Verizon/SpectrumCo Spectrum Gap v. Spectrum Crunch — Verizon’s Brilliant Aikido Move (Part II)

When last we left our story, the good folks at Verizon had recognized that the FCC’s concerns around spectrum concentration, the “spectrum gap” between AT&T and Verizon and everyone else, had grown exponentially in the last few months as it looked like the “spectrum crunch” (the general lack of new spectrum for all wireless providers in the face of increasing mobile data use) would continue for the foreseeable future. Yes, the “spectrum crunch” increases the desire to get spectrum into productive use (for example, by moving it from cable companies who can’t figure out what to do with it to Verizon). But it also makes spectrum a zero-sum game, where any gain to Verizon or AT&T translates directly to a loss by all other competitors. At this point, the spectrum gap has become so large that conferring any further advantage to Verizon (or AT&T) threatens the ability of any rival to offer competing services.

Faced with this change in the environment, Verizon announced last week that it would auction off its Lower 700 MHz A&B block licenses to competitors (including AT&T, natch) if it got the AWS spectrum from Spectrumco and Cox. Verizon explained on its Q1 results call for analysts that no one had forced it to offer these divestitures, but that if it got the AWS spectrum, Verizon would no longer need the capacity from these licenses. To translate: “we’re not spectrum hoarding, but if we get what we want from SpectrumCo we won’t need the super-duper wonderful 700 MHz spectrum we picked up at auction in 2008, so we will sell them off and make more spectrum available for our competitors.”

As I explain below, this is an utterly brilliant Aikido move by Verizon. Unfortunately, it doesn’t address the key problem with the transaction — the three side agreements between Verizon and its cable competitors to team up in a variety of ways — that make this look an awful lot like a would-be cartel. Even if we set that aside, as other folks have also noticed, the most likely winner of any private auction Verizon would hold for its Lower 700 MHz A&B blocks would be AT&T. Letting AT&T bug Verizon’s Lower 700 MHz A&B licenses would make the spectrum gap much, much worse.

More below . . . .


Verizon Wireless’ Aikido Move

Faced with sudden and unexpected negative headwinds, Verizon has attempted to pull off what Steve Jobs would have referred to as an “Aikido move.”  Aikido is a style of Japanese martial arts that emphasizes capturing your opponents energy, blending with it, and redirecting it away from you. Aikido has no punches or chops or kicks. It’s all about holds and throws.

What Verizon has done here is take the energy around the spectrum gap, particularly the fact that Verizon and AT&T have the bulk of the really totally awesome super good spectrum below 1 GHz (like the 700 MHz spectrum), and tried to redirect it away from themselves.  And, in a move worthy of policy black belts, they announced it in a way that concedes nothing while still not sounding like whiny petulant children (unlike certain other wireless carriers I could name). In the Verizon press release, Verizon acknowledged that “wireless operators, large and small, have expressed concerns about the availability of high quality spectrum” (without either agreeing with these concerns or dissing them). So don’t you worry, continues Verizon, if we get the less-good AWS spectrum from Spectrumco, that’ll meet our needs just fine. We’ll then put all this primo 700 MHz stuff on the market. That will close the spectrum gap by giving competitors a shot at getting 700 MHz licenses, while reducing our 700 MHz holding. What’s not to love? It’ll be win/win for everyone, the rising tide will lift all boats, etc., etc.

Politically, while Verizon is not going to characterize this as a “divestiture,” it functions as one. By preempting the FCC’s analysis, it makes it harder for the FCC say no (“after all,” VZ will argue, “this is the only way competitors will get 700 MHz spectrum. Don’t you want T-Mo and Sprint and everyone else to have a chance at 700 MHz spectrum?”) or even to impose what would arguably be more effective conditions for promoting wireless competition – mandatory data roaming rules (VZ has challenged the rules the FCC adopted last year, and the challenge remains pending). It also has the potential to fracture the coalition of competing carriers that have opposed the transaction but might hope to pick up some of the licenses in Verizon’s private auction.

So What’s Not To Love?

Let me start with my biggest objection. This does absolutely nothing about what I consider to be the worst aspect of the Verizon/Spectrumco deal, the three “side agreements” that lay the groundwork for a cartel at the heart of our wireline and wireless communications infrastructure, particularly the agreement to create a Joint Operating Entity (JOE). As I’ve written before, in addition to providing the backroom where the largest competitors for broadband and video services can happily disclose to each other their business plans and fix prices without any pesky antitrust oversight, the JOE provides a vehicle for Verizon, Comcast, Time Warner Cable, Cox and Bright House to create a joint patent portfolio that it can use for anticompetitive purposes.

For example, Time Warner Cable just applied for a patent on technology to enable “wifi roaming.” If TWC’s technology works as claimed, it would allow people to move from wifi network to wifi network as seamlessly as we move from cell tower to cell tower within Verizon Wireless’ licensed network. Obviously, that sort of technology could have major implications for wireless competition. But if TWC and Verizon Wireless are BFFs, do you think TWC will lease the technology to competitors? Or will they transfer it to the JOE for ‘further research and development?’

But let’s put that and the other non-spectrum concerns aside at the moment. Lets focus instead on why this actually makes the spectrum gap worse, not better.

AT&T Is Likely To Win The Licenses In Verizon’s Private Auction.

I’m not the only observer to note that if Verizon holds a ‘private auction’ to sell off these licenses AT&T will most likely win them all.  After all, that’s what happened when Verizon had to divest licenses after buying Alltel. As I’ve explained at length over here, AT&T just has too many advantages to reasonably expect someone else to get the licenses. For starters, AT&T has deeper pockets and can get more financing on better terms. But even more importantly, AT&T has a network plan based on the Lower 700 MHz A &B Block licenses it acquired in auction 2008 (and from Qualcomm more recently). It has towers, contracts for handsets, and everything else that would let it plug in Verizon’s licenses. Other providers would need to incur these expenses over and above the cost of winning the auction in the first place.

Needless to say, giving AT&T even more 700 MHz spectrum while also giving Verizon the AWS spectrum it wants doesn’t help the spectrum gap one iota. To the contrary, AT&T acquiring Verizon’s Lower 700 MHz licenses makes the overall spectrum gap between the top two and the rest of the industry much, muchMUCH worse. True, the FCC can convert Verizon’s voluntary offer into a condition and prohibit Verizon from selling to AT&T. I cannot say I view that as a likely outcome, given the political blowback. The much more likely outcome (if the FCC decides to approves, subject to this commitment), is for the FCC to indicate that it will decide any spectrum concentration issues after Verizon holds its private auction and hope somebody other than AT&T wins.

So we start with the problem that the most likely outcome of letting Verizon get Spectrumco/Cox’s AWS spectrum in exchange for auctioning off Lower 700 MHz spectrum is that both AT&T and Verizon get more spectrum and no one else gets any spectrum. Net result: Spectrum Gap much worse post-transaction, transfer does not serve the public interest, FCC should reject.

But lets pretend that the FCC did exclude AT&T from participating, so that we knew for sure someone else besides AT&T would get the Verizon licenses. Then it would be all better, yes? The spectrum gap would shrink, Verizon would put the Spectrumco spectrum to productive use, and even if we had a communications cartel in broadband and video we’d have a better and more competitive wireless market, right?

Sadly, no. Even if AT&T did not get any of the Verizon licenses, the spectrum gap would still be worse after the transaction than before.

What?!?! How Can VZ Selling 700 MHz Licenses To Competitors Make things Worse?

For that, we need to wait for Part III, since this is still too ridiculously long for a single blog post. But trust me, it will all make sense when we’re done.

Stay tuned . . . .

Link to Part I

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