Competition sometimes creates strange bed fellows. Last week,
this proverb was proved when Verizon Wireless entered into a
spectrum purchase and products resell deal with SpectrumCo. Verizon
Wireless, a joint venture between
Verizon Communicatons Inc.
(
VZ
) and
Vodafone Group plc.
(
VOD
), and SpectrumCo, a consortium of U.S cable giants
Comcast Corp.
(
CMCSA
),
Time Warner Cable Inc.
(
TWC
), and Bright House Networks, are arch rivals.
But most importantly, does this deal has the ability to
transform the U.S. telecom market structure into a duopoly,
especially when FCC and Department of Justice are raising several
questions regarding the proposed merger of
AT&T Inc.
(
T
) with T-Mobile USA.
A Duopoly in Disguise
Major concern for the U.S. regulators regarding the proposed
AT&T and T-Mobile merger is that this deal may ultimately
result in duopolistic situation for such a crucial infrastructure
sector such as telecommunications, thereby affecting the interest
of the general public. Now considering the Verizon Wireless and
SpectrumCo deal, we believe a product reselling agreement with
cable MSOs will enable Verizon to offer wireless, wireline,
high-speed broadband and video services almost throughout the U.S.
Similarly, cable operators can also bundle their existing offerings
with Verizon's 4G LTE services.
Detrimental to Subscribers
SpectrumCo won FCC auction for AWS spectrum in 2006. For five
long-years, they kept this precious wireless infrastructure
inactive and is now selling it at a premium of 29%. The one who are
at the receiving end will be the common people. Secondly, a
reselling agreement may result in a tacit agreement between Verizon
and cable operators to rig prices for their overlapping products.
This will ultimately affect the government's target of fair
competition.
If AT&T - T Mobile Deal Fails
An approval for AT&T - T Mobile deal will definitely lead to
a duopoly in the telecom market. Further, even if the deal never
sees the light, AT&T still has several options to cope up with
Verizon. The company can now purchase 700 MHz Block D and Block E
spectrum of
Qualcomm Inc.
(
QCOM
), which the later freed after discontinuing its FLO TV
services.
Even more, AT&T can enter into a deal with
DISH Network Corp.
(
DISH
), which has converted itself as a storage medium of valuable
spectrum and has already applied to FCC for its approval to deploy
a hybrid terrestrial-satellite broadband network. It should also be
noted that DISH has acquired Blockbuster. AT&T may enter into a
similar product reselling contract with DISH and can offer
Blockbuster movie streaming services over its wireless network.
Under this scenario, will there be any other telecom operator
e.g.,
Sprint Nextel Corp.
(
S
) or T-Mobile USA, with such type of scale and technology to
compete with Verizon or AT&T. But at the end of the day, its
again a duopoly.
Regulator's Decision the Key
It will be highly interesting to watch regulator's decisions
regarding these two proposed deals. The AT&T - T Mobile deal is
a direct merger, whereas Verizon - Spectrum Co. deal is an indirect
merger of a broad- based telecommunications landscape. A major
characteristic of the telecommunications industry is the huge
barriers to entry due to scarcity of spectrum. It is not easy to
establish a new telecom carrier since it will require government
permission to transmit voice, data, and video on public airwaves.
Spectrum licenses are limited and therefore quite expensive. Under
this scenario, regulator's decision holds the key to shape up this
market.
Our Recommendation
At present, we provide a broad-based Neutral outlook for the
Telecommunications sector primarily due to macro-economic
fluctuations, which may result in short-term earnings volatility
for the companies. Despite this, we remain cautiously optimistic
for Verizon Communications, AT&T, DISH Networks, and expects
excellent future results from Qualcomm.
COMCAST CORP A (
CMCSA
): Free Stock Analysis Report
DISH NETWORK CP (
DISH
): Free Stock Analysis Report
QUALCOMM INC (
QCOM
): Free Stock Analysis Report
SPRINT NEXTEL (
S
): Free Stock Analysis Report
AT&T INC (
T
): Free Stock Analysis Report
TIME WARNER CAB (TWC): Free Stock Analysis
Report
VODAFONE GP PLC (VOD): Free Stock Analysis
Report
VERIZON COMM (VZ): Free Stock Analysis Report
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