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Why Verizon needs AT&T-Mo to just disappear

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Sprint(s S) may have popped open champagne on Tuesday after the Federal Communications Commission denounced AT&T’s(s T) proposed merger with T-Mobile USA and recommended it go to administrative hearings, but Verizon Wireless(s VZ) executives uttered a few sighs of relief as well. Of all the possible outcomes in the AT&T-Mo fallout, the FCC approving the merger with a laundry list of new regulations would have been the worst-case scenario for Verizon. It appears to have dodged a bullet.

The FCC could have required AT&T to divest spectrum and networks in numerous markets; FCC staffers had competitive concerns in 99 of the top 100 markets. It could have imposed deadlines for deployments and stricter requirements on the population and geographic areas those networks covered. It might even have dictated commercial terms on how it used that spectrum, spelling out the terms of data roaming agreements and maybe even imposing restrictions on what AT&T could charge for data service. All of these would have been anathema to Verizon.

Why? Because whatever restrictions and stipulations AT&T is forced to abide by if this merger goes through would return to haunt Verizon down the road. Verizon may be sitting pretty on a big fat LTE network today, but it readily admits it must go back to the market for more spectrum at some point. That means acquiring another operator, buying spectrum from a competitor or picking up new licenses at auction. Verizon may even weighing a bid on Sprint. Given the current regulatory environment, such a purchase would be out of the question today. But there are plenty of smaller players Verizon likely is eyeballing. Any future bid Verizon makes on a competitor or spectrum would be clouded by whatever requirements the FCC and U.S. Department of Justice would impose on AT&T-Mo today.

What’s Verizon really thinking?

Verizon’s official stance is that it’s “unopposed” to the merger so long as no new requirements are imposed on U.S. operators. Last week, at a Morgan Stanley (s ms) investor conference in Barcelona, Verizon EVP and CFO Fran Shammo reiterated that stance: “There needs to be consolidation. And as long as there’s consolidation without regulation, we don’t have an objection to it.” (You can read the full transcript here).

A merged AT&T/T-Mobile would be a threat to Verizon just like it would be to Sprint. AT&T would gain enormous scale, and it could field an LTE network with twice the capacity of Verizon’s. Big Red has never lacked for confidence, though. It has no trouble competing against AT&T today when it has 100 million subscribers. What’s 34 million more that AT&T would gain from T-Mo? Verizon probably also feels it can take advantage of the inevitable chaos of a merger transition period to scoop up a lot of T-Mobile customers.

I think Verizon’s position on AT&T-Mo comes down to cold, hard Realpolitik: The enemy of my enemy is my friend. The biggest threat to Verizon’s future business isn’t AT&T; it’s the FCC and other regulators. Verizon’s interests are aligned with those of its arch-rival, but that doesn’t mean Verizon is supporting the merger outright. In fact, it’s playing a bit coy.

Verizon executives aren’t naïve enough to believe a AT&T-Mo could have flown through the FCC and DOJ unfettered. The public, political and regulatory outcry against AT&T guarantees that, if the deal were somehow to win approval, it would be loaded down with new regulations. Verizon’s aim was to minimize the damage.

The best outcome for Big Red

FCC Chairman Julius Genachowski

The FCC had three options: Approve AT&T-Mo outright, approve the deal with conditions or send it off to an administrative law judge for a hearing: the closest thing the FCC can do at this stage to denying the petition. The first option was off the table, so Verizon’s best hope was that the FCC and DOJ approve the deal with minimal requirements: some market divestitures here, some spectrum sales there.

Sending the merger review to an administrative hearing doesn’t bode well for AT&T, but it’s not an outright denial. AT&T can still save face by withdrawing its position. With no official decision made, there’s no precedence. AT&T would be free to try again with another potential acquisition, and Verizon could pursue its own consolidation agenda without a failed AT&T-Mo hanging over its head.

That doesn’t mean AT&T didn’t inflict any damage on Verizon. On Tuesday, FCC Chairman Julius Genachowski didn’t just recommend the commission shuttle AT&T-Mo off to an administrative hearing, he also circulated a draft asking commissioners to approve AT&T’s pending purchase of Qualcomm’s 700 MHz FLO TV spectrum(s qcom) “with conditions.” The FCC didn’t elaborate on what those conditions might be, but whatever they are neither AT&T, nor Verizon, is going to like them.

From Verizon’s perspective, the longer AT&T continues to press its case the more damage it can do. Verizon just wants this deal to die.

4 Responses to “Why Verizon needs AT&T-Mo to just disappear”

  1. Kevin, you said “The biggest threat to Verizon’s future business isn’t AT&T; it’s the FCC and other regulators.”

    I’m not sure what you meant. Are you suggesting that what’s in the best interest of AT&T and Verizon is, by default, therefore not “in the public interest” as well?

    But won’t something very worthwhile and positive come from this detailed market assessment — now that the focus can move back to solving the wireless broadband challenge in rural America and other under-served areas?

    Won’t the government, collectively, now move forward with plans to free-up unused TV channel spectrum and assign it as unlicensed bands for the Wireless Internet Service Providers to utilize for more widespread broadband deployment?

    My point: there seems like an apparent potential upside to all this market analysis. The public need didn’t suffer from this debate. The AT&T-Mo deal actually helped to raise awareness of the need to increase assigned spectrum to broadband ASAP.

    • Kevin Fitchard

      Hi David, thanks for responding. I agree with you entirely. I wrote this article to explain why Verizon is standing mutely on the sidelines while other operators rail against the merger. Basically I tried to take it’s point of view which is different from the point of view of the public interest.

      But in answer to your question about whether Verizon’s interest is opposed to the public interest, it’s a bit of a grey area. Verizon would argue that no or minimal regulation is always in the public interest as any backer of laissez faire regulatory policy would. So if you believe unquestionable of the power of the market to regulate itself, then the interests of the public and Verizon are aligned. If you don’t espouse that belief, which a good deal people of people aren’t, then the interests of the public and Verizon are at odds.

      I think you’re right, the public didn’t suffer from this debate. The debate helps clarifies what the government and public’s role in determining how the public airwaves are used. But if you’re a big wireless operator, that clarification isn’t necessary a good thing.

  2. I wonder how serious ATT was about T-Mobile. Sometimes it sounds like they wanted to raise pressure on Verizon. No one wants to see more merger, at least on the consumer side. We broke the Baby Bells a few decades ago and allowing Verizon to form was a great deal for corporations, not so much for competition on the consumer side. Prices are not competitive with three “real” players in the game and a distant fourth.

    Verizon will need to be throttled at some point. After, like the others, it too throttles its customers :)

    • Kevin Fitchard

      Hi Nicolas, thanks for commenting. I think AT&T went into this with all seriousness. In fact, if it didn’t think it had a pretty good chance of winning regulatory approval it wouldn’t have bothered. The cost of fighting it, and the money and spectrum on the line if it fail, would have been incentive enough to pass on the deal. But look at the public relations nightmare as well. AT&T is coming to embody the “evil expansionist corporation” whether its a fair assessment or not.