How Can Comcast, Time Warner Cable and Verizon Sell Spectrum Deal to Regulators?

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When the FCC allowed Comcast (NAS: CMCSA) , Time Warner Cable (NYS: TWC) and other major cable operators to participate in its Advanced Wireless Services spectrum auction in 2006, regulators expected that the cable distributors would use the wireless spectrum to offer innovative mobile products to their subscribers. If the FCC knew that Comcast, Time Warner Cable and other cable MSOs that formed their SpectrumCo joint venture intended to warehouse the spectrum for five years -- and sell it to one of their biggest rivals -- the commission probably wouldn't have invited cable companies to participate in the auction.

In the five years since the cable MSOs have acquired AWS spectrum, demand for mobile broadband spectrum has skyrocketed thanks to the popularity of smartphones and tablet computers. That demand could see SpectrumCo turn a profit of $1.2 billion by selling the their AWS licenses to Verizon (NYS: VZ) Wireless.

Rather than attempt to innovate and market new mobile voice and broadband products to subscribers, Comcast, Time Warner Cable, Bright House and their SpectrumCo partners decided to sit on the wireless licenses. As this FCC document details, SpectrumCo bought licenses covering some of the most densely populated areas of the country, including the most expensive license, covering the New York City metropolitan area, which cost SpectrumCo $468 million.

So when Comcast CEO Brian Roberts, Time Warner Cable CEO Glenn Britt and Verizon CEO Ivan Seidenberg travel to Washington to explain to the FCC and the Federal Trade Commission how this deal could be good for consumers, the reaction from regulators will likely be, "Really?"

In addition to selling the AWS spectrum to Verizon, the cable MSOs said they have signed deals with Verizon that would allow cable operators and Verizon to sell each other's products to customers.

It was about 15 years ago that Congress passed the Telecommunications Act, which allowed Verizon (then Bell Atlantic and NYNEX) and other telcos to enter the pay TV business, and let Comcast and other cable operators sell telephone service to their customers. Congress probably didn't envision that years later, they would see statements such as this line from the press release Verizon and the cable MSOs issued on Friday: "The cable companies, on the one hand, and Verizon Wireless, on the other, will become agents to sell one another's products and, over time, the cable companies will have the option of selling Verizon Wireless' service on a wholesale basis."

It's important to note that while AT&T (NYS: T) continues to expand the footprint for its U-verse TV service, Verizon has halted construction on new rollouts for its FiOS TV service. In cities such as Buffalo that have asked Verizon to market FiOS in hopes that it will create price competition for cable incumbents such as Time Warner Cable, Verizon tells consumers they have the option of bundling DirecTV (NAS: DTV) with their telephone service.

Could this new partnership with the cable MSOs eventually see Verizon market pay TV programming from Comcast, Time Warner Cable or Bright House to its telephone subscribers? Perhaps, but only if the SpectrumCo deal wins regulatory approval.

In a research note issued Friday, Miller Tabak analyst David Joyce noted that the SpectrumCo deal "may help by putting a damper on pricing promotions in the competitive environment between Verizon FiOS and the cable operators." It will be interesting to see what type of arguments the cable MSOs and Verizon will use to sell this deal, and how reduced competition is positive for consumers.

This article originally published here. Get your cable industry briefing here.

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