Verizon Likely To Receive FCC Approval For Cable Deals Soon

Verizon (NYSE:VZ) seems to have sufficient FCC votes in its favor to go ahead and buy wireless spectrum from the cable companies. The FCC Chairman Julius Genachowski has already said he supports the deal but, according to Bloomberg’s sources, two other members of the agency’s five-member team have also cast their votes approving the deal. ^[1] If true, this means that with a majority ruling in its favor, Verizon will finally be able to get its hands on a huge swathe of unused AWS spectrum it needs for LTE expansion. 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 signed between that the carrier and some of the biggest cable companies such as Comcast (NASDAQ: CMCSA), Time Warner Cable (NYSE:TWC), Bright House Networks and Cox. 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 just 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 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 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 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 they will give Verizon way too much spectrum and skew the wireless dynamics completely in favor of 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. A subsequent deal that Verizon signed with T-Mobile to divest AWS spectrum in a few markets however helped the carrier alleviate most of the 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. Since LTE is agnostic of whether the carrier uses CDMA or GSM, it will help smaller carriers such as MetroPCS and Leap provide nationwide LTE roaming by using the stronger and wider LTE networks of larger carriers such as Verizon and T-Mobile. Increasing adoption of higher speed LTE networks will see smartphone users use more data intensive applications, driving data ARPU up for the carriers.

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1. Verizon, Comcast Airwaves Deal Said To Have Votes At FCC, Bloomberg, August 22nd, 2012 [↩]