Verizon Wireless (NYSE:VZ) said it will pay $3.6 billion to buy the nationwide AWS spectrum licenses held by SpectrumCo, a joint venture of cable companies Comcast, Time Warner Cable and Bright House Networks, in a move that reshuffles the nation's spectrum landscape and represents another nail in the coffin for cable companies' independent wireless ambitions.
Click here for a chart of the top 10 AWS spectrum holders prior to the close of this deal.
Perhaps most importantly, Credit Suisse analyst Jonathan Chaplin noted the purchase gives Verizon a leg up on AT&T Mobility (NYSE:T) in terms of capacity. "VZ will have roughly 110 MHz of spectrum nationwide following this transaction, which is more than AT&T at ~90MHz--VZ now has a meaningful capacity advantage," Chaplin wrote in a research note. Verizon offers EV-DO service over its PCS spectrum across the country and has said it will launch LTE service on its AWS licenses (as a way to supplement its current deployment of LTE on its nationwide 700 MHz spectrum). The new AWS licenses it would acquire from SpectrumCo would likely give the company even more capacity for LTE services.
Additionally, the deal opens the door for the cable companies to resell Verizon's wireless service. The cable companies are currently wholesale customers of Clearwire (NASDAQ:CLWR) and resell Clearwire's mobile WiMAX service, though they have described sales of WiMAX service as minor and sluggish. Under the terms of the deal the cable companies and Verizon will become agents to sell one another's products and, over time, the cable companies will have the option of selling Verizon's service on a wholesale basis. Additionally, the companies have all formed a new innovation technology joint venture for the development of technology to better integrate wireline and wireless products and services.
Verizon said it intends to acquire the 122 AWS licenses held by SpectrumCo, which covers 259 million POPs. The cable companies paid $2.4 billion for the spectrum in a 2006 FCC auction. Since Comcast owns 63.6 percent of SpectrumCo it will receive around $2.3 billion from the sale. Time Warner Cable owns 31.2 percent of the venture and will get around $1.1 billion, while Bright House Networks owns 5.3 percent of SpectrumCo and will get around $189 million. Credit Suisse's Chaplin noted the purchase price indicates the value of SpectrumCo's AWS licenses increased 29 percent between 2006 and today.
(Cox Communications and Sprint Nextel (NYSE:S) were original members of SpectrumCo but Sprint sold its share shortly after the FCC's auction and Cox bought out its share in 2008--along with 31 AWS licenses--to pursue its now-failed bid to build its own wireless network.)
Additionally, the deal comes days after Verizon and Cricket provider Leap Wireless (NASDAQ:LEAP) announced a significant exchange of spectrum that, if approved by the FCC, will allow Leap to launch LTE service in Chicago and will allow Verizon to bolster its CDMA EV-DO and LTE networks in locations across the country.
Credit Suisse's Chaplin noted that Verizon has been less vocal than other carriers about its need for spectrum. "Most investors did not expect them to purchase spectrum until late 2012 or 2013," he wrote in a research note. "This move suggests their needs are perhaps greater and more immediate than previously thought." If Verizon does get approval for the deal, Chaplin noted that the carrier could try and combine the spectrum with its other AWS holdings for 20 MHz channels, which coupled with LTE-Advanced technology could give it significant throughput gains.
The deal is likely to have far-reaching ramifications for other players in the wireless industry scrambling for spectrum. For example, the deal likely will preclude T-Mobile from gaining access to SpectrumCo's spectrum in the event that the AT&T/T-Mobile deal falls apart.
Chaplin said the deal could make the spectrum held by Clearwire and the 40 MHz of S-band that Dish Network is trying acquire more valuable. "This is a modest negative for Sprint: it looks like they are losing the cable companies as potential partners; however, they gain from the increase in value at Clearwire," Chaplin wrote.
The Verizon-SpectrumCo deal is subject to approval by the FCC and the companies did not give a timetable for when the deal is expected to close. A Verizon spokesman declined to comment, but a person familiar with the situation who asked to remain anonymous said the review is expected to take six to nine months.
The move comes amid regulatory resistance to AT&T's (NYSE:T) proposed $39 billion acquisition of T-Mobile USA, which is built largely around the AWS spectrum AT&T would acquire and which AT&T said it needs to keep up with mobile broadband demand. Verizon Communications executives have talked repeatedly about the need to get wireless spectrum into the hands of those companies that can make the best use of it.
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