On Friday Dec 2, Verizon Wireless announced that it will acquire 122 AWS spectrum licenses covering 259 million Americans for $3.6B, from a joint venture of three US cable companies. This will give Verizon Wireless a sizable spectrum advantage over AT&T (111 MHz for VZW versus 100 MHz for AT&T). More importantly, the acquisition will shake up the US wireless industry at its core.
This purchase is the savviest investment Verizon Wireless could have made for under $4B. Verizon Wireless will be buying spectrum from SpectrumCo, a joint venture between Comcast, Time Warner Cable, and Bright House. While AT&T is fighting with regulators to keep its $39B acquisition of T-Mobile alive (with a risk of having to pay up to $6B if the deal does not go through), Verizon Wireless will probably not get much objection to its deal. The cable companies are not doing much with the spectrum that they are selling to Verizon. So, if anything, the deal would be putting some scarce resources to good use. On the other hand, Verizon and cable companies have agreed to resell each other’s products and services, which would be a great boost of new wholesale customers for Verizon Wireless.
The ramifications to the US wireless industry will also be huge in three key areas:
Wireless spectrum landscape: Spectrum is the scarcest resource in wireless networks. As Dan Mead, President and CEO of Verizon Wireless said in the announcement, “Spectrum is the raw material on which wireless networks are built”. Verizon’s purchase of this significant piece of scarce wireless resource will not only help in its expansion of its fourth generation LTE network. It will also eliminate opportunities for other players to get access to this invaluable resource. For example, AT&T would have to push harder for T-Mobile merger or look hard elsewhere. Other carriers, including international operators will also be very limited in their ambitions to set up networks in the US.
Wireless wholesale demand side: With this deal, cable companies are scrapping their own plans to build a wireless network and looking to Verizon Wireless to provide the wireless services for them. The acquisition agreement also includes an option for cable companies for “selling Verizon Wireless’ service on a wholesale basis”. This agreement will take out cable companies’ demand for wholesale wireless service from other operators.
Wireless wholesale supplier side: With a big chunk of demand for wholesale wireless service taken out, it would be challenging for wholesale service providers to get customers. Companies like Clearwire and LightSquared will have to look in a much smaller pool of potential wholesale customers. The pressure on Clearwire will also impact its relations with Sprint, which might end up becoming its only major customer.
One major domino effect might be the crash landing of the independent wholesale wireless service provider model. Given the gazillion dollars of capital expenditure needed to build wireless networks and with key wholesale customers taken out, it would be very tough to justify the future investments.
We will see the results in 2012, no doubt!
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