Verizon Close To Securing Additional Spectrum, Maintains LTE Lead

Verizon (NYSE:VZ) has secured the Justice Department’s approval for a $3.9 billion spectrum purchase from the cable companies Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC), Bright House Networks and Cox. ^[1] The FCC is yet to vote but Chairman Julius Genachowski has said that he supports the deal. Once the FCC approval is received, which we believe is only a matter of time, Verizon will be able to get its hands on a huge swathe of unused AWS spectrum it needs for LTE expansion. However, the DoJ has applied a few conditions to the cross-marketing deals between the companies that it believes will hurt the customers by reducing competition and increasing prices.

Going forward, Verizon will not be able to sell TV and broadband services from the cable companies in the areas where it offers its own FiOS service. Also, the service providers can co-market each others’ services only for the next five years, after which they will have to re-apply to extend the deal. Verizon’s FiOS service is however not widely available, and the carrier doesn’t plan to expand into newer markets; so this wasn’t a deal-breaker for either party.

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From Verizon’s perspective, we believe the spectrum purchase is the more important aspect of the deal since it impacts Verizon’s LTE expansion plans and gives it the spectrum necessary to fight the spectrum crunch plaguing the industry. With AT&T clawing at its heels and Sprint having just entered the fray, Verizon will need to maintain its LTE advantage and stay ahead of the game. This does not mean that the cross-marketing deals are not important since it helps Verizon’s services gain more prominence in some of the biggest cable company stores. But, for now, LTE and spectrum seem to be the priorities considering the current wireless dynamics.

The mobile services division accounts for almost 84% of Verizon’s $44 value, in-line with the current market price.

Why LTE is more important

Verizon has been aggressively spending on 4G LTE infrastructure, rapidly rolling out in newer markets to maintain its lead over rivals AT&T and Sprint, as well as making sure outages do not recur. While Sprint recently launched its LTE service in 15 U.S. markets and AT&T’s LTE network covers about 80 million Americans, Verizon has its LTE network available to about 230 million people in the U.S., more than two-thirds of the entire U.S. population. As a result, its capital expenses have been rising over the last few years owing to the rapid deployment of LTE and 3G network upgrades, and we do not see this trend reversing anytime soon. Verizon will hence look to maintain its lead and increase LTE adoption as a means to start recovering at least a part of the huge capital expenses incurred as well as to grow its market share in an increasingly saturated wireless market.

Moreover, the increased adoption of 4G will reduce its dependence on 3G networks, which are under great strain due to the heavy data usage of smartphones. Also, LTE, as a network technology, not only supports higher speeds but is also more efficient than current 3G networks at handling data, thereby reducing maintenance and handling costs.

Spectrum swap addresses concerns

However, Verizon’s spectrum deals have been opposed to by many, including Sprint and T-Mobile, on the grounds that the spectrum purchase will give Verizon way too much spectrum and skew the wireless dynamics completely in favor of the larger incumbents.

Verizon tried to dispel these concerns by moving to put some of its unused 700 MHz spectrum for sale. It even hired advisers Loop Capital and Stephens Inc. to help it find potential bidders for the spectrum. However, no details about a potential 700MHz sale have been announced so far. But the subsequent deal with T-Mobile to divest AWS spectrum in a few markets helped Verizon alleviate anti-competitive concerns of T-mobile as well as the FCC. (see Verizon Swaps Spectrum With T-Mobile; Moves Closer To Getting FCC Approval)

At a time when demand for data services is soaring as subscribers 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. Divesting and the sale of spectrum will also allow an increasing number of wireless service providers to lay out LTE networks with the additional spectrum, thereby providing higher 4G speeds and improving network efficiency. This will see smartphone users use more data intensive applications, driving data ARPU up for the carriers.

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1. Regulators OK Verizon’s $3.9B bid to buy cable spectrum, CNET, August 16th, 2012 [↩]