The dirty secret inside Verizon’s cable spectrum buy

Several companies and nonprofit organizations filed their opposition to Verizon’s(s vz) planned $4 billion buy of spectrum owned by the cable companies on Wednesday. But this isn’t an industry fight. This is a fight that should involve everyone from consumers to the Internet companies whose businesses rest on access to the wireline and wireless pipes affected by this deal. I’ve already explained the big picture problems with the deal, but it’s time to dig deeper so folks really understand what’s at stake.

Competition: it’s already bad, but it could get worse.

This deal reduces the amount of both wireless and wireline competition: As I’ve explained in previous posts, the loss of the cable companies’ spectrum marks the loss of the last real likelihood for another entrant into the wireless market dominates by AT&T(s t) and Verizon. It will also prevent smaller, spectrum-hungry operators from buying the airwaves (which is T-Mobile’s biggest argument against the deal). Additionally, the exclusivity agreements on the wireline side could preclude the cable companies from signing up to use wireless from a smaller, hungrier player offering a new channel and maybe some cash that T-Mobile, Clearwire or another provider could have sorely used.

On the wireline side, it signals that the speeds of FiOS aren’t going to increase further, and takes out Verizon as a potential competitor with an over-the-top video service that changes the way ISPs have to sell their triple play. Now everything fast, and even pay-TV related, will continue to rest in the hands of cable companies. And there’s another big issue we’re not talking about yet. But we should.

Meet JOE. He’s a problem

The marketing agreements create a shadow joint-operating entity (JOE) between Verizon and the cable companies. This JOE is worrisome to those of us who realize that getting Verizon in a room once a month with the executives at the nation’s largest cable companies could lead to agreements about technology, deployment strategies and R&D that will be controlled by the large ISPs. The fear is that this organization will be able to slowly stifle new innovations for Internet services or even devices attached to wireline networks by creating technologies and standards that are only available to the JOE participants. Perhaps others might be able to license those technologies, but there’s no guarantee of that, or that the JOE would do so for a fair and reasonable amount.

A suggestion would be to have the Department of Justice, which is reviewing the deal, impose conditions on how the JOE is supposed to license any IP it comes up with. Because ISPs move packets and have a box inside people’s homes, there are plenty of ways to shut someone out of a network using patents and hard tech, as ISPs and cable providers well know. So if I were Boxee, Roku, Amazon(s amzn), Google(s goog), Apple(s aapl) and other big and small names in the connected home and content environment, I’d start pressing the FCC, DoJ and the participants themselves for answers on the JOE.

What’s the FCC to do?

I can’t imagine that the FCC can stop the sale of spectrum, or even that it should. But as the Department of Justice and the FCC review the deal, the secret marketing agreements between the companies deserve a lot of scrutiny. People who have seen the documents can’t comment on them, but they admit that they are bad from a consumer and competition point of view.

If the deal were really about spectrum, the price paid for the airwaves would have been much higher. Four billion dollars for 20-30 megahertz covering most of the nation isn’t all that much as airwaves go. Clearly there is value for both Verizon and the cable companies locked away in these secret agreements. The government should just strike the agreements altogether, but that’s a hard argument to make when they aren’t public. But attorneys for carriers, big Internet companies and others should make sure they file to see the documents so they can weigh in. This isn’t just a telecom issue, it has the potential to be an Internet issue — much like network neutrality.

Barring the wholesale spiking of the agreements, the DoJ and FCC should impose conditions such as dictating the terms under which the parties involved could license their patents, eliminating the exclusivity agreements that could hurt Sprint(s s) or smaller wireless operators further and ensuring that data roaming could occur on the new spectrum. Because at the current price, this deal is about a lot more than the spectrum, and unfortunately the only people who can see the whole deal can’t tell consumers and watchdogs about it. Once again, Verizon is an evil genius.