Verizon's XO deal raises more concerns around number portability, backhaul and spectrum hoarding

Public interest groups and the nation's smaller wireless carriers are voicing a number of concerns about Verizon's $1.8 billion proposed acquisition of XO Communications' fiber business and its related deal to lease XO's LMDS spectrum (under XO's Nextlink brand) in the 28 GHz and 39 GHz bands. Specifically, Public Knowledge, the Competitive Carriers association and others are urging the FCC to carefully evaluate the transaction and its possible effects on Verizon's competitors and the overall telecommunications marketplace.

"Because of the potential harm to competition from Verizon's proposed acquisition of XO, and because of the important issues raised by Verizon's associated lease of the Nextlink spectrum, the applicants have failed to meet the threshold requirement to demonstrate that the proposed transactions will serve the public interest," public interest group Public Knowledge wrote in its filing with the FCC urging the commission to reject the transaction. "The Commission cannot approve these transactions unless the concerns raised by these combined transactions are properly addressed."

In its filing, Public Knowledge took issue with Verizon's spectrum-leasing agreement with XO specifically, arguing that the FCC should implement dynamic spectrum sharing rules in the 39 GHz band, and should make some spectrum unlicensed, partly to ensure that Verizon isn't able to control a significant chunk of spectrum that many believe will form a key element of any future 5G service.

"The FCC's latest report on competition in the wireless industry found that AT&T and Verizon Wireless combined hold 73 percent of all sub-1- GHz spectrum," Public Knowledge wrote. "The Commission has already acknowledged concerns about aggregation in the mmW [millimeter wave, such as 39 GHz] spectrum bands and requested comment for how to address these concerns when reviewing secondary market transactions in these bands. … It is imperative that the FCC not allow the mmW bands to be dominated by the two largest carriers as the sub-1-GHz bands are today."

For its part, the CCA -- which represents Sprint, T-Mobile and roughly 100 other small and rural wireless network operators -- noted that Verizon's acquisition of XO could affect the prices smaller carriers pay for local number portability. Number portability is the technology that telephone companies use to allow customers to switch their phone number to another carrier.

"Some competitive wireless carriers gain access to numbering resources outside their network footprint by entering into commercially negotiated agreements with third parties who have access to numbering resources outside of the competitive wireless carriers' own network footprint," CCA explained. "These agreements are typically negotiated with wireless providers not affiliated with incumbent local exchange carriers, interconnected VoIP providers, and, mostly, large competitive local exchange carriers (CLEC), including XO, that are unaffiliated with nationwide wireless carriers."

Continued CCA: "As the sole owner of Verizon Wireless, a nationwide wireless carrier, Verizon will have the incentive either to deny these resources to smaller wireless carriers and prevent customers from switching to competing providers, or to charge more for these services and raise the costs of its retail rivals."

Finally, CCA and another public interest group, New America's Open Technology Institute, argued Verizon's acquisition of XO could give the carrier dominating control over the backhaul -- the process by which companies like T-Mobile and Sprint connect their cell towers and other network elements to the nation's core internet network. Indeed, the FCC is currently investigating this market, which the commission refers to as "business data services" (BDS) but is also called special access, in order to ensure fair backhaul prices.

"The acquisition would consolidate the market for backhaul services, giving Verizon's wireless product a competitive advantage and the ability to increase prices for backhaul transport," wrote Open Technology Institute. "Such price increases would significantly burden rival wireless carriers since backhaul typically accounts for 30 percent of their operating costs. Price increases would make backhaul service less affordable, creating a serious barrier to new entrants and impeding the deployment of 5G. These effects would be acutely felt in areas that are currently served by both Verizon and XO."

And backhaul will become even more important in the 5G market, the group warned. "Due to its extensive fiber network, XO is well-positioned to offer crucial 5G support in many parts of the country," Open Technology Institute wrote. "Notably, the majority of XO's fiber in its top markets is unlit, or dark. This large amount of dark fiber could be a lucrative asset as the industry moves toward 5G."

XO currently operates metro networks in 40 major U.S. markets with over 4,000 on-net buildings and 1.2 million fiber miles. The service provider's intercity network also spans 20,000 route miles connecting 85 cities.

CCA and the public interest groups aren't the only entities to sound the alarm on Verizon's XO transaction. Dish Network also recently warned the transaction would give Verizon control over spectrum "that promise to play central roles in 5G applications."

Verizon said it expects to close the XO acquisition in the first half of 2017.

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