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Summary:

When the FCC and DOJ crushed AT&T’s $39 billion acquisition of T-Mobile, the competition gods rejoiced. But today regulators are content to let pass a Verizon-cable spectrum deal that would have huge implications for residential broadband competition. So much for the golden age of telecom regulation.

Vampire fangs

When regulators killed AT&T-Mo last year, they didn’t pussyfoot around. They slapped down that $39 billion boondoggle with authority, heading off AT&T’s every attempt to weasel the T-Mobile acquisition through. It seemed like the FCC and Justice Department had grown fangs, and as I wrote at the time they deserved to be lauded for their persistence in resisting a deal that was clearly bad for consumers and competition.

Apparently those fangs have fallen out.

On Thursday the DOJ announced it was rescinding all of its objections to Verizon’s $3.9 billion acquisition of the cable operators’ 4G airwaves — and the joint-marketing agreements that accompany them. A spectrum deal isn’t the same thing as a megamerger between Tier 1 operators, but this was no simple transfer. Those joint-marketing agreements were effectively noncompete deals that divvied up the wireless and residential wireline markets between Verizon and its new cable buddies.

There are basically two parts to this deal: a spectrum transaction subject to approval by the FCC and an antitrust issue subject to the oversight of the attorney general. While there has been a huge outcry against both aspects, the spectrum transfer was always going to happen. But there’s no reason why regulators couldn’t approve the spectrum transfer while denying the marketing pacts (throwing it back to the companies to see if they still wanted to move forward).

The cable companies have essentially been squatting on very valuable 4G airwaves for six years. Verizon was offering to take that spectrum off their hands and put it to use. The antitrust aspect is another story altogether. Here you have the phone companies and cable operators — entities that are supposed to be arch-competitors in the residential broadband market — suddenly calling a cease-fire and cross-selling one another’s services. If that doesn’t raise antitrust flags, what does?

The DOJ claims it won two key concessions that will keep competition safe for consumers. But let’s take a closer look at those concessions:

  • The co-marketing agreements can stand only until Dec. 2016 (five years retroactive to the day the partnerships were announced). Also, any new technology emerging from the collaboration between cable and Verizon must be licensed freely after that deadline. Basically the DOJ is giving Verizon and cable a five-year grace period to sell a single residential broadband service (cable), killing off the already suffering DSL as a competing technology and establishing an irreversible cable monopoly.
  • Verizon has agreed not to exercise the co-marketing agreements in its FiOS fiber-to-the-home markets. Verizon always planned to compete with cable in its FiOS territories, because fiber, unlike DSL, actually gives Verizon an advantage over cable. Verizon executives testified to that effect before Congress. For the DOJ to claim this is a concession is like claiming Mick Jagger has “conceded” to strut onstage at all future concerts.

In a previous post, my colleague Stacey Higginbotham summed up the potential implications of the Verizon-cable pact best:

“In a pessimistic view, this means that the cable guys would no longer face competition nor a reason to keep pushing their wireline infrastructure. Today that’s not so bad, since most cable companies have deployed the faster DOCSIS 3.0 technology that can deliver up to 100 Mbps down to homes, but it is depressing to consider that five years from now we may still have that same infrastructure and little opportunity to go forward, unless the cable companies want to invest in fiber to the home. And without Verizon or AT&T pushing them forward, why would they? It’s worth noting that Verizon’s FiOS plans helped jump-start the deployment of DOCSIS 3.0 services in areas where Verizon laid fiber.”

The DOJ seems to have simply given in to the pressure supplied by communications giants, squandering the good will it accrued after taking such an immovable stand against AT&T-Mo.

As for the FCC, it at least succeeded in getting Verizon to agree to sell off a portion of its 700 MHz airwaves and to swap some of its new 4G spectrum haul with T-Mobile. The commission also got a key concession to rural operators out of Verizon: a commitment to open its LTE network to roaming partners.

But the FCC doesn’t get a complete pass. Chairman Julius Genachowski proposes giving Verizon a baffling seven years to deploy its LTE network over those new airwaves. In its own filings with the commission, Verizon has insisted it would run out of mobile broadband capacity in 2015. If Verizon’s 4G network is set to break in three years, why does it need a seven-year window to use those frequencies it claims to so desperately need? The FCC should have held Big Red to its word.

Eight months after becoming consumer champions, regulators now seem to be returning to their old habits of approving any and every telecom deal that comes across their desks. My, how these golden ages pass quickly.

Photo courtesy of Shutterstock user katalinks

  1. Thank you Kevin for clarifying the approach of this deal.

    I was also concerned about the 5 year bind of cable companies with Verizon. If I’m understanding this correctly, it seems to me that the cable companies can only sell Verizon service and products which only leverages Verizon’s control. This gives Verizon even more unfair advantage over the others seeking to bundle service packages.

    In spite of what they claim, I feel the FCC and DoJ failed to negotiate a concise consumer protection package.

    John B.

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  2. Good article.

    I’m disappointed that the DOJ effectively rolled over and will let the JOE go forward and establish this cartel – this is a quasi merger of the Cable Cos & Verizon.

    An additional aspect that hasn’t been mentioned is backhaul. The JOE also specifies for Verizon to exclusively source a large portion (or all?) of its backhaul from the cable companies. This is going to do some serious damage to the nascent competition in that market. Unfortunately, most of the details are redacted out of most of the public documents at the FCC.

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  3. Given that Verizon wasn’t aggressively selling DSL services anyway, and in fact has sold off much of the DSL footprint, do you really think it’s that damaging that they’ll simply continue to do so? It affects only a tiny proportion of the total population of the US, and a relatively small proportion of Verizon’s access lines. Meanwhile, in the rest of the country it’s business as usual.

    Loved your Mick Jagger line, though.

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    1. Kevin Fitchard Friday, August 17, 2012

      Thanks Jan,

      Good point. But don’t you think Verizon should divest itself of its ILEC territories before its starts ceding the broadband market? It’s like its rigging the game against whatever wireline company takes over.

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      1. It’s already divested quite a bit, but there are only so many potential buyers out there. It hasn’t abandoned those areas, but it clearly isn’t investing significantly in them either. And really the marketing deals are mostly about areas that Verizon doesn’t serve at all with wireline (VZ DSL areas are a small fraction of the total)

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    2. Kevin Fitchard Friday, August 17, 2012

      Yep, but even if you discount the FiOS stuff. Verizon is stlll one of the largest broadband providers in the country. Still, to your point it only has barely over 5 million DSL subs. If the amount is so inconsequential, why not except all of VZ’s ILEC territories from the co-marketing pact. There are definitely some competitive issues with the out-of-territory pacts, but they’re nothing quite so severe as the in-territory ones.

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    3. Well said.
      I from the sounds of it the only place Verizon is proposing to co-market in are areas it isn’t in or has an inferior service and can’t compete anyways*. If they spent a lot of money upgrading their land lines in those areas they could compete… but all of Verizon’s excess money is going into wireless. Regardless of the agreement I doubt Verizon will be very competative in in these places for a while.

      * based on this being limited to a subset of DSL areas excluding fiber.

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