Verizon Wireless makes marketing, airwave deal with three cable companies

December 2, 2011

Verizon Wireless has reached an unorthodox deal with three major cable companies that could transform the way consumers get access to TV, cellphones and the Internet, setting up a consortium of firms with enormous power over mobile and home entertainment.

The agreement among the former rivals immediately drew concern from regulators, according to a person familiar with the matter. Advocacy groups said the alliance could limit choices for consumers.

Under the deal announced Friday, Verizon will pay $3.6 billion to Comcast, Time Warner and Bright House Networks to use a swath of cellphone airwaves that the cable giants own but do not use. That would cement Verizon’s status as the dominant wireless carrier and give it access to valuable spectrum at a time when its primary rival — AT&T — is struggling to expand its network through a controversial proposed merger with T-Mobile.

But perhaps the most extraordinary aspect of the deal is its cooperative marketing arrangement, which calls for the cable companies and Verizon to “become agents to sell one another’s products.”

That would allow, for example, a consumer to walk into a Comcast store and get a Verizon Wireless plan tacked on to his television, Internet and landline phone service. Eventually, Verizon’s name might not appear on those bundled plans, the firms said.

The cable companies would essentially kill plans to move into the cellular industry. Meanwhile, Verizon would promote the cable companies even where it offers its fledgling cable and home Internet service known as FiOS.

This part of the agreement is “a complete reordering of the competitive universe as we know it today,” said Bernstein Research analyst Craig Moffett. It “amounts to a partnership between formerly mortal enemies, not just outside of Verizon’s FiOS territories, but even within them.”

While consumers could eventually see their cable TV, Internet, home phone and cellphone services on a single monthly bill, some antitrust experts are worried about deal. They are especially concerned that Verizon — in its push to dominate wireless services and its new obligation to promote other cable companies — will lose interest in FiOS altogether. That business has about 14 percent of U.S. households, but it has been expensive to build.

The deal will go before regulators at the Department of Justice and the Federal Communications Commission for review.

“A flag is raised when two rival networks move to start selling each other’s services,” said a person familiar with the concerns of federal antitrust officials. “They lose their desire, impetus, to compete. That is a big antitrust flag.”

These companies and their direct rivals are all competing in the same space: providing high-speed Internet in the home and on the go. At the same time, a host of other giants including Google, Apple, Netflix and Facebook are eating away at their core services, allowing users to place phone calls, send text messages and watch streaming videos for free or a la carte via the Internet.

Some analysts believe the cable companies’ practice of charging consumers for hundreds of shows they never watch may be outmoded soon. Verizon’s move to solidify it’s Internet and wireless business, perhaps at the expense of its FiOS service, may help position the company to take advantage of that shift.

The companies hailed their deal, while Verizon said it remains committed to its FiOS service.

Verizon’s Internet and video business is separate from its wireless business, which is jointly owned with U.K.’s Vodafone, said Peter Thonis, a spokesman for Verizon Communications.

“FiOS will continue to compete fiercely with cable, and we are committed to it for our customers,” Thonis said in an e-mail.

Added Comcast spokeswoman Sena Fitzmaurice: “Through this deal, there is no reduction of competitors, and the same number of choices will remain in the marketplace.”

The companies said that they do not think federal regulators can review their marketing agreement. They noted that AT&T has a similar cross-promotional deal with satellite company DirecTV.

But antitrust experts said that either Justice or the FCC could expand its review and question how the marketing partnership would affect consumer choice.

“It’s fair to say this is going to get a hard and thorough review,” said the person familiar with the concerns of federal antitrust officials, who spoke on condition of anonymity because the review process is not publicly disclosed. “If not in the review, in an investigation.”

A spokeswoman for Justice did not immediately return a phone call and e-mails seeking comment. The FCC said in a statement that it would take a “thorough, fair, and fact-based review of the proposed transaction.”

Mark Cooper, director of research for the Consumer Federation of America, said the deal deserves a hard look by Washington.

“Verizon was supposed to be the great competitor for Comcast in the video space, while Comcast has been looking for a wireless play to match the Verizon bundle,” he said. “The deal signals bad news for consumers, who can expect higher prices for video, fewer choices and higher prices for wireless.”

Cecilia Kang is a national technology reporter, writing about tech and Internet policies at the Federal Communications Commission and Federal Trade Commission and how regulations affect businesses and consumers.
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