Blog Post

The dirty secret inside Verizon’s cable spectrum buy

Several companies and nonprofit organizations filed their opposition to Verizon’s(s vz) planned $4 billion buy of spectrum owned by the cable companies on Wednesday. But this isn’t an industry fight. This is a fight that should involve everyone from consumers to the Internet companies whose businesses rest on access to the wireline and wireless pipes affected by this deal. I’ve already explained the big picture problems with the deal, but it’s time to dig deeper so folks really understand what’s at stake.

Competition: it’s already bad, but it could get worse.

This deal reduces the amount of both wireless and wireline competition: As I’ve explained in previous posts, the loss of the cable companies’ spectrum marks the loss of the last real likelihood for another entrant into the wireless market dominates by AT&T(s t) and Verizon. It will also prevent smaller, spectrum-hungry operators from buying the airwaves (which is T-Mobile’s biggest argument against the deal). Additionally, the exclusivity agreements on the wireline side could preclude the cable companies from signing up to use wireless from a smaller, hungrier player offering a new channel and maybe some cash that T-Mobile, Clearwire or another provider could have sorely used.

On the wireline side, it signals that the speeds of FiOS aren’t going to increase further, and takes out Verizon as a potential competitor with an over-the-top video service that changes the way ISPs have to sell their triple play. Now everything fast, and even pay-TV related, will continue to rest in the hands of cable companies. And there’s another big issue we’re not talking about yet. But we should.

Meet JOE. He’s a problem

The marketing agreements create a shadow joint-operating entity (JOE) between Verizon and the cable companies. This JOE is worrisome to those of us who realize that getting Verizon in a room once a month with the executives at the nation’s largest cable companies could lead to agreements about technology, deployment strategies and R&D that will be controlled by the large ISPs. The fear is that this organization will be able to slowly stifle new innovations for Internet services or even devices attached to wireline networks by creating technologies and standards that are only available to the JOE participants. Perhaps others might be able to license those technologies, but there’s no guarantee of that, or that the JOE would do so for a fair and reasonable amount.

A suggestion would be to have the Department of Justice, which is reviewing the deal, impose conditions on how the JOE is supposed to license any IP it comes up with. Because ISPs move packets and have a box inside people’s homes, there are plenty of ways to shut someone out of a network using patents and hard tech, as ISPs and cable providers well know. So if I were Boxee, Roku, Amazon(s amzn), Google(s goog), Apple(s aapl) and other big and small names in the connected home and content environment, I’d start pressing the FCC, DoJ and the participants themselves for answers on the JOE.

What’s the FCC to do?

I can’t imagine that the FCC can stop the sale of spectrum, or even that it should. But as the Department of Justice and the FCC review the deal, the secret marketing agreements between the companies deserve a lot of scrutiny. People who have seen the documents can’t comment on them, but they admit that they are bad from a consumer and competition point of view.

If the deal were really about spectrum, the price paid for the airwaves would have been much higher. Four billion dollars for 20-30 megahertz covering most of the nation isn’t all that much as airwaves go. Clearly there is value for both Verizon and the cable companies locked away in these secret agreements. The government should just strike the agreements altogether, but that’s a hard argument to make when they aren’t public. But attorneys for carriers, big Internet companies and others should make sure they file to see the documents so they can weigh in. This isn’t just a telecom issue, it has the potential to be an Internet issue — much like network neutrality.

Barring the wholesale spiking of the agreements, the DoJ and FCC should impose conditions such as dictating the terms under which the parties involved could license their patents, eliminating the exclusivity agreements that could hurt Sprint(s s) or smaller wireless operators further and ensuring that data roaming could occur on the new spectrum. Because at the current price, this deal is about a lot more than the spectrum, and unfortunately the only people who can see the whole deal can’t tell consumers and watchdogs about it. Once again, Verizon is an evil genius.

7 Responses to “The dirty secret inside Verizon’s cable spectrum buy”

  1. I will continue to say this until someone listens:
    Spectrum congestion, largely caused by video can be alleviated by something as simple as a “broadcast overlay” using excess digital TV spectrum. The FCC, Congress and the wireless carriers don’t want it, instead preferring fabricated spectrum shortages. After TV spectrum is expropriated and the auction winners (incumbent wireless carriers) have all spectrum in the warehouse you will still be paying for data usage plans, etc…just a maddening wheel of deception. Let me also add that after the National Broadband Plan has taken all TV spectrum and delivered it to the wireless industry that noting will change, spectrum will be warehoused, etc. Why not let guys like LPTV station owners provide spectrum on an as-needed basis to all wireless carriers; once it is auctioned it ain’t coming back.

  2. Martyn Roetter

    The Petitions to Deny have raised some but far from all of the critical issues that should be addressed in a review of the Verizon/cable transactions. But they have however not yet provided any analyses or solid evidence of the dangers of the national broadband video cartel that is emerging (which is so large it should perhaps be dubbed an SUVtel). Unless opponents are prepared to develop this evidence (and proposals for the analytical framework and research needed have been presented to them)it will be hard for the FCC and DoJ to justify blocking these deals. It is also amazing for example that Netflix has been silent so far yet its future business will not survive if these arrangements between former competitors are allowed to proceed.

  3. It’s sad to see our eroding innovation and competition rationalizing dwindling in the hands of a few monopolies. My Internet choice in Long Beach are Charter (appalling service), Verizon (OK service but yet another monopoly) and Clear (who throttled my services so badly I couldn’t make video calls). And now, Verizon wants an even greater part of the pie, thus restricting our choice further?

    Last I checked, 80% of our GDP comes from small to mid-size businesses, NOT giant, bloated monopolies. Verizon and other ISPs tried to restrict the Internet US backbones by charging a premium for a theoretically free and open service called the Internet, so now it buys other venues? While we continue with the giant monopoly folly, Asia is waking up with a fierce hunger. What will it take to snap out of this daze we are in? Give me choice, not restrict it!

  4. “I can’t imagine that the FCC can stop the sale of spectrum, or even that it should.”

    I disagree completely.
    Instead of selling spectrum, why not regulate interoperability and then “rent” the entire available commercial spectrum to anyone who wants to get into the wireless game?

    • That’s an interesting idea going forward, but to make such a proposal retroactive would destroy value — it’s like changing the rules in the middle of the game. The cable guys purchased this spectrum under a set of rules, and they should be respected. And I think Verizon should be able to buy those airwaves. Of course, if the deal does go through there should be conditions and perhaps a spectrum divestiture if analysis of the new holdings warrants it.

      I think it would be far mroe telling (and pro-consumer) if the FCC or DoJ said the sale could go through without the JOE or marketing agreements. I imagine then, the deal would suddenly look bad in the eyes of the cable guys and they’d try to back out and sell the airwaves at a higher price.