Is Verizon buying off T-Mobile with its new spectrum deal?


AT&T may have tried and failed to scoop up T-Mobile’s precious swaths of wireless spectrum, but that doesn’t mean the air is off the market. On Monday, Verizon Wireless and T-Mobile announced a complex deal of spectrum swaps and sales that, Verizon hopes, will help earn regulatory approval for Verizon Wireless’s proposed $3.6 billion purchase of unused spectrum licenses from cable companies. T-Mobile had been one of many voices opposing that deal, saying it would effectively put even more spectrum into the hands of the company that’s already the nation’s largest mobile operator — which could be bad for competition and (ultimately) for consumers. Verizon says it needs the new spectrum to continue to innovate and meet demand for ever-more-robust mobile services.

The latest deal will unquestionably benefit T-Mobile as it attempts to bootstrap itself into an LTE operator — and a possible iPhone seller — in the wake of AT&T’s aborted takeover. But will it also have the effect of making Verizon Wireless virtually unchallengeable in the mobile arena, giving it a stranglehold on digital services?

What’s the deal?

cell tower [Shutterstock noolwlee]

The proposed deal between Verizon and T-Mobile has the companies both swapping and selling advanced wireless services (AWS) spectrum licenses in some 218 markets around the United States, including major markets like Washington D.C., Philadelphia, Detroit, Cleveland, Minneapolis, and Seattle. Although the exact spectrum licenses won’t be known until the companies file with the FCC, some of the exchanges will apparently be simple swaps: T-Mobile will be give Verizon Wireless some of its spectrum licenses; Verizon will give T-Mobile some of its licenses. T-Mobile will also be buying AWS spectrum licenses from Verizon for an undisclosed amount.

The deal is contingent on Verizon Wireless’s proposed $3.6 billion acquisition of 122 spectrum licenses from cable companies including Comcast, Time Warner, and Bright House networks (jointly represented by a purpose-built firm called SpectrumCo). Some of the licenses Verizon wants to transfer to T-Mobile would be acquired from those companies. It sought out the cable companies’ spectrum licenses in order to fuel its 4G LTE expansion; however, it is willing to make a deal with T-Mobile so both companies can better align their spectrum offerings in key markets—and offer more mobile bandwidth.

Verizon plainly hopes that selling some of the AWS licenses to T-Mobile will earn the FCC’s approval of its spectrum purchases, which have run into opposition from both consumer advocates and Verizon’s competitors, who say it would put too much spectrum into Verizon’s hands. T-Mobile has been one of the most vocal opponents of Verizon’s planned spectrum purchased, which makes the latest bargain a change of tune. Presumably, the proposed new deal with Verizon will be OK with T-Mobile, so long as it gets those AWS licenses.

T-Mobile and AWS

T-mobile 4G LTE

How would T-Mobile benefit? According to the company, it will gain AWS spectrum licenses covering some 60 million people, and improve T-Mobile’s spectrum offerings in 15 of the top 25 markets in the United States. This boost could be crucial for T-Mobile, which has struggled as the only national mobile operator in the United States without a clear plan to transition to 4G services. (Never mind that T-Mobile has been billing its own flavor of amped-up HSPA+ as 4G for a couple years now.)

So, T-Mobile took the $4 billion consolation prize it got from the failed AT&T takeover and announced plans to upgrade its existing network, including plans for nationwide LTE service. However, T-Mobile’s eventual LTE service will be a bit different from those being offered by the likes of AT&T and Verizon Wireless at the moment, for technical reasons. AT&T and Verizon both use 700MHz spectrum blocks, while T-Mobile’s frequencies will be much higher in the AWS range. That means T-Mobile’s network won’t penetrate buildings as well as LTE networks built in 700 MHz blocks, but the move is still T-Mobile’s best shot since it actually owns more AWS licenses than any other mobile operator.

There’s no way T-Mobile is going to be able to acquire licenses to offer LTE services in the 700MHz block on a nationwide basis, so it must leverage the AWS assets it already owns. Acquiring additional licenses from Verizon Wireless would let T-Mobile expand AWS coverage in key markets, and the spectrum swaps enable both companies to align the licenses they own in particular markets into contiguous blocks to maximize mobile bandwidth.

Verizon and AWS

Verizon Wireless Logo

Here’s the thing: T-Mobile isn’t the only company banking on AWS licenses to make LTE work: Verizon and AT&T are betting on it too. Verizon and AT&T hold the majority of the 700MHz licenses in the United States, but neither company thinks it has enough holdings in the 700MHz bands to provide enough LTE service for everything businesses and consumers are going to want to do with mobile broadband from now until the end of time. So they’re also both very interested in AWS spectrum licenses they can use to supplement their 700MHz holdings.

T-Mobile’s extensive AWS licenses were one of the main reasons AT&T was willing to pay some $39 billion to acquire T-Mobile. Since the AT&T/T-Mobile merger fell apart, AT&T finalized a deal with Qualcomm to purchase 700Mhz spectrum that had been used by the company’s failed MediaFlo mobile TV technology. However, AT&T got outmaneuvered by Verizon Wireless when it came to cable companies: Verizon’s $3.6 billion deal would net AWS licenses that are basically sitting unused. Cable companies bought them thinking they needed to get into the mobile market, but have never done anything with them.

So Verizon would both score AWS licenses it can use to supplement its LTE capacity in the 700MHz band; and optimize those licenses in key markets, making sure it has the largest contiguous blocks possible to offer more bandwidth. SpectrumCo members (Comcast, Time Warner, and Bright House) will be able to resell Verizon Wireless service — think of those “quadruple play” bundles combining voice, cable, Internet, and mobile.

Verizon and competition

If both of Verizon’s deals go through, (with the cable companies and then with T-Mobile), T-Mobile will have more spectrum licenses and potentially be in a better position to roll out LTE services nationwide. That, in turn, increases competition in the mobile broadband arena, and that’s got to be a good thing, right?

FCCVerizon Wireless certainly hopes so. It is apparently looking to this add-on deal with T-Mobile to assuage regulatory concerns about the deal with cable companies. But not everybody is convinced, and for good reason: The deal will still see Verizon Wireless — already the nation’s biggest mobile operator — getting more spectrum licenses. Not only that, the deal effectively makes cable operators its customers through the resale agreements, and puts Verizon in a position to potentially get its new best buddies (the cable companies) to agree to sweetheart deals — perhaps some agreements on how to handle backhaul traffic or agreeing to limit delivery of over-the-top video services that might lead consumers to ditch cable TV service.

“The true danger lies not only in the concentration of spectrum in the hands of the leading wireless provider, but with the cozy, cartel-like arrangements between Verizon, Comcast, and the other MSOs party to the deal,” wrote Public Knowledge senior VP Harold Feld in response to the proposed Verizon/T-Mobile deal.

Verizon Wireless would likely argue the cable companies were never its competitors anyway. After all, they’d never really done anything with their spectrum licenses and had never set themselves up as mobile operators. However, that narrow view may not hold water with regulators, who will be looking to see whether the deal with Verizon forbids cable companies from making similar reseller arrangements with other mobile operators, or how it could spill over to impact other services like online video.

And, weirdly, up until last week, T-Mobile was one of the most vocal opponents of Verizon’s proposed spectrum acquisition from cable companies. Economists, regulators, and other industry watchers often assess the amount of competition in a particular market using the Herfindal Index (aka the Herfindahl–Hirschman Index, or HHI). There are no units for the index, but, basically, the higher the number, the less competition there is in a particular market. T-Mobile submitted an analysis of what Verizon’s proposed spectrum deal would do to the market for LTE services in major U.S. markets (PDF). T-Mobile’s conclusion? Of the 728 markets for which T-Mobile has data, 688 (95 percent) already quality as “highly concentrated” markets. After the proposed acquisition, that number would change to 716, and six of the top ten markets in the U.S. would have their concentrations increase 16 percent on average — meaning the HHIs would jump more than 500 points to totals over 3,500.

The future

Verizon and T-Mobile indicate they’re hopeful both deals will be approved by the FCC later this summer.

T-Mobile will presumably withdraw its objections to Verizon’s cable company deal, now that it has made its own side-deal with Verizon — and the exact impact of the spectrum acquisitions and swaps on the overall HHI numbers for individual markets can’t be calculated until the full dossier of license changes is revealed. It may not be quite as dramatic as T-Mobile calculated last week.

However, it’s impossible to imagine that Verizon Wireless will come out of the deal with less concentrated holdings in key markets than it has now — which, if T-Mobile (and Sprint and other members of the Alliance for Broadband Competition would have us believe) already represents a highly concentrated market with very limited competition.

In other words, if the deals are approved, Verizon will increase its control of LTE spectrum capacity, but T-Mobile will have managed to carve out a fiefdom for itself that, Verizon hopes, will convince the FCC mobile broadband competition is alive and well.