Friday, May 18, 2012

What is the problem with the Verizon AWS deal?

Over the past weeks, operators and other parties have lined up to question the rationale behind the Verizon bid to purchase AWS licenses from a consortium of cable operators. FCC have also started to ask questions.

What is all this fuss about? The AWS licenses owned by the cable companies have mainly been unused since the mid 2000s when they were awarded and would complement the existing Verizon LTE 700Mhz licenses very well. The 700Mhz licenses while great for coverage are unfortunately not very useful for data capacity which will become very obvious if there is a 4G iPhone in the pipeline. It all seem to make perfect sense. To prove their case even further, Verizon is offering to sell off some excess 700Mhz licenses to make the AWS deal pass regulatory muster.

If it only was this simple. There are three main problems with the Verizon - cable deal which different parties have raised.

1. Spectrum concentration.

Some parties, especially other carriers, are concerned that the total amount of spectrum controlled by Verizon (as well as AT&T) will make it impossible for other operators to compete on a level playing field. To avoid this, spectrum caps has been suggested a solution. Spectrum caps are basically rules that regulate how much spectrum any one single operator can own in certain bands of spectrum in each market. This would limit the potential for “rent-seeking” by AT&T, Verizon and others.

While introducing caps in the US market would be an efficient and precise way to increase competition, it is unlikely that it will happen. The carriers would probably mount a large-scale lobbying effort on the hill to try and keep regulation and competition at a minimum and the general legislative climate has not been that kind to additional regulation lately.

2. Spectrum warehousing.

The carriers have almost in unison demanded that the FCC release more and more spectrum to soften the blow of ever increasing data consumption. Interestingly enough, several operators already own vast stretches of spectrum that has never been used. AT&T and Verizon already own spectrum positions in the AWS band which has sat unused since the mid 2000s when they were awarded.

The hoarding of spectrum that is never used has obvious and similar competitive results to spectrum concentration. As long as Verizon and AT&T own these blocks, nobody else can use them.

Unfortunately when it comes to AWS in particular, the anti-competitive results are multiplied by another effect which makes the warehousing doubly harmful. Because the FCC has been quite unsuccessful in coordinating spectrum bands and frequency positions with the rest of the world, several prime US spectrum bands are more or less only in use here. AWS is among those more or less US-only bands.

This means that when AT&T and Verizon buys AWS spectrum and then warehouse it, they automatically increase the cost for the few operators who are forced to use AWS spectrum because of spectrum constraints.

The increase in cost happens in two separate processes. The most obvious one is that their bidding increase the price of the spectrum positions at the time of the auction. This might seem like a big problem because it is easily measured in billions of dollars.

Sadly the second process is much more harmful. Because AWS, when it was awarded, was a more or less US-only band as well as a new band, few if any handset providers and network manufacturers made compatible phones or base stations for the AWS band. When AT&T and Verizon bought large positions in the AWS band which they ultimately never used, they effectively killed any incentive for chip, handset and network hardware manufacturers to make compatible gear for the few operators such as T-Mobile and some even smaller carriers that ended up launching networks based on this standard.

Because the market was deemed so small, all compatible hardware came at a higher price. Also most phones didn’t have the compatible chips installed because it would have cost a few extra dollars to do so. This is why T-Mobile has been unable to sell the iPhone and many other handsets.

Because of FCC inability to coordinate spectrum bands with the rest of the world, as well as strategic spectrum warehousing by AT&T and Verizon, US consumers pay a premium every day for sub-par wireless service compared to the rest of the world.

It is very difficult for Sprint and T-Mobile to compete on level terms with AT&T and Verizon because the way the game is regulated and played. This costs US consumers a lot more than the few billions awarded at spectrum auctions, both in direct costs like expensive data and voice plans, but also indirectly through poor service delivery and coverage because of lack of competition.

3. Rumored agreement to stop FiOS build-out.

It has been rumored that as part of the agreement for Verizon to buy the AWS spectrum from the cable companies, they have also offered to halt the build-out of their FiOS service. If that is the case, it is in effect an agreement to grant the cable companies monopoly on high-bandwidth wired services to the home, while Verizon and AT&T can continue to strengthen their oligopoly in the wireless market.

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