Is it Duopoly in Telecom - Analyst Blog

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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