Verizon’s cable spectrum mashup: evil genius or simply genius?

U.S. Senator Al Franken finds the deal "troubling."

Congress is eyeing the competitive implications of Verizon’s (s vz)(s vod) $4 billion deals to buy spectrum from the cable companies, hoping to understand how the deals could affect both wireless and wireline markets. Much like those of us at GigaOM, some in the Senate are wondering if this is a cease-fire in terms of broadband competition, both in the air and on the ground.

Under a pessimistic view the deal could lead to consumers’ getting stuck 5 or 10 years out with slower broadband than the rest of the world, with no competitive impetus to move the U.S. forward. On the wireless side, it potentially eliminates the threat or the existence of a new player that could lower prices and keep Verizon and AT&T (s t) “honest.” That’s why Congress, the FCC and perhaps the Department of Justice should ask a lot of questions about this deal and its attendant marketing agreements between the cable companies and Verizon.

While they are at it, regulators and legislators should also ask a few more things, such as why the cable companies announced their deal with Verizon a mere three days after AT&T withdrew its petition to approve its T-Mobile deal from the FCC. Knowing the deal was unlikely to go through and that AT&T would soon be in the market to replace the spectrum it couldn’t get from T-Mobile, why wouldn’t the cable companies hold off, knowing they could then pit AT&T’s and Verizon’s bids against each other?

Was it likely that AT&T, which was willing to spend $39 billion on T-Mobile, would walk away from SpectrumCo without even matching Verizon’s $3.6 billion bid for Comcast, Time Warner Cable and Bright House Networks’ airwaves, and its later $315 million bid for Cox’s licenses? Recall that around this time, analysts expected AT&T to pay a 77 percent premium for Dish on speculation that AT&T was out for its spectrum. At that premium Dish would be worth almost $23 billion.

Conspiracy or the future?

The day the deal was announced, I laid out why Verizon may have done this deal and why Congress and the FCC should pay attention. In selling off their airwaves in exchange for some secret marketing agreements, the cable guys may have gotten Verizon off their backs in terms of its fiber-to-the-home deployments, leaving cable as the fastest broadband around in areas that don’t have FiOS.

In a pessimistic view, this means that the cable guys would no longer face competition nor a reason to keep pushing their wireline infrastructure. Today that’s not so bad, since most cable companies have deployed the faster DOCSIS 3.0 technology that can deliver up to 100 Mbps down to homes, but it is depressing to consider that five years from now we may still have that same infrastructure and little opportunity to go forward, unless the cable companies want to invest in fiber to the home. And without Verizon or AT&T pushing them forward, why would they? It’s worth noting that Verizon’s FiOS plans helped jump-start the deployment of DOCSIS 3.0 services in areas where Verizon laid fiber.

What about wireless?

Comcast is already bundling Verizon’s wireless services to its customers, as my colleague Kevin Fitchard pointed out on Wednesday, pushing ahead with the marketing deal even though the actual spectrum transfer and deal have yet to be approved. But in taking out the cable companies, Verizon may have just killed the best chance of a competitive wireless operator. Comcast laid out in gory detail why it ultimately decided not to deploy a wireless network with its spectrum, but given the cable consortium’s spectrum holdings, cable’s burgeoning commitment to Wi-Fi and the fact that many Americans have a cable set-top box in their homes, Comcast and the cable guys were the U.S.’ best chance of getting an alternative type of mobile network and creating some real competition in wireless.

For example, this month Free, a French broadband provider, announced a mobile service that relies on its existing set-top boxes in the homes of its broadband customers to provide a Wi-Fi network in urban areas. The phone service uses 3G and Wi-Fi and by doing so can offer mobile data for about $25 a month. Providers in France are already dropping their prices in response to the new offering. But in the U.S. the cable guys decided to pass up their chance to play in wireless. Now all the focus will be on Republic Wireless, which is also using Wi-Fi (and Sprint’s 3G network) to deliver calls, although without the benefit of having a Wi-Fi-enabled set-top box already in the home.

Cable’s capitulation on wireless might be good news for Republics and even for AT&T and Verizon, although they are not likely to be as threatened by a cable-wireless offering as the smaller providers. But in selling its airwaves to Verizon in exchange for the chance to resell the carrier’s wireless service (and, heck, even FiOS in areas where Verizon has deployed fiber to the home), cable sold out its wireless ambitions and as a result sold out consumers.

And Verizon? Well, Verizon scored a lot of new spectrum at a fraction of the capital and political cost that AT&T expended trying to do the same thing. Verizon has hurt its direct competition in addition to possibly hurting wireline and wireless competition. Now that’s genius.