If there's one thing you can't accuse Verizon (NYS: VZ) of, it's laziness. The ambitious telecom giant has been actively working on getting more market share, more broadband spectrum, and more business partners. And the competition is finding that it's easier to join them than beat them.
An agreement with rivals takes some competitors off the table
Ever since inking a pact with cable companies Comcast (NAS: CMCSA) , Time Warner Cable (NYS: TWC) , Bright House Networks, and Cox Communications late last year to purchase 122 Advanced Wireless Services broadband spectrum licenses encompassing areas with a population of 259 million, Verizon has been getting antsy. The Federal Communications Commission has not given the green light for the $3.6 billion deal, which also allows the cable companies to market Verizon products -- and vice versa. Despite that nagging little detail, the marketing has begun.
Comcast and Verizon just announced their plan to offer bundled services from each vendor to six new markets, in addition to the three markets in which the pair launched the service earlier in the year. Verizon has also sold bundled services with Time Warner Cable, but has not done so with Bright House or Cox yet.
This is all very ambitious, but perhaps a bit premature, in light of the fact that the government hasn't yet approved the deal. In order to pave the way for the FCC to see things its way, Verizon has made an offer to sell some of its own spectrum to ameliorate any concerns the agency may have regarding the competitive advantage that this deal will impart to Verizon. Indeed, smaller carrier T-Mobile has filed a complaint against Verizon, claiming that much of the spectrum it already has goes unused.
As a peace offering of sorts, Verizon has offered to put up for sale some of the 700 MHz spectrum licenses it acquired via auction in 2008, as long as its big plan gets the nod. This may or may not happen, since congressional hearings in March between regulators highlighted that if the deal went through, there would essentially be only two competitors in the industry, Verizon and AT&T (NYS: T) . Smaller carriers wouldn't have a chance, since the two large companies would own almost all the available spectrum.
Jumping the gun?
Although the FCC hasn't explicitly told the companies not to go forward with the marketing portion of the agreement, it seems arrogant to me for Verizon and its partners to do so. Of course, going forward with it helps Verizon gain market share, as the areas in which it and its partners are setting up shop are prime AT&T territory. They're not playing around, either: The companies are aggressively marketing the bundled products, and are offering carrots in the form of pre-paid debit cards with values of up to $300, free cable upgrades, and higher data plans for the first year. As you might expect, the bundles are not being offered where Verizon FiOS is available.
The argument that Verizon has put forward to regulators in favor of the deal is that without the purchase, Verizon's network will run out of wireless spectrum by next year. This would lead to consumer distress, something that Verizon simply can't abide. Spectrum is, of course, limited, but that doesn't necessarily mean that Verizon should be allowed to purchase such large amounts for itself. After all, the government nixed the AT&T and T-Mobile merger for reasons of unfair competition, and AT&T was up front about wanting the deal primarily to pad its spectrum reserves.
Another problem is that the 700 MHz spectrum sale that Verizon has offered in return for a yes vote may not really be such a deal. The licenses it plans to part with are primarily in the A and B sectors, not C, which is the type that Verizon is now using and what vendors looking to flesh out LTE networks would need. The AWS spectrum that Verizon plans to purchase from the cable operators is a different kettle of fish altogether, and would provide prime real estate upon which to build out a world-class network. To paraphrase T-Mobile in its filing, if the spectrum quality is so great, then why isn't Verizon using it?
But the spectrum isn't worthless -- it's just less desirable than what Verizon is using. Even if T-Mobile doesn't find the offer attractive, other carriers might. AT&T, for example, might pick up some of it to add to its spectrum-starved network, and other smaller carriers may be interested as well. The problem is, if the deal is sanctioned, the extra spectrum may not make enough of a difference to any of the other carriers. If it doesn't happen, the offer will likely be taken off the table anyway.
Much hinges on the FCC's decision
It seems to me that if the FCC decides in Verizon's favor, the small amount of competition that now exists will disappear. Small carriers will lose all hope of competing with Verizon or AT&T, and the latter will be at a distinct disadvantage. Not only will there be little hope of ever shoring up its less-than-robust network in a way that can give Verizon a run for its money, but the pact between Verizon and the cable companies will give them the clout to dislodge AT&T from the areas where it now enjoys market share.
I think that the agency is leaning toward blocking the deal, however. From comments made by senators during the hearing, Verizon's pleas seem to be falling on deaf ears. After all, there is only so much spectrum to go around, and if Verizon will be in a shortage situation soon, then so will everyone else. Also, the senators seemed miffed that the cable companies bid for and bought prime spectrum at federal auction back in 2006, then did nothing with it -- until now, when they see an opportunity to sell it all to one entity, which was exactly what the auction process sought to avoid.
If the decision is nay, what of the marketing camaraderie now being enjoyed by Verizon and its new cable pals? Verizon may have gotten itself in a heap of trouble here. Will the company be chastised, or will it morph into the new Ma Bell? Consumers and investors alike will be watching this situation closely, as it could very well be a game-changer.
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At the time this article was published Fool contributor Amanda Alix owns no shares in the companies mentioned above.The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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