The Verizon-Cable Deal Will Go Through Despite FCC Delays

The FCC has recently decided to extend its review of Verizon’s (NYSE:VZ) spectrum deal with the cable companies. Late last year in December, Verizon had announced a $3.6 billion deal that would give it a significant chunk of wireless spectrum from SpectrumCo, a joint venture formed by Comcast (NASDAQ:CMCSA), Time Warner (NYSE:TWC) and Bright House Networks. It then signed a similar deal with Cox Networks to add to the spectrum pile it is building to fight the spectrum crunch that is plaguing the wireless industry.

Critics of the deal have lauded this move by the FCC as they see it as a signal that the regulators see potential issues with the deal. ^[1] However, this is most likely a routine delay and not really a “stopping of the clock”, as the CWA would like to believe, since the FCC rarely finishes such reviews within 180 days. ^[2]

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What caused the spectrum crisis?

Opponents reason that the deal will lead to spectrum hoarding and put too much power in the hands of Verizon. But we don’t subscribe to this line of thinking as the current situation is not very different. Spectrum is being hoarded even now, only the culprits in this case are the cable cos. In order to understand why, we need a recap of how the spectrum crunch actually came about.

When the FCC last conducted similar auctions in 2006, it allowed cable companies to bid for wireless spectrum as the regulatory agency wanted to increase competition in the wireless industry. However, the move backfired as plans to start their own wireless services never materialized for the cable companies, and they ended up hoarding spectrum that could otherwise have been used constructively by the wireless industry. This has now not only contributed to the spectrum crisis but also inflated the value of this unused spectrum.

Verizon deal provides a solution

The FCC has been trying to get these spectrum hoarders to give up their spectrum but the talks have not worked out so far. Verizon’s deal would make things easier. It would not only bring the spectrum back to where it belongs but also address the spectrum crunch situation that the wireless industry is facing. In order to address concerns that Verizon would then exert too much power, the FCC can ask Verizon to divest some of the assets it acquires to potential bidders in much the same way as the carrier had to divest some of the acquired Alltel assets in 2010.

At a time when demand for data services soaring as subscribers increasingly use mobile devices to remain connected and watch videos on the move, bringing spectrum back to the wireless industry will not only see the resource being put to use but also help improve speeds and prevent network clogging. Additional spectrum will also allow an increasing number of wireless service providers to lay out LTE networks, which not only provide higher 4G speeds but also serve to improve network efficiency. This will see smartphone users increasingly use data intensive applications on their smartphones, driving data ARPUs up for carriers.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. CWA Applauds FCC Decision to ‘Stop the Clock’ on Verizon Wireless/Big Cable Proposal, CWA1107.org, May 2nd, 2012 [↩]
2. FCC Extends Review of Verizon’s Spectrum Deal [↩]