Senators Probe Verizon/SpectrumCo Deal at Antitrust Hearing

Chairman Herb Kohl, D-Wis., asked if the deals “will roll back … advances in competition and even amount to a truce between one of the two largest phone companies and over 70 percent of the cable TV industry.” Under the deal, Verizon would get “what is likely the last swath of crucial spectrum available for years to come, keeping this vital input for wireless service out of the hands of its competitors,” Kohl said. After the deal, Verizon and AT&T together will control two-thirds of the nation’s cellphone customers and “the lion’s share” of spectrum, he said. “Having won the battle for competition by blocking last year’s AT&T/T-Mobile merger, are we now in danger of losing the war?"

Given predictions of a spectrum crunch, policymakers “must give significant weight to the efficiencies” resulting from the Verizon acquisition of spectrum, said Ranking Member Mike Lee, R-Utah. On the joint marketing agreement, Lee said “the most important question” is whether the deal will affect Verizon’s incentives to deploy FiOS competing with cable. “Competition is essential to consumer welfare,” and concerns by the deals’ critics “highlight the important issues facing these industries,” Lee said.

It’s just “unused spectrum” that would be acquired, said Verizon General Counsel Randal Milch. That means no competitive problems to fear, he said. “Verizon Wireless is not buying a competitor and is not buying any customers or facilities,” he said. “We are only buying spectrum not currently in commercial use in order to put it to use serving customers, and no customer will see fewer choices or increased prices as a result of this transaction.”

Comcast could not find “a viable business model” to go into the wireless market itself, said its Executive Vice President David Cohen. After the launch of the Apple iPhone, the company realized it didn’t have adequate spectrum without buying more. Rural Cellular Association CEO Steven Berry said cable could have received a higher price for its spectrum from Verizon’s “starved” competitors, like RCA members. But Cohen said SpectrumCo engaged in discussion with “virtually every wireless carrier” in the U.S. and decided Verizon had the best offer. Berry said that’s because no one besides Verizon could sign a “no compete” agreement nationwide.

T-Mobile “seems like who you would talk to” about buying cable spectrum, said Sen. Al Franken, D-Minn. They and Sprint Nextel are the “two likely suspects,” he said. Comcast talked to T-Mobile at some time before AT&T and T-Mobile announced their deal, Cohen said.

The other commercial agreements “are ordinary and customary, market-standard agreements,” Cohen said. “There is no acquisition of customers or of ongoing business operations. Not one competitor will be removed from the marketplace.” Cable and Verizon will continue to compete “vigorously,” he said. Verizon is not “abandoning” FiOS by signing commercial agreements with cable to sell their service, Milch said. Both officials compared the agreements to existing and unchallenged offerings in the market, including AT&T’s arrangement with DirecTV.

Franken is “skeptical” about the marketing deal because cable prices have risen dramatically over the last few years, especially in areas with less competition, he said. Franken asked how he could be sure prices wouldn’t increase more after the deal is completed. “It is almost as if your companies got in the room with the other cable companies and threw in the towel,” he said.

Kohl asked if the marketing deal would cause Verizon to “pull [its] punches,” for example when competing with cable on price, even if the telco doesn’t go so far as to bury FiOS. Milch said it would not. Verizon Wireless stores don’t currently sell FiOS. After the deal, in areas with FiOS, the wireless carrier will either sell both FiOS and cable service or neither one, he said.

"Why would you compete after this?” asked Columbia University Professor Timothy Wu, a former chairman of transaction foe Free Press. The spectrum acquisition will “further cement Verizon’s control” over spectrum and access to roaming, said Berry, who represents Verizon’s competitors. It also means higher prices for consumers, he said.

Verizon wants to team with cable under the commercial agreements so it can provide bundles of wireless and wireline service throughout the country, rather than only “a relatively small portion” of the U.S. with FiOS, Milch said. Verizon shareholders have invested $23 billion in FiOS, and they're only starting to see a return, he said. The arrangement won’t stop Netflix or other Internet companies from using Verizon networks, he said. Verizon needs the cable spectrum to meet high customer demand and weather a coming spectrum drought, Milch said. The spectrum crunch could happen as soon as 2013, he said.

There’s an “equally large competition crisis” that will be made worse if the deal is approved, said Free Press Policy Adviser Joel Kelsey. Verizon wants more spectrum to keep it out of the hands of rivals, he said. And the commercial deal will discourage Verizon from building out FiOS, he said. To alleviate competitive concerns, the deal must at least be conditioned by significant spectrum divestitures under an updated spectrum screen, as well as requirements to provide voice and data roaming on “reasonable” terms, he said.

Both deals appear to pass the antitrust test, said Rick Rule, managing partner of Cadwalader, Wickersham & Taft. Rule, an antitrust attorney who represented Microsoft, said he has no clients involved in the transaction. Cable never developed its spectrum or got into the wireless business, Rule said. Without the deal, that spectrum will continue to generate “zero” new wireless services, he said. In contrast, Verizon appears to have a roadmap for spectrum, he said. It will be difficult for the U.S. Justice Department to argue under antitrust laws that cable companies are even a “viable potential competitor” in wireless, he said. The marketing deal appears to comprise “fairly standard commercial agreements” that would not “materially impact” competition between Verizon and cable, he said.