Verizon's Really Big Score

AT&T's (NYSE: T  ) seemingly star-crossed love affair with T-Mobile has been getting the lion's share of media attention since that merger deal was announced last March. But even if that $39 billion proposal does manage to get Department of Justice and Federal Communications Commission approval, it possibly would have less an effect on the telecom industry than the $3.6 billion wireless spectrum deal that Verizon (NYSE: VZ  ) just made.

On Friday, SpectrumCo, a joint venture currently made up of Comcast (Nasdaq: CMCSA  ) , Time Warner Cable (NYSE: TWC  ) , and Bright House Networks, agreed to sell 122 Advanced Wireless Services (AWS) spectrum licenses to Verizon Wireless. Those licenses cover a population of 259 million. But if this deal was just about spectrum, the cable companies probably would have held on to that valuable commodity as some protection against the long-term threat wireless poses for cable.

More than spectrum
This is a "complete reordering of the competitive universe as we know it today," analyst Craig Moffett of Sanford Bernstein & Company wrote in a report, according to The New York Times. He was referring not to the spectrum but to the marketing agreements Verizon reached with the cable companies.

Comcast, Time Warner Cable, and Bright House get more than the profit they made on the deal. They will now have the opportunity to get into the wireless biz by reselling Verizon's wireless services. Verizon will now be able to market the cable companies' services.

Past forays into wireless have not been promising for the cable companies. Last month, Cox Communications closed down its wireless unit indicating it lacked the scale needed to compete with the established mobile carriers.

This may turn out to be a true win-win arrangement, but with Verizon getting the uppercase "W." That's because it will have the upper hand in seven out of the eight dominant markets nationwide if AT&T's pending spectrum deals with T-Mobile and Qualcomm (Nasdaq: QCOM  ) aren't approved. It now holds five of those markets.

Another problem for Clearwire
Just previous to the Verizon/SpectrumCo announcement Friday, another important telecom event happened: Sprint Nextel (NYSE: S  ) signed last-minute contract agreements with its 4G WiMAX network provider Clearwire (Nasdaq: CLWR  ) . This was great news for Clearwire, as it gave some breathing room to the company, allowing it to take the gun away from its head and pay the $237 million interest payment that was due that afternoon.

But the Verizon deal later that day turned Clearwire's smile upside down. Telegeography reports that Comcast and Time Warner Cable, with their new-found 4G LTE wireless reselling deal with Verizon, may no longer feel the need to look to its current partnership with Clearwire and its slower WiMAX technology for wireless service.

If you can't fight 'em, join 'em
Analyst Craig Moffett called this deal "a partnership between formerly mortal enemies." And so it's even more remarkable that the agreement calls for the cable companies and Verizon to collaborate on developing products that will incorporate mobile and cable technologies. Those may include cable boxes, televisions, and smartphones that can work together.

One thing the cable companies could get that Verizon -- and AT&T -- already have will be the ability to market a quad-play bundle: mobile-phone service along with their existing video, Internet, and home-phone services.

Comcast's president of cable, Neil Smit, told The New York Times that "We'll be marketing Verizon Wireless' products, and they'll be marketing our products." Another Comcast executive == this one anonymous -- implied an even closer relationship: "We'll be joined at the hip going after new customers."

Future spectrum costs
Wireless spectrum is a finite resource, and the removal of this big chunk of it from the market can only increase its value, making it that much pricier for AT&T to match Verizon's big footprint.

For a price tag less than one-tenth that of the AT&T/T-Mobile merger proposal, Verizon seems to have leveraged itself into an even more commanding position. Should this have been the deal AT&T sought to make instead of the one it made for T-Mobile?

We'll have to wait and see how the FCC and the DOJ treat this agreement, but if it comes up clean then I'd have to rate Verizon "outperform" in CAPS.

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Fool contributor Dan Radovsky owns shares of AT&T. The Motley Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (8)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 05, 2011, at 9:08 PM, conradsands wrote:

    It must be nice to be a deep-pocketed duopolist in this economy. According to the report “Corporate Taxpayers & Corporate Tax Dodgers 2008-10,” two of the 25 companies with the largest total tax subsidies were AT&T at #2 ($14.5 billion) and Verizon at #3 ($12.3 billion). Also, there were 30 corporations that paid less than nothing in aggregate federal income taxes over the same period. These 30 companies, whose pretax U.S. profits totaled $160 billion over the three years, included Verizon. The report states the laws that allow this were not enacted in a vacuum, but rather were adopted in response to relentless corporate lobbying, threats and campaign support.

  • Report this Comment On December 05, 2011, at 9:08 PM, conradsands wrote:

    Consumers are finally noticing that AT&T and Verizon = The Most Expensive Wireless Plans in America. We know where Verizon and AT&T (both in the top 5 for corporate lobbying) get all that money to run commercials 24x7, pay out huge “fat cat” executive bonuses and hire armies of lawyers and lobbyists to push the U.S. market into a wireless industry duopoly -- the American consumer. This is how AT&T and Verizon fashion themselves as brilliant … with their political use of money.

    Taking into account the whole U.S. market, a combination of AT&T and T-Mobile would increase the Herfindahl-Hirschman Index (HHI), a widely accepted measure of market concentration, to 3,216 from 2,848, according to a Bloomberg analysis. Any score above 2,500 indicates a highly concentrated market, and any increase of more than 200 points clearly enhances market power, according to federal guidelines.

    If this ridiculous deal goes through, Sprint will be the only low-priced post-paid national wireless carrier left in the United States. T-Mobile customers are already fleeing to Sprint because they know they won’t get low prices from AT&T or Verizon. But AT&T and Verizon are two of the top corporate lobbyists in the country, so beware of how things could “mysteriously” turn in this case.

    “It’s only a slight overstatement to say that if they weren’t going to block this one, the Justice Department might as well just throw the antitrust guidelines out the window,” said Herbert Hovenkamp, professor of law at the University of Iowa, who is considered by many to be the dean of American antitrust law. “This merger clearly seems to violate them.”

  • Report this Comment On December 05, 2011, at 9:09 PM, conradsands wrote:

    Better than Verizon's usual news ...

    Verizon Wireless has agreed to pay $25 million to the government to settle an investigation of the "mystery fees" it improperly charged millions of customers for data sessions they never intended to launch, the Federal Communications Commission said.

    The "voluntary payment," which the FCC said is its largest on record, comes on top of the refunds Verizon plans to issue to around 15 million customers. Those refunds will total at least $52.8 million, the FCC said.

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