising demand is a problem for all carriers. In fact, it is precisely because the spectrum crunch is faced by all carriers that letting Verizon (rather than one of its even more spectrum-starved competitors) get exclusive access to the open AWS spectrum creates such a problem for competitors (assuming one believes my arguments here).

As a result, despite initially thinking that the spectrum transfer by itself might be a good thing, we at PK concluded (and wrote in our Petition to Deny) that the public interest benefit of the spectrum transfer would be “marginal at best.”  Yes, all things being equal, it is better to have spectrum in the hands of someone who will actually use it. But it is a really bad thing to further undermine the already difficult competitive situation in the wireless world by giving the current Number 1 provider an even bigger advantage. So when considering whether the spectrum assignment “serves the public interest” as required under Section 310(d) of the Communications Act, we concluded the answer was “no.”

Needless to say, those who don’t believe a wireless duopoly is a bad thing, or who argue that it is better for consumer welfare to focus on spectrum efficiency (or both), will dismiss these concerns. While I do not begrudge them the freedom to make their arguments, the fact that DoJ resoundingly rejected the first argument in AT&T/T-Mo, and the FCC rejected the second in both AT&T/T-Mo and AT&T/Qualcomm, means we ought to accept them as existing law — at least for the moment. Nevertheless, this is something of a hard sell due to the fact that the transaction does not trigger the spectrum screen in most markets.

Possible Conditions? Assuming the FCC does not reject the transaction, the FCC can still impose conditions that address the competitive concerns. The most obvious is mandatory data roaming even if the D C Cir. affirms Verizon’s pending challenge to the current data roaming rules. This way, competitors could still have access to spectrum capacity, albeit at a significant cost and only subordinate to the use of Verizon Wireless. We also proposed significant rural build out conditions (since the AWS licenses at issue are pathetic on requiring build out to less profitable rural areas) and our current favorite “use it or share it” to prevent spectrum wharehousing. (Under “use it or share it,” unused spectrum would go into the TV white spaces database for unlicensed use until the licensee actually builds out its system.)

B. The 3 Side Deals.

In addition to the sale of spectrum, the parties negotiated three “side deals” that they claimed were totally independent of the spectrum transfer. Two of them deal with the former competitors/potential competitors becoming exclusive marketing agents for each other. When Verizon Wireless negotiated the purchase of Cox’s AWS spectrum a few weeks later, they agreed to extend the agreements to Cox.

Under the agreements, Verizon Wireless will now market the video products of Comcast, TWC, Cox and BH within their respective territories. Although Verizon Wireless may also jointly market FIOS within its FIOS territories, Verizon Wireless may not market any other video service that competes directly with its cable partners. Comcast, TWC, and BH contract to become resellers of Verizon Wireless service, but no other competing service. In addition, after a couple of years, the cable operators have the right to become wholesale providers of Verizon Wireless service under their own brand names. e.g., Comcast can get a wholesale contract for capacity from Verizon Wireless and sell its customers Comcast-brand mobile 4G broadband. (We call this a “mobile virtual network operator” or “MVNO” agreement.)

The third agreement is the most obscure, the hardest to understand, and in my opinion, the single most dangerous agreement for the future of competition. The parties agree to form a “Joint Marketing Entity” (JOE) “for the development of technology to better integrate wireline and wireless products and services” (to quote the official press release). To translate: the largest residential broadband providers, who also happen to be among the largest residential video, and the largest mobile services provider, will sit down to jointly develop technologies on how to better integrate their supposedly competing services. You know how Google, Apple, Microsoft, and RIM are all involved in this “mobile patent war?” Imagine if, instead of each of them trying to develop competing wireless operating systems and technologies, they said: “Hey, we’re the four biggest developers of mobile operating systems. Instead of competing, lets pool all our patents together and not let anyone else license them from us except on terms we all agree to use. We’ll meet in a back room every month, talk about all our future development plans, and make sure that we develop patented technologies and proprietary standards for where we plan to take the industry going forward.” Why would that possibly raise any concerns?

Issues With the Side Agreements.

The side agreements raise a bunch of issues on two levels, immediate impacts on competition and broader industry structure. But before we can even get to those questions, we need to pass the first hurdle: do the FCC and/or DoJ even have jurisdiction over these agreements? If so, do they have jurisdiction as part of the review of the AWS license transfers, or under more general antitrust authority or the Communications Act?

Substantive Issue 1: The Future of Competition In Telecom, Video, and Broadband.

I’m sorry, I can’t get to the issues without a passel of background material on how we got to our current competitive situation where telcos and cablecos are the primary sources of “triple play” competition for video/data/voice and why that matters for policy. So please bear with me.

Back when Congress passed the Telecommunications Act of 1996, Congress made a conscious decision to replace the theory of “natural monopoly” (which held that economics made provision of telecommunications a ‘natural monopoly’ that the government must regulate to protect consumers) with competition. We made a bet that we could get all kinds of exciting competition for all of our communications and media needs if we tweaked a few things and encouraged cable operators to get into the telecom business, phone companies to get into the video business, long-distance carriers to get into the local business, wireless companies to get into any business, etc., etc. When Michael Powell became chairman of the FCC in 2001, policy shifted to rely not merely on “competition,” but on “facilities based competition.” You either built your own network to deliver whatever service you wanted to deliver, or you were a scum sucking parasite not a “competitor” and the FCC had no interest in whether you lived or died.

So competition based on resale of services pretty much died out as a serious competitive influence in the country. Only two entities had fully grown networks with wires stretching to everyone’s houses — telcos and cablecos. As a result, telcos and cablecos became the dominant providers of wireline broadband. Meanwhile, we saw some separate competition in video (which telcos have tried to enter) from stand-alone video competitors like direct broadcast satellite (DBS). Similarly, we saw competition in mobile services between stand alone mobile providers such as Sprint and T-Mo and the integrated mobile and landline voice players AT&T and Verizon. (Voice has been pretty much eliminated as a separate market.) But cable guys have not been able to penetrate into the wireless market.

By happy historic irony, this happened just when much of Europe abandoned traditional monopoly service in favor of competition through resale. Whether we ended up with the better deal or they did (or if each rule set comes with its own set of problems) is one of those never ending debates in telecom. What’s important for the Verizon/Spectrumco/Cox deal is that, as a result of the last 15 years of policy choices, we live in a world where we rely almost entirely on competition between cable broadband and telco DSL (with the exception of where Verizon has deployed FIOS) to protect consumers in the broadband market. In addition, we have shaped much national telecom policy on the idea that cable cos and telcos will compete not merely on the basis of their broadband offering, but on the entire “triple play” package of video, broadband, and voice.

In the fight between cablecos and telcos, cable won. Period. It’s a very long blog post to explain why. But cablecos have very successfully pulled voice customers away from telcos, whereas telcos have pulled far fewer video customers away from cable operators. Even FIOS, the most successful video investment by a telco, has only about 4 million subscribers out of a potential market of about 17 million in the current FIOS footprint. Worse from a broadband competition perspective, cable continues to beat out DSL for marketshare. Where Verizon and AT&T have continued to dominate over their cable rivals, however, is in wireless.

So our great hope for facilities-based competition in the last few years has been the hope that Verizon and AT&T will leverage their wireless for a “quad play” that will force cable to respond by getting into the mobile business (because even if mobile does not directly substitute for wireline, it offers coolness in its own right) or that video distribution by wireless networks (generally as a form of Internet streaming rather than as a stand alone cable-like service) will compete with traditional cable video services. This, ideally, would force cable operators to develop some kind of “wireless strategy” to keep customers (like the way Cablevision developed a Wi-Fi based strategy when it failed to win any licenses in FCC auctions).  As critics liked to point out, this wasn’t much of a competition policy. But at least it was something for those who cherished the idea from the 1996 Act that we could use (facilities based) competition to replace regulated natural monopolies.

“Competition Is Hard.”

The Verizon/Spectrumco deal side agreements amount to: “competition is hard, we don’t want to do it.” By Verizon agreeing to provide the video services of its chief rivals (at least in its DSL territories) and the cable guys reselling the largest wireless provider as their ‘wireless strategy,’ the side agreements amount to a tacit agreement to divide the markets between them and avoid competition.  (The argument this is ‘tacit’ is the best case scenario for VZ and the cable guys. I’ll explore the possibility of less “tacit” collusion below.) Verizon gets the wireless world without worrying that cable will someday come barging in and take its last residential market. The cable guys can stop worrying about pesky capital investment in their broadband networks as Verizon lets its wireline voice and DSL offering (other than FIOS, which VZ still needs to pay off) whither away. And while Verizon won’t shut down FIOS anytime soon, it won’t expand the footprint either. Even in territories where Verizon FIOS has a franchise, but has not built out a network, Verizon is unlikely to invest in a new build. Why would it, when it really has no further interest in spending what it takes trying to compete with cable for video and residential broadband customers?

To this VZ and the cable guys have two answers. First, they will reflexively reassure everyone that of course they still plan to be ferocious competitors, eat each other for breakfast, yadda yadda yadda. They will then respond that, even if they are giving up on entering each other’s markets, that is not their problem. “Dude, I’m sorry you pegged your hopes on us having a throw down, but we are in business for profit not for policy. No matter how much you may want cable to enter wireless, or want Verizon to expand FIOS, we only make those business decisions where it makes sense. you can’t make us enter new businesses and compete with each other. And while this may make you all existential angsty with hand-wringing about big issues like ‘what is the future of telecom competition in a converged world’ and ‘what does this mean for residential broadband,’ that is not our problem. Verizon tried with FIOS. Cox tried to offer a competing wireless service. It’s just too hard. Deal.”

To which I will answer yes, competition is hard. But that does not mean the government has to make it easy to surrender to each other. Alternatively, if we aren’t going to get facilities based competition, we need to figure out what happens next. (Depending on your philosophy and economic interest, you either (a) invest a lot of money hiring economists to explain why we either still have lots of competition or why we don’t need competition to benefit consumers;  (b) you figure out what regulations you need to protect consumers; or (c) spend a lot of time hoping the problem magically solves itself.)

“Competition Is Hard, Collusion Is Easy.”

It’s one thing to say that “we are not going to try to break into a new line of business, that’s too hard.” It’s another thing to say “hey, why don’t we get together and actively avoid competing with each other; we could make much more money by coordinating with each other and working together to screw over our competitors.”

The danger when you have competitors collaborating is that they will — surprise! surprise! — not only avoid competing, but will actively try to collude. As Adam “invisible hand” Smith, the patron saint of free markets, famously said: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Here, we have the leading companies in telecom not only avoiding competition, but actively going into business with each other. Worse, they have made the arrangement exclusive. If Time Warner Cable doesn’t want to go into the wireless business, fine. But why should they pledge to never team with anyone other than Verizon Wireless, while Verizon Wireless pledges never to team with any competing video provider but TWC (in TWC’s franchise territory)?

More to the point, these guys are our primary wireline broadband providers. For years, we’ve relied on the cable/telco dsl duopoly for what competition we have in broadband. These companies will now be going into business together for every line of business but residential wireline broadband. They will work together through the JOE to come up with all manner of cool technologies to deploy on their networks. They will gather together for JOE meetings, discuss their deployment plans and strategies, and we somehow expect that they will do all of this without colluding with each other?

And let’s consider the JOE. It will develop a set of patents and proprietary standards for all things streaming between wireless and wireline networks. The companies that control 40% of the wireline broadband market, 40% of the wireless market, and 40% of the video market will adopt these technologies. Anyone want to take bets on whether Verizon Wireless licenses them on fair, reasonable and non-discriminatory terms (what we call “FRAND”) to T-Mobile? Or whether Comcast will license these patents to DIRECTV? Tell you what, go look up OCAP. I’ll wait.

Finally, if this is just about spectrum, why did Verizon Wireless and Cox enter into the exact same side agreements? I can believe Brian Roberts of Comcast and Lowell MacAdams of Verizon independently came up with a set of side agreements on a trip to the Men’s Room while negotiating the spectrum sale. But for Verizon and Spectrumco to turn around and welcome Cox into the club a few weeks later looks a heck of a lot more like collusion.

Competition is hard, collusion is easier . . . . also more profitable. Hence the very real concern that these agreements are not just agreements not to compete, but agreements to actively collude.

Needless to say, Verizon and the cable cos have a fairly predictable response. How DARE you accuse us of such a horrible thing as collusion? Shocked, shocked am I that you could even suggest such a thing! This is all just rampant speculation from evil Uber-Socialists who don’t trust free markets.

From Competition to Collusion To Cartel?

Finally, if we let these agreements stand, and the government decides they lie totally outside their jurisdiction, what prevents the parties from further amending them later? Verizon and Spectrumco have now amended their agreements to welcome Cox into the club. They have a back room in the form of the JOE to meet regularly. They sit at the heart of our telecommunications infrastructure. As the Adam smith quote above highlights, we should generally expect that given the opportunity to form an alliance that will permit these companies to manage the industry to their advantage and squelch competition, they will do so.

Needless to say, the response from Verizon, Comcast , et al. to the concern that these agreements might be the basis for an actual cartel, a formal structure by which competitors act to coordinate their business to strategically limit outputs and disadvantage competitors similar to when Rockefeller and Standard Oil got together with the Railroads, is to react as if I have taken leave of my senses. To this I can only respond that I do not raise such charges lightly. But after reading those portions of the side agreements — particularly the JOE — made available under the Second Protective Order, I cannot come to any other conclusion. I frankly do not see how you comply with the obligations of the JOE and not be a cartel. To dismiss these concerns on the grounds that “cartel” is a naughty word that upsets one’s delicate sensibilities is a useful rhetorical tactic but a failure of policy.

Substantive Issue 2: The JOE and The Future of Streaming Technology

Even if we set aside my concerns that these agreements promote collusion and provide the foundation of a future Communications Cartel, the problem of the JOE and the ability to leverage patents and proprietary standards for steaming media between wireline and wireless networks is huge. We are still at a fairly early stage in the development of technologies to hand off streaming seamlessly between various networks. If a handful of companies develop a portfolio of foundational patents, combined with the market power to establish these patents as standards in the marketplace, it will give the largest companies enormous control over the future direction of the industry.

Substantive Issue #3: Violation of Section 652 of the Communications Act

Section 652 (47 U.S.C. 572) of the Communications Act prevents a cable operator from acquiring an interest in a Local Exchange Carrier (LEC) or vice versa. 652(c) prevents certain kinds of joint ventures to offer phone service or video service. Comcast, TWC, Cox and BH are all incumbent cable operators. Verizon is, among other things, a LEC. So this raises some questions.

Needless to say, Verizon and the cable cos have plenty of reasons why they don’t think their deals violate this provision. Chief among them being that Section 652(c) does not explicitly prohibit joint ventures between cable operators and the affiliates of LECs. The cable cos argue that their deal is with Verizon Wireless, not Verizon Communications — which is the actual LEC. This is rather like Fredrick, despite turning 21, remaining apprenticed to the Pirate King because he was born in Leap Year and thus stuck in indentures until 1940. (What? Too  literary?) We have various reasons why we think that argument does not carry the day. In the interest of actually finishing this blog post at some point, I will avoid rehashing them in detail here.

There are other provisions under the Communications Act that we argue gives the FCC both authority and responsibility to act. Again, in the interest of moving on, I shall simply flag this as we argue one way, applicants obviously disagree, and invite folks interested in the specifics to peruse our Petition.

Procedural Issues: Comcast and the Magic Black Crayon.

The Applicants started with the position that the side agreements were utterly and completely separate and independent. They argued the FCC didn’t even have any jurisdiction over them, and if the FCC wanted to know what was in them they could go and look at them over at the DoJ, so there! So the FCC sat there and waited until the parties finally agreed to voluntarily put the agreements in — subject to a few minor redactions to protect what the parties regarded as highly sensitive but irrelevant information. You can see the letter where the Applicants explain all this here. The FCC, in the belief the applicants meant what they said, then put the application to transfer the agreement on public notice and the clock started ticking.

Turns out when the applicants said “we will redact a few things” they meant “we will black out huge chunks of stuff based on whatever we feel like.” I confess I blame Comcast for this. Having dealt with them before in a number of similar situations, I have to say this is a favorite time wasting tactic of theirs. Some of the redactions almost seem designed to be of the “look, I’m messin’ with you, what you gonna do about it?” variety. Others looked a lot more substantive. So opponents of the transaction spent a bunch of time and filings saying: “Yo, FCC, make these guys put stuff in the record like anyone else,” to which Verizon, Comcast et al. responded with “won’twon’twon’twon’twon’tWON’T ANDYOUCAN’TMAKEMESOTHERE!!! Please Commission, aren’t I your favorite MVPD? Please tell these meanies to go away.”

Did The FCC Make A Decision About The Side Agreements?

After about a month or so of chewing on this, the FCC responded. The FCC required Verizon and the cable cos to submit some additional material in the side agreements, but not all. At the same time, an FCC spokesperson issued a statement via email. I can’t find any link, so I reprint it below:

“After an initial review of the proposed spectrum license transfers as well as the commercial agreements between Verizon Wireless and several cable companies, the Commission staff has concluded that portions of the commercial agreements are inseparable from the proposed license transfer and related wireless competition issues. Consequently, those portions of the commercial agreements will be examined within the license transfer proceeding.”

“The additional competitive implications of the commercial agreements are being reviewed in a separate inquiry. This administrative approach will facilitate the fair, timely, and thorough review of the proposed transaction and agreements.”

To translate as best I understand it.  The FCC decided that the side agreements raise a lot of questions, some of which clearly belong in the evaluation of the license transfer decision while other questions appear to stand on their own regardless of whether the license transfers happen or not. So the FCC will consider all the issues in a kind of parallel way. However, the “separate inquiry” for whatever questions the FCC thinks don’t actually belong in the license transfer has no formal docket number or process or anything like that. It might, ultimately, some day, if the FCC decides that something actually needs to happen. Or it might not. The FCC does a lot of investigations and inquiries and looking at stuff. Sometimes nothing happens (for example, nothing seems to have happened on the inquiry on whether Google’s “spy-fi” escapade violated FCC regs), whereas the FCC investigation into Verizon “mystery charges” ultimately produced a big financial settlement.

So What Do You Think Will Happen Here?

I have every confidence the FCC will thoroughly investigate these matters and fully expect the agency to take the necessary steps to protect consumers and promote competition.

Ouch! That Bad?

Actually, I have no idea. As I said above, this presents a lot of very tough questions. Some of them seem pretty straight up and have fairly straight up solutions (e.g., eliminate the JOE). Others are much tougher (so, facilities based competition did not work out — what’s Plan B?). This is a clever way to handle things from the FCC’s perspective, in that it gives the FCC a lot of flexibility to decide what to do and doesn’t require the FCC to make an immediate determination on the hard questions about the side agreements and overall jurisdiction.

Those who regard the FCC as thoroughly pwned by Comcast and/or Verizon will have no doubt that this is just window dressing so that the FCC can pretend to care while letting the biggest incumbents do whatever they want. Those regarding the FCC as a ravenous regulatory beast lusting to command-and-control free market innovation into oblivion will regard this as an unwarranted exercise in regulatory bullying. The fact that Genachowski totally spiked the AT&T/T-Mo deal gives him that air of unpredictability that keeps you guessing. Sure, it doesn’t look like the FCC is doing anything. But if they were going to do something, they would look just like they weren’t going to do anything until they actually did something.

What Do You Think Happens?

Beats the heck out of me at this point. Anyone following our fillings at PK knows what I would like to see happen. I ultimately think that if the FCC approves the spectrum transfer (which most folks would say is the smart way to bet) we will see conditions designed to address the competition and rural deployment concerns. As I noted before, whether one agrees with this position or not, the FCC has consistently signaled in the most recent competition reports and the AT&T/T-Mo and AT&T/Qualcomm deals that it believes we have a significant competition problem from the growing concentration of spectrum in the hands of the two largest providers.

The contract issue is more difficult. I can see a range of possibilities from requiring the parties to suspend the agreements entirely to agreeing with Verizon and the cable cos that the agreements fall outside of the FCC’s jurisdiction to a whole bunch of possibilities in between. Unlike the spectrum concentration issues, the issues raised by the side agreements are novel, difficult, and go to the heart of every serious competition question in the new world of telecom convergence. In other words, there are exactly the kind of thing that agencies loath needing to make decisions about — especially in the context of an existing transaction.

Stay tuned . . . .