T-Mobile to FCC: Stop Verizon from buying more spectrum

verizon-wirelessT-Mobile USA filed a complaint today with the FCC, hoping to block Verizon Wireless — the nation’s largest wireless carrier — from further acquiring wireless spectrum in the $3.6 billion dollar deal Verizon made with cable companies last December. The Verizon deal is separate from the auctions the FCC plans to hold in order to fund federal social service benefits by selling off unused wireless spectrum. It is instead a private deal that Verizon reached last year with some of the nation’s largest cable companies, and could have far-reaching implications for the wireless telecom and cable industries.

T-Mobile and AT&T

Late last year, the closely watched merger of AT&T — the nation’s second largest wireless carrier — and T-Mobile — the fourth — deteriorated, and eventually collapsed under the scrutiny of federal regulators. AT&T’s acquisition of T-Mobile would have made the new company the largest wireless carrier in the US, with over 130 million domestic subscribers, and introduced a new threat to Verizon’s longstanding dominance. Instead, AT&T was forced to pay T-Mobile a $4 billion “breakup” fee, as well as cede valuable wireless spectrum to T-Mobile and “enter a mutually beneficial roaming agreement with Deutsche Telekom,” T-Mobile’s corporate parent, according to a statement on AT&T’s website. Although the merger bid was ultimately withdrawn, the vigor with which AT&T pursued the deal illustrates a stark reality in the wireless telecom world, in which accumulating wireless spectrum is both the goal, and the means of achieving a goal. As AT&T’s withdrawal statement read:

“The actions by the Federal Communications Commission and the Department of Justice to block this transaction do not change the realities of the US wireless industry. It is one of the most fiercely competitive industries in the world, with a mounting need for more spectrum that has not diminished and must be addressed immediately. The AT&T and T-Mobile USA combination would have offered an interim solution to this spectrum shortage. In the absence of such steps, customers will be harmed and needed investment will be stifled.”

All you can eat

Hyperbole or not, Verizon has been ravenously acquiring wireless spectrum over the past few years, spending an estimated $10 billion during the 2008 FCC wireless spectrum auction, in addition to the $3.6 billion it spent last December, and a further $315 million in a deal with Cox cable just two weeks later. As mobile analyst Jeff Kagan wrote in a research note after that announcement, “AT&T would have loved to sink their teeth into some of that spectrum that Verizon just got…it looks like Verizon is rolling in spectrum now and should not face the problems AT&T faces,” according to Wireless Week.

The spectrum acquisitions must, however, be approved by the FCC — and possibly the Justice Department — in order for Verizon to complete the purchases. It is during this stage that T-Mobile and others hope to kill the deals. In its complaint, T-Mobile claims the additional spectrum “is unlikely to provide any near-term benefits to Verizon Wireless costumers,” according to The New York Times. “Rather, the principal impact of the acquisition would be to foreclose the possibility that this spectrum could be acquired by smaller competitors — such as T-Mobile — who would use it more quickly, more intensively, and more efficiently than Verizon Wireless.”

What the deal really means

The looming question in our minds, however — and one that Verizon has so far said little about — regards the marketing agreements inked between Verizon and the cable companies it reached the spectrum deal with, which include Comcast, Time Warner, Cox, and Bright House Networks, some of the largest in the country. In that separate deal that coincides with the spectrum sale, the cable companies agreed to market Verizon services to their customers, and vice versa. As Senator Al Franken put it in a letter to the FCC in part published by The New York Times, “These joint-marketing agreements will turn these rival companies into partners, rather than competitors. I fear this will ultimately mean less competition, less choice, and higher prices for consumers.”

To understand the history behind those words, it’s important to know that when the above mentioned cable companies bought the spectrum in question at an FCC auction in 2006, they collectively paid $2.37 billion for 137 licenses, and bid together under the name SpectrumCo. Why would five of the nation’s leading cable providers cooperate with each other in buying wireless spectrum that they would normally be using to pummel each other to death with? In a move that seems downright utopian through modern lenses, it appears that the original intent of the consortium was actually to someday create its own wireless network to compete with the likes of Verizon and AT&T. Although Cox eventually split from the partnership in a failed attempt to do this on its own, the rest had been simply resting on their laurels — that is until they were approached by Verizon, and the possibility of a tidy $1 billion profit.

What the marketing portion of the agreement portends about the deal, more so than even the spectrum purchase, is the possibility that the nation’s leading cable providers may soon be teaming with Verizon to realize their wireless aspirations. What Verizon will get out of the agreement is clear: More spectrum, and therefore more robust networks, as well as vast new markets for possible wireless and wireline integration. Cable companies as well will surely be in the position to buy Verizon services cheaply through wholesale, and resell them as completely new wireless products, no doubt bundled with their own cable offerings. What on the surface may have seemed like T-Mobile’s sour grapes, may in fact be a much more severe threat to competition for which the FCC should take a careful look.

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