Two burning questions about the Verizon-Cable deal

Verizon General Counsel Randal Milch testifies in Washington

Washington lawmakers on Wednesday pressed Verizon(s vz) and Comcast(s cmcsa) for two hours on their plan to tag team the residential broadband and wireless markets, reselling each others’ respective mobile and cable services. Amongst the political theater at the Senate Judiciary subcommittee on the Antitrust, Competition Policy and Consumer Rights hearing, two questions kept coming up: Are Verizon and the cable companies colluding to drive up broadband prices? And does Verizon really need the spectrum it’s buying from cable operators, or is it just placing it out of competitors’ grasp?

To compete or not compete?

Verizon general counsel Randal Milch and Comcast EVP David Cohen of public policy stuck to same lines Verizon and the cable companies have repeated ever since they announced their competition-rattling pact in December. Milch and Cohen said that their companies had every reason to compete against one another where Verizon runs its FiOS fiber-to-the-home, which can match cable head on in speed and TV programming.
That may well be true, but the Milch and Cohen kept side-stepping the issue of all of Verizon’s non-FiOS markets where it only offers DSL. In those markets, Verizon is essentially ceding the residential broadband market to Comcast Time Warner(s twc) and Bright House Networks. At one point, subcommittee chair Herb Kohl (D-Wis.), asked them directly what guarantees they could make that they would compete with one another and “not pull your punches.” Milch responded once again that Verizon had every intention of maintaining FiOS as a competitive service.

A license to grow or withhold?

As for warehousing spectrum, Verizon said it plans to use SpectrumCo’s advanced wireless service airwaves as soon as it gets it hands on them. Cohen backed up his claim by the saying that the cable operators were unable to launch a wireless service of their own over those airwaves so putting the licenses in Verizon’s hands would see them put to use.
Verizon’s critics and many of the Senators on the panel, however, didn’t see it that way. One of the other witnesses called, Free Press policy advisor Joel Kelsey, said that SpectrumCo’s AWS is the last remaining block of high-value spectrum currently unencumbered in the market. Verizon buying it precludes any other carrier from getting much-needed airwaves to build and expand their own 4G networks, Kelsey said. His advice was the FCC to kill the deal outright.
Not all of Verizon’s critics were on the exact same page though. While Rural Cellular Association president and CEO Steven Berry, called the deal “effectively a non-compete agreement,” he said its members – pretty much everybody that’s not AT&T or Verizon – weren’t opposed to the spectrum deal itself. They just wanted conditions placed on the spectrum transfer, requiring Verizon to divest airwaves alternate airwaves and commit to fair data roaming and tower backhaul agreements.

What if one or the other deal fails?

Both Milch and Cohen tried to separate the spectrum buy from joint operating entity their companies would create, claiming the two were completely unrelated deals that happened to be occurring simultaneously. Here things got a bit interesting. They said just as different regulators were weighing the different deals, Verizon and Comcast approached them as mutually exclusive opportunities. The implication here is that if the U.S. Department of Justice nixed their joint marketing pact, the spectrum deal could still go forward. The opposite could hold true if the Federal Communications Commission denied the spectrum transfer.
Milch and Cohen, however, didn’t directly say they would continue to pursue one deal if the other failed.The price Verizon is paying for the licenses, $3.6 billion, is low considering how valuable a commodity spectrum is these days.
Nobody can fault for Verizon for lacking a flair for the dramatic. Milch reiterated Verizon’s claims that it is quickly eating up its current spectrum capacity, the ill effects of which will be felt by customers as early as next year. Milch also maintained that while Verizon is pursuing every technical enhancement and upgrade available to it, those measures won’t put a dent in its customers voracious capacity demands.
“We do not think we can engineer our way out of the capacity crunch,” Milch said. “More spectrum is necessary.”
Tower image courtesy of Nikhil Verma