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Verizon Silences T-Mobile: Wireless Industry Consolidation and Cross-Industry Collusion — Verizon Wireless, Comcast and T-Mobile

29 June 2012 180,554 views One Comment

Comcast Verizon MonopolyAs cable giant Comcast agrees to settle charges with the FCC for violating the terms of its merger with NBC-Universal, Verizon Wireless gets a tip of the hat from the commission for agreeing to sell portions of spectrum licenses to the spectrum-desperate T-Mobile in exchange for an estimated $260 million in cash.

Comcast settled with the commission for a mere $800,000 after it was found guilty of infringing upon antitrust provisions by not sufficiently marketing its standalone internet service, as was required by the agreement. And now, Verizon Wireless is swapping regulated wireless spectrum with T-Mobile in an effort to help the chances that the FCC will approve its proposed purchase of unregulated spectrum from the SpectrumCo consortium of cable companies including, you guessed it: Comcast.

Over the last few weeks, the Federal Communications Commission has been holding meetings with representatives from Verizon Wireless to express concern over the future of competition in the wireless industry should they approve of the controversial $3.6 billion purchase of unregulated spectrum licenses from CableCo that will essentially, in part, be financed by the new deal with T-Mobile.

But now the FCC views Verizon in a more favorable light, making the Verizon/SpectrumCo deal look even more likely to pass. This report examines the level of interconnectedness between the cable and wireless industries, and the alarming ramifications.

The term, “Too big to fail” is often used to describe the situation the world is in whereby certain financial institutions are so large and interconnected that allowing them to fail would devastate the global economy. In retrospect, the federal government should never have allowed these institutions to grow so large, making Main Street so vulnerable to the risks taken on Wall Street. Literally everything we do relies upon the well-being of individual companies. How stupid of us to let that happen in the first place! We pledge that we will never let it happen again.

Well it’s happening again, this time in a different industry: the broader industry of internet access, from the connection through our mobile devices (and all the apps that go with them) to streaming videos on our home computers, through video game consoles, and on TV. In the past, voice and video were competing products, and the corporations through which we acquired these services were competing companies, but a deeper investigation will reveal that they are becoming increasingly interconnected.

We are now at a pivotal moment with respect to the future of mobile devices and many are rightfully concerned that the FCC is asleep at the wheel. While the world was focused on the Stop Online Piracy Act (SOPA), the Protect IP Act (PIPA), and the AT&T/ T-Mobile deal, Verizon Wireless was working behind the scenes with its own shady deals and anti-competitive posturing. The AT&T/ T-Mobile deal was stopped by the FCC for fears that the consolidation of two of the nations largest wireless carriers would undermine industry competition, but the moves Verizon was (and still is) making are just as dangerous — and much more subtle.

Now that the SOPA and PIPA have faded from the attention of the mainstream media, Verizon is no longer able to fly under the radar. Of course, Verizon’s team of lawyers and lobbyists have been standing by, waiting to defend the company against a myriad of attacks and charges. Smaller companies fear that the so-called spectrum crunch, the idea that our massive thirst for data will exceed the industry’s capacity to supply the necessary data, places all wireless carriers at a significant risk — and that affording the larger carriers exclusive access to more spectrum is bad for competition.

However, the issues run deeper than this surface argument — and Verizon Wireless has managed to silence yet another opponent. The spectrum licenses the cable companies control are not regulated, meaning the owner can use them free of the restrictions that are placed on the licenses Verizon is now selling to T-Mobile. T-Mobile had long been against the Verizon Wireless/ SpectrumCo deals, but has changed its official position as a result of the new deals it has struck with Verizon.

The fact is, Verizon Wireless is the largest wireless operator in the U.S. market, with one of the best spectrum positions in the industry. In approximately 100 markets where the cable companies own licenses, Verizon already has a significant amount of AWS spectrum. Verizon argues that it needs additional wireless spectrum to grow its 4G LTE network, but the company has already said it won’t deploy the licenses it acquires from the cable companies right away. Verizon purchased nationwide licenses on the 700MHz band in the 2008 spectrum auction, and those licenses are being used to build its 4G LTE network. What’s more, if the company is allowed to acquire the additional AWS licenses from the cable companies, Verizon would control an astonishing 40MHz of wireless spectrum in the AWS band in major markets. Therefore, there is 20MHz of AWS spectrum that Verizon already owns but is not using.

Since the announcement of the potential deals, Verizon had been calling for the FCC to ignore T-Mobile’s fears that they will be unable to compete if Verizon gets a large band of unregulated spectrum, calling the claims hypocritical as it was not long ago that the company was fighting to be acquired by industry giant AT&T. This is its own form of hypocrisy. For one, Verizon backed the AT&T/T-Mobile deal with the knowledge that it would face similar threats today. Second, of course T-Mobile’s argument was different. Rather than attempting to disprove its opponents, Verizon was spewing rhetoric aimed at discrediting T-Mobile on the basis of hypocrisy. In a change of tactics, rather than try to further discredit its opponent, the wireless giant is leeching off the desperation of its weaker competitor, silencing them in exchange for capacity and compliance.

As this article will make clear, the debate is entirely different than the acquisition of  T-Mobile by AT&T. T-Mobile’s needs as an asset of AT&T are considerably different from their needs as a small wireless carrier. T-Mobile needs spectrum. They need access to nationwide roaming networks. They need for their devices to work on these networks. They will do anything to get what they need. And so will Verizon.

Ironically, the fear is that with the new unregulated spectrum licenses, Verizon Wireless will have too strong of a competitive advantage to enable proper competition in the industry. With Verizon’s success in turning its staunchest rival into an ally and advocate, we are beginning to see what this looks like in real life. Verizon has used the spectrum it claims it is not warehousing as leverage to silence the opposition. The strategic use of spectrum in this manner is a card that has been hiding in Verizon’s sleeve for some time. That the FCC does not see this, and in stead applauds Verizon for such behavior is beyond comprehension. The argument here is two-fold. On the one hand it is about power and access to spectrum; and at the same time, about collusion between the largest mobile provider and a consortium of the largest cable providers.

Verizon and the cable companies are forming agreements and alliances now that essentially divide the future pie of all types of internet access, content and content delivery systems — both through mobile and land-line connections; voice, video and text. Verizon has turned a potential wireless competitor (the entire cable industry!) into its biggest ally and partner in crime.

Mobile phone usage is rapidly increasing and access to data-guzzling content like streaming video is placing pressures on the entire wireless infrastructure of the United States. According to the FCC, in the last few years total mobile data consumption has increased by more than 700 percent and projections are predicting it will grow by more than 17 times in the near future. These demands impact all wireless carriers, not just the biggest players. All wireless providers will need access to additional spectrum, the platform over which wireless communications are transmitted.

The main argument put forth by supporters of the deals is that the spectrum purchases and commercial agreements will not impact competition in the space, but will actually enhance competition and innovation while at the same time benefiting consumers by putting unused spectrum to better use. What’s more, the deal’s supporters argue for a completely market-based industry with as little government intervention as possible. We will address all these issues later on in this article, conceding that this argument does have some merit. However, simply looking at the deals from this perspective is as naive as it is misleading and short-sighted.

Fred Campbell, former chief of the FCC’s Wireless Bureau and current director of the Communications Liberty and Innovation project — a conservative institution — recently filed comments to the FCC in favor of a completely competitions based telecommunications industry. He argues that putting restrictions on bands of spectrum that mandate interoperability (i.e., ensuring that your device will work) is like socialism. More specifically, Campbell writes that, “Over the past two years, however, it [the FCC] has looked more like a 1930s-style central planning agency”.

Though airline prices decreased and competition increased after the deregulation of the airline industry, the telecommunications industry, especially the wireless sub-sector, is a completely different case. The argument proposed here is not against wireless competition. In fact the opposite is true. This argument aims to protect competition in an industry that tends naturally toward consolidation and monopolization. Even Adam Smith, father of the free market, was aware of the limitations of free markets. These limitations exist when there are externalities involved: i.e., the benefits of interoperability. Regulations are therefore required to make these markets work.

Furthermore, the wireless industry has experienced dramatic changes in the past few years with respect to both technological advances and the broader industry structure. Campbell is leaching off the public’s general negative sentiment toward the idea of central planning to make a completely unrelated and unsubstantiated argument. His argument is that by imposing interoperability requirements, we will see a drastic decrease in innovation that will outweigh the benefits gained through economies of scale. Campbell argues that mandating carriers to enable their spectrum for 3G devices is bad for innovation because the future is in 4G LTE. While we must look to the future and plan accordingly, we cannot ignore where we are now. While smartphones account for 50% of all mobile devices, the vast majority of smartphones currently run on the 3G network. Of the 50% of all movie devices that are smartphones, 70% are not currently on 4G LTE.

The big wireless carriers like Verizon and AT&T are undoubtedly supporting these claims as they push their new 4G LTE technology that is faster, more expensive, utilizes significantly more data, and thereby brings in more revenues, costs consumers more and locks them in with long-term contracts on their products and prices. In turn, this affords the major carriers more control with respect to bargaining power with manufacturers. However, it would be u there is still a large portion of the market that has not yet opted for a smartphone. And most consumers who have are still using 3G.

There has to be some sort of ulterior motive to Campbell’s argument. For one, can he truly argue that innovation in the wireless industry has slowed in the past two years?

The past two years has seen the biggest transformation in mobile device technology in history! According to Nielsen, smartphones now account for half of mobile phones, a 38% increase from 2011 to 2012! An entire industry has arisen out of app development. Mobile internet technology has improved dramatically. Video content is now streamed at high speeds through Netflix, Hulu and many other outlets. According to Gartner, 64% of smartphone owners are using their mobile devices to shop online, and worldwide mobile payment transactions are expected to exceed $171.5 billion in 2012, up 62% from $106 million in 2011. If anything, ensuring that more devices work on more networks will benefit consumers and promote industry competition while enhancing innovation.

Furthermore, Campbell asserts that with respect to competition in the telecom industry, “since the early 1990s, the FCC had been making progress toward a more market-based approach to communications policy.” That’s not exactly the case.

Verizon is positioning itself for a duopoly in the mobile industry, one that will be controlled by only two large competitors, itself and AT&T. As the nation’s two largest carriers, AT&T and Verizon have made their support of industry consolidation very clear. In the telecom industry, consolidation makes sense and has the potential to benefit both the consumer and provider. However, as a nation we decided that the costs of industry consolidation and the risk that brings to consumer choice, price control and innovation outweigh any potential benefits. Some industries are considered natural monopolies, which is a cost-technology assessment wherein a conclusion is drawn that it is in the interest of the consumer for one company to have exclusive rights to operate in a given market.

Take railroads as a classic example. When railroads were first developed, it did not make sense for companies to compete and build their own infrastructures, so the natural monopoly model worked. Another example is public utilities. It doesn’t make sense for many companies to compete and build their own transmission networks (water and gas pipelines, electric and telephone lines) because of the high capital costs required that would serve as barriers to entry to competitors anyway. Due to the high fixed costs of building such networks, it is in the public’s interest to achieve the most economies of scale possible, and thereby relegate these investments to natural monopolies.

If left to their own devices, firms that hold monopoly status tend to abuse that power in many ways. And it is very hard to prove if those powers are being abused. So the government steps in and regulates the behavior and practices of monopolistic firms, setting legal limits as to what these companies can and cannot do, how much they can charge for various products and services, etc. In markets where competition is preferable, the government may decide to deregulate that industry to foster competition and innovation. This was the case when the airline industry was deregulated by the Reagan administration. When the airline industry was regulated, different carriers had exclusive rights to different routes, so there was little to no competition. As more potential entrants to the market were restricted from doing so, prices remained high and innovation low. After deregulation in the 1980s we saw new entrants into the markets and an increase in competition for individual routes that led to dramatic decreases in prices and innovations with respect to fare pricing. This made air travel cheaper, more pleasant and more accessible to all.

Back in 1996, Congress and the FCC determined that neither a completely free market nor a government regulated natural monopoly was appropriate for the telecom industry. Unsure of where the future of the industry was headed, as a nation we determined that we needed to protect industry competition to foster innovation and remove many of the high barriers to entry so that consumers could have choices among various competitors. Mobile telecommunications is unique in that, like many natural monopolies, users experience positive externalities resulting from network effects. Network effects are essentially a condition wherein user experience increases as the number of users increases. Think about telephones: the more people who have telephones, the more people you can call. So when a user purchases a telephone for the first time, everyone is better off.

If left to pure competition, the larger carriers would likely restrict access to their devices increasing the barriers to new entry. This would mean that consumers would pick the carrier with the highest level of network effects: the one with the most users. The result would be further industry consolidation and an increasing shift toward the monopolization of the industry. In 1996, Congress wanted to protect network effects and other positive externalities in the telecommunications industry without limiting consumer choice to just one firm. The 1996 Act made provisions that required incumbent carriers and new entrants to interconnect their networks so that users can communicate with one another, regardless of which carrier they choose.

The question remains, if Congress made these provisions in 1996, then why are we seeing a shift toward spectrum consolidation today? Like I said earlier, nobody could have predicted the technological evolution of mobile devices. Nobody could have foreseen the smartphone revolution and the new industry that has emerged out of app development and the new reliance upon data.

The point of the 1996 Telecommunications Act was to foster competition in the best way possible given the industry landscape at the time. So the Act set up regulations on the basis of facilities based competition. This meant different regulatory provisions for different classifications of products and services. The different groupings of products was based on the underlying technology required to provide that service, in other words, intramodal competition. For example, the Act anticipated, promoted and protected the competition between local voice communications and long-distance voice providers, both of which used circuit-switched networks to offer their services. The major assumption was that the same types of products worked off of the same underlying technologies.

However, this is not the way the industry evolved. Now that VoIP services are available over broadband connections, a new technology has entered the mix that has forever changed the competitive landscape of voice communications. These newer technologies that provide the same services over the internet do not recognize either state or national boundaries, and products like Skype, Google Voice, and other such VoIP applications do not require the massive initial upfront capital costs associated with setting up traditional wireless and wire-line networks.

Now that companies like Verizon and AT&T are forced to compete in a different competitive environment, they are able to make educated predictions about how the broader industry will evolve and adjust their strategies to accommodate these changes. The problem is, the regulatory bodies set up to protect against monopoly power do not take into account intermodal competition — competition for similar services that are based off of fundamentally different underlying technologies. Therefore, the regulatory bodies are either incapable of identifying anti-competitive strategies, or do not have the jurisdiction to take actions that will protect consumers.

After Verizon purchases this new spectrum, the mobile industry will become considerably less competitive and more consolidated around the two largest carriers; however, industry consolidation is just the tip of the iceberg. In two separate but interconnected moves, Verizon Wireless is attempting to sell its regulated and thus far unused lower A and B block spectrum while trying to purchase unregulated AWS spectrum licenses from SpectrumCo, a joint venture between the largest cable providers. At the same time, Verizon was striking deals with the cable companies to both cross-sell products and services, and to hold regular meetings to discuss futures strategies and foster joint investment projects in technologies that will bridge (or eliminate) the gap between these two supposedly competing industries.

According to Sprint, “The cooperative arrangements between these companies encompass wired and wireless technologies, voice, video and data services: the full complement of 21st century electronic communications services and have the potential to touch each consumer and every government, business, healthcare, and educational institution in the United States”.

When you add to the mix that Verizon will be purchasing this AWS spectrum from cable providers, the anti-trust argument becomes undeniably obvious. Weaved into the fabric of this purchase will be agreements between Verizon Wireless and the cable companies to sell each others’ products.

Verizon will sell cable products like Internet and TC services through deals with companies like Comcast, Brighthouse and Time Warner, and the SpectrumCo companies will sell Verizon Wireless services. What’s more, these contracts will make the SpectrumCo cable operators wholesale providers of Verizon Wireless service after only a couple years. This means that you will be able to purchase Verizon Wireless 4G LTE service under a cable company’s brand name — for example, a Time Warner brand mobile 4G service. This deal is blatantly anti-competitive as Verizon will sell cableco products that directly compete with its fiber optic FiOS TV and broadband services.

What’s more, the companies will all band together in a Joint Operating Entity (JOE) to develop new technology for a cable and wireless interface, and for other products or processes. Such a non-compete agreement explains why Verizon has halted the expansion of FiOS and will mark the beginning of a new kind of product bundle, making it all the more impossible for smaller wireless carriers to put forth the competitive packages and products necessary to attract consumers.

To add insult to injury, during a June 7 speech at the Telecommunications Industry Association trade show, Verizon’s CTO Tony Melone criticized the FCC for it’s investigation into the deals. He told the audience that the FCC needs to speed up the approval process for buying and selling spectrum licenses so that they could be put to good use. However, by comparison, the 6 months the FCC has spent reviewing the deal is relatively quick. Other spectrum deals, such as the AT&T license purchase from Qualcomm, took close to a year to complete. What’s more,t that deal involved significantly less spectrum (12MHz versus more than 20 MHz).

Time to approval aside, this is one of the largest spectrum license deals the FCC has ever reviewed outside of an outright acquisition. What’s more, there are deeper considerations that must be made than the simplified argument that spectrum will be put to use. The day before, AT&T CEO Randall Stephenson made similar remarks. Furthermore, Melone argued that the FCC shouldn’t trouble itself with the marketing agreements because it is a separate deal that would happen even without the spectrum license transfers. He told the audience, “These are separate and distinct deals”.

Yet David Cohen, head of regulatory affairs for Comcast, testified before Congress that the spectrum sale and the JOE are in fact one deal. He told lawmakers that if one part of the deal is altered too much, the entire deal could be in jeopardy. After the failed attempt to enter the wireless market, the cable companies decided to hold on to the spectrum for a time like this — when they could strategic leverage ownership of the licenses to enable them to develop a wireless strategy. “When our Plan A of building our own network didn’t work out, we still planned to leverage this valuable asset to help us strategically. That’s what the Verizon deal gives us”, Cohen said.

However, the Joint Operating Entity (JOE) between Verizon and the SpectrumCo cable companies puts Verizon at yet another competitive advantage. All technologies, products, and apps developed through the JOE will be patented. And the patents will be shared by the members of the JOE. While the types of technologies they will develop is obviously top-secret, it’s not hard to speculate about the direction they will go. With Skype competing with traditional voice services and Netflix and Youtube competing with traditional television broadcasting systems, it would not be a stretch to assume that the JOE will focus on protecting the companies from these external threats. These developments have are already underway. Verizon recently announced plans to launch its own aggregated video portal called Viewdini, that will work on the 4G LTE network to stream videos from Netflix, Comcast, Hulu and mSpot.

With no regulatory strings attached to the spectrum that require open access and equal treatment of all applications and devices, it is easy to imagine what that would mean to competing technologies: they won’t work! Verizon has not announced how it will price this product, nor has it suggested how it will deal with the massive amounts of data the new video streaming app will consume. It’s scary to think that one company will have the final say in exactly how and what kind of video content will be available on our mobile devices. And any company that wants to include its content in these services will have to negotiate directly with Verizon. By joining forces to develop new technologies with complete control over the spectrum used to develop the future 4G LTE standard, Verizon and the cable companies remain one step ahead of the competition.

Similar to the way Comcast is under investigation for its anti-competitive treatment of bandwidth through its Xfinity product, making Netflix appear relatively slow and expensive, Verizon has come under fire for blocking certain phone applications — a direct violation of net neutrality and open access conditions of the 700 MHz spectrum. For example, Verizon blocked access to Google Wallet on its Samsung Galaxy Nexus 4G LTE smartphone. Google Wallet competes with a mobile payment platform called Isis that is under development by Verizon, AT&T and T-Mobile. Such actions go directly against any attempt to avoid monopolies but are not captured by current legislation. The only way to prevent this from happening across the board when Verizon gets unregulated AWS spectrum from SpectrumCo would be to enforce similar conditions to these licenses. However, with AT&T developing products with Verizon and with the cable companies also developing products with Verizon, who is left to monitor these actions and look out for the consumer?

The major players in the game have decided that collusion is easier than the competition set up by the Telecommunications Act of 1996. The Act was established to encourage competition between cablecos and wireless providers with the expectation that the cablecos would enter the wireless world and the wireless companies would enter the world of cable. So competition would have looked like Verizon FiOS and the companies would compete through the bundles they offer. But the cable companies have failed in the wireless world and the wireless companies have decided that they don’t want to touch cable now that streaming videos has changed the landscape. So what do they do? Abandon competition, sell each others’ products, get rid of regulatory requirements aimed at ensuring open access and net neutrality and team up to develop and share new patented technologies. Why? Because who’s going to stop them?

Like what happened with the oil industry, the new formation of telecom is increasingly looking like a cartel. All the big players have now divided up the market and abandoned competition. Granting Verizon this new spectrum is but one aspect of a larger shift toward industry consolidation and collusion across markets and products. The side agreements ensure that the biggest companies remain dominant and the JOE supports this claim by “forcing” them to share information on strategy and creating an interconnected environment in which the success of all the participating companies share an interest in proprietary patents and standards of operation, suggesting they will work together to shape the industry’s evolution.

The call to stop Verizon Wireless from acquiring the new AWS Spectrum is an effort to protect consumers of the not-too-distant future. If “too big to fail” is used to describe financial institutions, “too big to stop” seems apropos for Verizon. The FCC must take action now before we become dependent upon a non-competitive industry that has already shown its muscles with respect to leveraging the benefits of monopolistic behavior at the expense of consumers and weaker competitors — both direct and indirect competitors.

Both deals are currently under review by the FCC, and without major press coverage, will likely be passed. For consumers, the ramifications may not be felt immediately — but not unlike what’s happening in the banking industry, they will be felt by everyone at all levels.

The future of the mobile device industry will be shaped by many unpredictable circumstances, but we do know that our lives are increasingly reliant upon our cell phones. We can predict that smartphones will become more prevalent than they already are, and that data usage will increase dramatically as apps become better, smarter and faster. So Verizon says buying this new spectrum is in preparation to meeting the demands of increased data demands, despite the fact that the lower A and B block spectrum licenses that it is trying to sell are capable of supplying data. Looking at it from another angle, as WiFi becomes more expansive, where does that leave the cell phone carriers?

I live in New York and right now there is neither cell phone reception nor WiFi in the subway. I can’t place a phone call and I can’t surf the web. But very soon that will change. WiFi access will be in the subway, so I’m excited about being able to surf the internet and place international calls through Skype to my family and friends across the world — all without ever tapping into my wireless carrier’s data network!

This is amazing, right!? Not if Verizon has anything to say about it. They make money off of data usage and place restrictions on exactly what we can do on our mobile devices and how. The pivotal moment I described above accounts for such restrictions placed on open access to the internet. The moves Verizon is making today will effect competition in the mobile industry, making it impossible for smaller wireless carriers to compete on a level playing field. The deals it is sticking with cable providers gives Verizon control of the nation-wide spectrum from which we purchase internet access — a spectrum to which smaller wireless carriers won’t have access.

From Verizon’s standpoint, Why should it pay to develop service on a spectrum that would become moot in the future when it could purchase an unregulated nationwide spectrum now?

The problem begins with the outdated manner by which the FCC views spectrum allotments. More specifically, that the FCC treats all spectrum equally — when this is not at all the case. Advanced Wireless Spectrum, or AWS, is, as its name suggests, the most attractive spectrum. This is not because LTE cannot be developed on other spectrum bands, but rather because the AWS spectrum is subject to far fewer regulatory strings, meaning the company that controls this spectrum will be able to use it how it pleases. In the words of T-Mobile’s VP of Federal Regulatory Affairs, Kathleen Ham, the “spectrum screen” through which the FCC evaluates and reviews spectrum license transfers is “broken”. Especially after its new stance on the Verizon deal, T-Mobile’s argument maintains its validity: the screen is broken. The FCC should ignore T-Mobile’s forced change of positions because, like an innocent prisoner would do to avoid the death penalty, T-Mobile is doing what it must to stay alive.

Efficient use of spectrum will be the key to keeping prices low in the future; but in a world without rivals, the competitive pressures of efficiency will not be there. A recent study by the National Telecommunications and Information Administration (NTIA) revealed that it is possible to repurpose lower block spectrum to accommodate consumer demands. However, this assumes that the smaller carriers are afforded equal access to spectrum to accommodate those needs. This means that rather than allowing the larger companies to hoard and stockpile spectrum, all unused spectrum must be available for use by competitive carriers.

It is not a stretch to imagine that with the larger wireless carriers controlling the vast majority of the spectrum out there, the smaller carriers will vanish with the wind. By rejecting the AT&T acquisition of T-Mobile, the FCC is sending mixed messages. At once they are saying to the smaller carriers, “we want you to compete”, and at the same time are ignoring structural shifts towards industry consolidation. Looking to the future, with only two main players in the mobile carrier market, AT&T and Verizon, who else can consumers turn to if they are unhappy with their service?

The actions of wireless providers have a direct impact on the services and products available to their customers. Have you ever noticed that your Google search results are different on your mobile device from the results you might find in your web browser? Check and see. Verizon has already been filtering the results and redirecting misspelled or mistyped web addresses to it’s own search engine rather than to the user’s preferred default search engine.

Have you noticed how some of your apps don’t work as fast as you might like them to? Verizon has control over how much data or bandwidth is allocated to certain apps, favoring products that are beneficial to the company. Skype might not work well because it competes with the carrier over voice, text, and video chatting. Comcast has recently been under fire for offering preferential treatment of its own Xfinity services over competing services provided by Netflix. Comcast has been accused of not counting bandwidth used by Xfinity toward the data caps of its customers, using bandwidth throttling and traffic rate limiting to offer better and cheaper services for its own products.

That’s a direct result of the restrictions Verizon Wireless places on the way certain features of mobile devices work. In all reality, with WiFi access everywhere you won’t need your wireless service provider. You should only need a device and internet access. You should be able to place phone calls for free through companies like Skype and Google — but why would Verizon want you to be able to do that? So they are going to do everything in their power now to preempt the proliferation of technological advances that render themselves moot.

Now the future of mobile technology will be developed according to a new standard of Long-Term Evolution (LTE). Currently only 9 percent of Verizon customers are using the LTE network, but Verizon is pushing their technology hard and has beat out Clearwire’s superior WiMax solution with its 4G LTE technology. 4G LTE is faster and more efficient than 3G and will increase consumer demand for data. Smaller wireless carriers are now fearful that by granting Verizon Wireless control over the AWS spectrum, there won’t be any spectrum available through which they can accommodate the future LTE standard of service. Despite the fact that Verizon has already developed LTE on the 700MHz band, it now claims that it needs AWS to accommodate future LTE demands. And right now, in no small measure due to the high price it charges its customers for data usage, Verizon currently has the lowest smartphone penetration in the industry.

The general argument against monopolies and duopolies seems to fit the present case. When few large companies control a market, questions of collusion and price fixing become harder to prove as the barriers to entry and the possibility for the growth of smaller companies become too high. That’s the whole reason for regulatory oversight in the first place. This is not an argument against industry competition; in fact, the opposite! This is an argument in favor of the protection of industry competition, rather than a hands-off free market that naturally tends toward industry consolidation and ultimately monopoly.

As by now you can hopefully tell, the AWS spectrum and LTE 4G technology is the smallest part of the problem. In the words of Harold Feld, Legal Director of Public Knowledge, a pro-consumer advocate,”It says something when the spectrum details are the easy part of the deal. It’s the side deal that’s the [bigger] issue”.

Verizon Wireless is pushing to gain more control over larger quantities of spectrum licenses with no regulatory oversight. This has companies like T-Mobile and Sprint Nextel worried about their ability to meet the demands of consumers with equally competitive products. In terms of mobile devices and all the features that come along with them, this has a huge impact on consumers. With a nationwide spectrum capable of meeting the future needs of advanced technologies (like apps) that increasingly rely on the use of data, smaller carriers will be unable to compete.

This concern is not without evidence. Verizon Wireless has been warehousing its spectrum rather than deploying it to provide better and wider service. T-Mobile has publicly argued that it already makes use of its spectrum in a more efficient manner than it’s larger competitors. In fact, it specifically says it uses its spectrum a whopping 50% more efficiently. What’s more, T-Mobile built out the AWS spectrum it acquired in the 2006 auction almost immediately. According to T-Mobile VP of federal regulations Kathleen Ham, “The industry is at a critical time in the transition to 4G LTE, and spectrum will be the key to success in this transition. We just want to make sure that we aren’t in a situation where we end up with spectrum haves and have-nots.” This is the epitome of the concerns related to monopolistic and non-competitive behavior.

T-Mobile has access to a smaller spectrum while Verizon Wireless holds all the strings. They have yet to make any efforts at making use of its lower A and B Block spectrum licenses because of the regulatory strings attached to it. Yet Verizon argues that this is because it would be too expensive to do so. And this is exactly why the FCC is now asking Verizon Wireless pointed questions regarding its plans upon acquiring the new spectrum. But questions are easy to ask and answers are easy to come up with. The FCC must go beyond asking questions and accepting answers crafted by an experienced team of legal professionals. It is unlikely that the FCC will reject the deals, but at the very least it should add restrictions upon them.

So why is the AWS spectrum more attractive to Verizon than the lower A and B blocks they are trying to get rid of? I briefly alluded to the regulatory strings attached to the A and B block spectrum without going into much detail. Back in 2008, after America made the switch from analog television broadcasting to digital television, this spectrum was no longer needed to broadcast television programs. So the FCC auctioned off the rights to operate this 700 MHz frequency band. Both Verizon and AT&T entered the bid for this spectrum, and so did Google. Prior to the auction, Google asked for certain requirements be placed on the licenses granted through the auction in exchange for a commitment to a minimum bid. When the price in the auction went above Google’s bid, the open platform restrictions Google requested were triggered.

Google had no intention of acquiring any spectrum licenses, but rather it wanted to enter the auction to ensure certain net neutrality provisions that would ensure open access to the bands. This way the companies who secured licenses through the auction would not be permitted to use technological measures to block competitive devices from working on the spectrum. Not all of the requests were applied to the spectrum, but two important requests were granted: open applications and open devices. Open applications means that consumers will be able to download and utilize any legal software applications, content or services they wish. Open devices ensures that consumers will be able to use the handheld communications device of their choice on whatever wireless network they prefer.

These regulatory strings are in the interest of the consumer and competition in the industry, but place restrictions on the way wireless companies like Verizon and AT&T can use the bands to favor their own products. So Verizon is trying to purchase the AWS spectrum from the cable companies without putting the licenses on public auction. So despite the argument that unused spectrum is being put to better use, looking at the entire scope of the spectrum swap reveals strong motivations for pushing these deals through without much public attention.

When you look at the historical trends of mobile service technology, interoperability promotes competition and broader consumer adoption. As a prime example, the ability of mobile companies to come to an agreement on universal standards has proven to be the largest driver of text messaging traffic. Prior to 2001, carriers did not allow their subscribers to send text messages to users of rival providers. When carriers lifted the restraints on text messaging, the number of messages sent went through the roof. There has been no such agreements made on features such as video calling, which is certain to be a big player in the future. What’s more disconcerting is that the major carriers are now arguing against interoperability on devices as a whole. In other words, they want to produce and promote 4G LTE devices, and build out their networks in a manner by which 3G devices will not work. Furthermore, without interoperability requirements, regional carriers will be unable to get the hardware that operates on the spectrum bands of larger carriers, making their phones incapable of roaming on the nationwide networks.

Not only will the smaller carriers not be able to provide the speed and quantity of data as the larger carriers, but the devices themselves will also no longer be compatible with the accessories of the future. This will have a direct impact on both the quality and price of accessories.Take headsets for example. Due to the lack of interoperability between the different blocks of spectrum, headset produced for companies like T-Mobile will not work on Verizon devices. At the same time, headsets manufactured for Verizon devices will not work on T-Mobile or Sprint phones.

Smaller carriers will simply not be able to compete. From the perspective of basic economic theory, this means that fewer manufacturers and designers will invest in products for smaller carriers, meaning that all designers looking to maximize their own revenues will work to produce for larger market. Thus, the better designers gravitating away from catering to the consumers of the smaller carriers will increase exponentially. What’s more, because of economies of scale, these inferior products will be more expensive.

Groups are mobilizing to stop the deal from going through. Several opponents have now formed a group called the “Alliance for Broadband Competition”. Among the groups members are T-Mobile, Sprint, and advocacy groups like Public Knowledge, the American Antitrust Institute, the Rural Cellular Association, and the Rural Telecommunications Group. It has yet to be seen whether T-Mobile has withdrawn from this group. It now seems like, more than ever, it’s up to us to defend ourselves — our free access to the internet and healthy competition in an industry that relies on innovation. You can help by writing to your local representative urging them to pressure the FCC to stop the deal, or at the very least to impose significant restrictions on the licenses purchased in this spectrum.

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One Comment »

  • Alex Robinson said:

    We must keep competition. No monopolies.

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