Verizon (NYSE:VZ) has finally received the green signal from the FCC for its $3.9 billion purchase of nation-wide wireless spectrum from a consortium of cable companies that include Comcast (NASDAQ: CMCSA), Time Warner Cable (NYSE:TWC), Bright House Networks and Cox. [] The carrier will however have to divest some of the AWS spectrum it acquires to T-Mobile within 45 days of closing the cable spectrum deal. The FCC has also imposed additional conditions that will ensure that Verizon doesn’t hoard spectrum and continues to offer data roaming arrangements on the acquired spectrum to other carriers at reasonable rates. This comes on the heels of an antitrust approval it won last week from the Justice department which had sought to apply a few conditions to the cross-marketing deals that the carrier and the cable companies had signed together. The DoJ felt that the unaltered agreement would have hurt consumers by reducing competition and increasing prices.
Having agreed to the terms imposed, Verizon will not be able to sell TV and broadband services from the cable companies in areas where it offers its own FiOS service. Also, the service providers can co-market each other’s 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 recently having entered the fray, Verizon will need to maintain its LTE advantage and stay ahead of the game. This does not however imply 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.
Mobile services account for almost 84% of Verizon’s $44 value, about 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, 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 part of the huge capital expenses incurred and grow its market share in an increasingly saturated wireless market.
Moreover, the increased adoption of 4G will reduce dependence on 3G networks, which are getting strained due to the heavy data usage of smartphones. Also, LTE, as a network technology, not only supports higher speeds but also is more efficient than current 3G networks at handling data, thereby reducing maintenance and handling costs.
Spectrum swap addresses concerns
However, Verizon’s spectrum deals were being opposed by many, including Sprint and T-Mobile, on the grounds that they will give Verizon way too much spectrum and skew the wireless dynamics completely in favor of the larger incumbents. Verizon was however able to turn T-Mobile’s opposition into support after it offered to divest some of the AWS spectrum it was acquiring to T-Mobile, thereby alleviating most anti-competitive concerns. (see Verizon Swaps Spectrum With T-Mobile; Moves Closer To Getting FCC Approval)
In addition, Verizon moved to put some of its unused 700 MHz spectrum for sale. The carrier recently said that it has found 64 companies that are interested in the spectrum, and would start accepting bids once it received approval for its own spectrum deal. These initiatives served to help Verizon show to the FCC that it wasn’t trying to hoard spectrum.
Overall, Verizon’s spectrum deal is a huge positive for the industry since it brings unused spectrum back to the wireless industry at a time when demand for data services is soaring and the industry is trying to avoid a spectrum crunch. The divestiture of some of the acquired spectrum as well as the pending sale of the lower blocks of the 700 MHz spectrum will help reallocate spectrum among carriers in a way that meets specific carrier needs. Not only will this help carriers build out robust LTE networks but also improve speeds and prevent network clogging.
Moreover, if Verizon and T-Mobile are able to build stronger and wider LTE networks due to their respective deals, even smaller wireless carriers stand to gain from the nation-wide roaming that they can provide by leveraging the larger carriers’ networks. This is because LTE, as a standard, is agnostic of whether the carrier uses CDMA or GSM and can therefore see, for example, CDMA-based MetroPCS use GSM-based T-Mobile’s LTE network to provide roaming services. This will foster greater competition in the industry as well as increase the adoption of LTE. Increased adoption of high-speed LTE networks will see smartphone users use more data intensive applications, driving data ARPU up for the carriers.
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