For those just joining, Part I recounted how Verizon suddenly encountered unusually strong headwinds in its effort to acquire AWS-1 spectrum from the cable consortium known as SpectrumCo (Comcast, Time Warner Cable, and Bright House) along with the AWS-1 spectrum that Cox Cable took when it broke up with SpectrumCo back in ’08 (you can get all the details on the deal and I why don’t like it from my Insanely Long Field Guide to the Verizon/SpectrumCo deal ). In Part II, I explained how Verizon’s proposed private auction of its Lower 700 MHz A&B block licenses would not resolve the problems with the proposed deal because (a) it wouldn’t address the three side agreements that make this look too much like the foundation of a cartel among the major broadband, video and voice providers; and, (b) AT&T would most likely end up acquiring the licenses.
Now let us assume for the sake of argument that AT&T would not bid for the Verizon Lower 700 MHz licenses. Would that make everything OK?
Sadly, no. Even without AT&T winning the licenses, letting Verizon acquire the SpectrumCo/Cox AWS licenses will massively aggravate the spectrum gap between Verizon and its competitors, while doing little to alleviate the spectrum crunch for competitors. Marguerite Reardon does an excellent job explaining why here, but I cannot help but add a few more wonky details below . . . .
It’s true that, as a general rule frequencies between 1 GHz and 500 MHz are in the “sweet spot” for mobile broadband for reasons I won’t try to explain now (because they are long and complicated). But that does not mean all licenses in that range are all equally wonderful awesome magical coolness. A lot of things make a huge difference in whether the licenses are useful or not. Finally, even if the licenses are useful in some abstract sense, they may not be nearly as useful to some users as to others.
For the reasons I will discuss below, Verizon doesn’t need the Lower 700 MHz A&B licenses. In fact, given where Verizon is today, they don’t even want them. That’s why Verizon was already swapping and selling off its Lower 700 MHz A&B licenses even before it announced its deal with Spectrumco. And its what makes this offer by Verizon such a perfect Aikido move. Verizon is offering to do something it already wanted to do as a “concession.” Even better, Verizon is being totally honest about it. They keep saying that no one is forcing them to offer to sell these licenses and that they are selling them based on their assessment of their actual spectrum needs (post-transaction). All of which is true. What they neglect to add is some of the liabilities on these licenses.
- Interference Problems : The Lower 700 MHz A Block sits next to Channel 51. In markets where DTV broadcasters remain active on Channel 51, the 700 MHz A Block remains subject to interference. A quick glance at the licenses and the markets covered shows that 15 of the 24 Lower 700 MHz A Block Licenses have potential interference issues from broadcasters on Channel 51.
- Build Out Requirements: The Lower 700 MHz A& B block licenses have fairly aggressive buyild out requirements. By June 2013, Verizon will need to cover 35% of the service area by geography, not by population density (you can find the service rules on the FCC’s Auction 73 homepage). That means the rural licenses (the A Block licenses not subject to interference and many of the Lower 700 MHz B Block licenses) will be hellishly expensive to build out for a relatively modest rate of return. It is unclear if VZ has made significant progress in meeting the build out requirements for these licenses given its focus on C Block deployment (which has a coverage requirement by percentage of population, not geography). In any event, VZ has strong incentive to get rid of these licenses if it doesn’t need them, as they are comparatively expensive to build out and maintain relative to C Block.
- Interoperability mandate coming: The FCC has indicated it wants to see interoperability for the lower 700 MHz band soon so that smaller, rural providers that invested in 700 MHz A & B block licenses can get access to equipment and roaming. If Verizon has no remaining Lower 700 MHz spectrum, it will not need to worry about entering into any roaming agreements with competitors. While interoperability for the Upper 700 MHz band (where VZ’s C Block is) may happen someday, it won’t happen anytime soon.
Let us pause for a moment to savor the following delightful irony. AT&T has claimed often and very loudly (and, IMO, rather disingenuously) that it avoided C Block because of its “no locking, no blocking” rule and paid a premium for Lower 700 MHz A&B block so that it could lock equipment and block applications to its heart’s content. Verizon went after C Block, which it supposedly got for a bargain because the “no blocking, no locking” rule soooooo devalued the spectrum by depriving the licensee of the ability to extract monopoly rents. Fast forward to today. Where is the most active LTE deployment in 700 MHz? Why in the horribly encumbered, over-regulated C Block? What band is Verizon dumping? The ever-so-superior unencumbered by nasty bad bad regulation A & B Blocks. And who is going to have interoperability and do roaming with its competitors? AT&T, which claimed to have paid a premium for the freedom to be an uncooperative greedy bastard. Hmmmmm . . . .taste the irony.
OK, enough irony savoring. Back to the most important reason Verizon wants to ditch this spectrum.
- Verizon Is Telling The Truth That AWS 10 MHz blocks Work Better For Its System: As AT&T and its supporters droned incessantly during AT&T/T-Mo, LTE works better with big contiguous spectrum blocks. You can use it with the 6 MHz Channels in Lower A & B. But, as Verizon noted in its earnings call, Verizon has a really good set of 11 MHz paired block in the 700 MHz band to form the backbone of a national LTE network. Getting fresh, clean similar sized blocks of AWS spectrum from the cablcos to supplement that is much more valuable than the scattered, smaller Lower 700 MHz licenses it wants to sell off in exchange for getting the AWS spectrum.
To use an analogy from chess, this is like sacrificing two pawns so you can advance a third pawn to the other side of the board and get a Queen. Unfortunately, for the rest of the industry, it ends up as a Fool’s Mate (death in two moves).
But Why Is It Bad For Everyone Else? It’s Not Like the Licenses Are Worthless to Others.
If we didn’t have a spectrum gap weighing on competition, we’d call this a total win for Coase and the market. Spectrum ended up being assigned inefficiently by auction (for whatever reason) but, by virtue of market mechanisms, the spectrum moves from those who can’t use it to those who can use it better. Because while the Lower 700 MHz A&B licenses don’t fit Verizon’s plans, they could help out spectrum constrained smaller carriers by improving their relative spectrum positions a great deal. So we move to a more Pareto Efficient state and the world is, overall, a better place post-transaction from a spectrum perspective (eliding over the whole “cartel of the biggest broadband and video providers” thing). Right?
Unfortunately, no — not if we care about the spectrum gap and competition. Why? Because the spectrum gap between Verizon /AT&T and everyone else still increases dramatically above our already unhealthy level of spectrum inequality. Verizon takes a giant leap forward in its spectrum holding and overall spectrum efficiency, whereas the competitors improve only marginally in absolute terms. Yes, compared to their current level of spectrum constraint, it would improve the ability of competitors like Cricket to have a Lower 700 MHz license in San Francisco, even one potentially subject to Channel 51 interference (and the market mechanism of the auction will determine just how much more valuable that would be). But in absolute terms of Cricket’s ability to compete with Verizon, the difference is so marginal it is not helpful.
Keep in mind that Verizon has already said that they have no plans (assuming they get the AWS spectrum) to actually use the Lower MHZ 700 A& B licenses, so selling those off does not reduce Verizon’s lead in the spectrum gap. So if we care about the spectrum gap, we need to take into account that this divestiture still does not alleviate the overall problem of spectrum concentration, even if it does improve spectrum efficiency.
To use a perhaps controversial analogy that will lose me any Republicans I haven’t already turned off, it is rather like the argument over whether or not to reduce everyone’s tax rate by 5%. It is perfectly true that if we did that, everyone would get a tax cut. If all we cared about was giving everyone a tax cut, then this is fine. Everyone gets something. But if we care about wealth inequality and/or the overall impact on the economy, then the fact that we are giving everyone a 5% tax cut is a problem because it produces only a very modest benefit in absolute terms for the 99% of the population with incomes under $250,000 (who arguably need more money so they can boost our GDP via consumer spending and stuff). On the other hand, the top 1% (especially the top .01%) get a huge benefit in absolute terms, thus increasing the overall income inequality. Similarly, Verizon’s proposal, if approved by the FCC, will increase the overall spectrum inequality by conferring a huge advantage on Verizon (in addition to the whole cartel thing) while conferring only a very modest advantage on some competitors (even if AT&T is barred from bidding on the licenses).
Conclusion
We can argue whether all we care about is spectrum efficiency and that worrying about the spectrum gap is “punishing success” and that AT&T and Verizon are ‘job creators’ so that giving them even more spectrum s good for everyone. But we should not pretend that what Verizon is offering actually closes the spectrum gap when it makes it worse. If we care about the spectrum gap, rather than just about the spectrum crunch, the VZ/Spectrumco deal still needs to be blocked.
And, of course, there’s also that whole cartel thing.
Stay tuned . . . .