Verizon Wireless Allies With Cable in $3.6 Billion Deal




Dec. 2 (Bloomberg) — Verizon Wireless, the largest U.S.
mobile-phone carrier, struck an alliance with cable companies
that will change how customers buy Internet, mobile and pay-TV
services and present new challenges for rivals such as ATT Inc.

Verizon Wireless will pay the group $3.6 billion for
wireless spectrum, the companies said today in a statement.
Comcast Corp., the country’s largest cable provider, will
receive $2.3 billion, while Time Warner Cable Inc. gets $1.1
billion and Bright House Networks LLC gets $189 million.

Verizon Wireless and the cable companies will also market
and sell each other’s services under the agreement. The Basking
Ridge, New Jersey-based mobile carrier will offer cable-TV
products in its retail stores and receive a percentage of
revenue for every cable customer it signs up, while cable
companies will receive fees for each wireless customer they sign
up, according to Time Warner Cable spokesman Alex Dudley.

“This is a strategic masterstroke for Verizon,” Craig
Moffett, an analyst at Sanford C. Bernstein Co., said in a
note today. The agreement will lead to “a complete reordering
of the competitive universe as we know it today.”

The deal allows Verizon Wireless to add airwaves as
customers increasingly use smartphones such as Apple Inc.’s
iPhone to watch video and browse the Web. ATT, the second-
largest U.S. wireless operator, has been trying to add capacity
through its proposed acquisition of T-Mobile USA, though the
U.S. Justice Department has sued to block the deal.

Verizon Communications Inc., which co-owns Verizon Wireless
with Vodafone Group Plc, rose 0.2 percent to $37.85 at the close
in New York. Comcast gained 3.5 percent to $23.36 and Time
Warner Cable gained 4.7 percent to $63.80.

New Partners

The deal allows the cable companies to offer wireless
services to their customers without investing in their own
network or acquiring a wireless company, Neil Smit, a Comcast
executive vice president, said in an interview. After four
years, Comcast, Time Warner Cable and Bright House can market
Verizon Wireless service under their own brands. The cable
companies will be able to bundle and price the service as they
see fit, according Smit.

The two largest U.S. cable companies can offer wireless
voice and data along with home phone, broadband and TV in one
bundle, said Smit, potentially offering discounts for customers
that sign up for multiple services. Time Warner Cable will also
sell Verizon wireless products, such as Apple Inc.’s iPhones, in
its retail stores, said Dudley.

“Frienemies”

The partnership between Verizon Wireless and cable comes as
Verizon Communications sells FiOS, a broadband and television
service that directly competes with cable offerings. The
partnership may make Verizon and cable operators more
cooperative “frienemies,” said David Joyce, an analyst at
Miller Tabak Co. in New York. Comcast and Time Warner Cable
could benefit if Verizon feels less compelled to create
undercutting price promotions against its new partners, he said.

“This might slow the competitive push from FiOS to drive
down prices, which could help the cable companies,” said Joyce
in an interview.

Verizon FiOS will continue to compete aggressively with
Comcast and Time Warner Cable in overlapping markets, said
Verizon Wireless Chief Executive Officer Dan Mead.

“It’s the nature of our business in wireless now,” Mead
said in an interview. “You’re competitors one minute and
suppliers or partners the next.”

There is only a 15 percent overlap in Comcast’s region with
Verizon’s FiOS, according to Comcast spokeswoman Jennifer
Khoury, which made Comcast more willing to strike the deal. Time
Warner Cable has an 11 percent overlap, said Dudley.

Changing Wireless Landscape

Time Warner Cable is selling its spectrum for a 74 percent
premium after originally purchasing it for $632.8 million in
2006. Comcast bought its spectrum for $1.29 billion in 2006,
earning a 78 percent increase.

The deal may put additional pressure on Sprint Nextel Corp.
and partner Clearwire Corp. The cable companies have had a
partnership with Clearwire, in which Sprint has a majority
economic interest, that allows them to resell Clearwire’s
wireless service. Comcast has 30,000 wholesale customers and
Time Warner Cable has 27,000. Comcast and Time Warner Cable will
stop offering Clearwire service within six months, according to
Smit and Dudley.

“It aligns the cable companies with Verizon Wireless in
the near and longer term,” said James Ratcliffe, an analyst at
Barclays Capital. “That means a close partnership with Sprint
becomes very unlikely at this point.”

Sprint, Clearwire

Sprint’s ability to be “a viable partner” to the cable
industry is now in doubt, according to Moody’s credit analysts
Dennis Saputo and John Diaz. Clearwire also is “a loser,” wrote
Saputo and Diaz, as it effectively ends the probability that
cable will provide more funding for the money-losing company.

Susan Johnston, a spokeswoman for Clearwire, and Scott
Sloat, a spokesman for Sprint, declined to comment.

Clearwire rose 5.4 percent to $2.14 and Sprint dropped 3.7
percent to $2.60.

The partnership also removes an option for Deutsche Telekom
AG’s T-Mobile USA if its acquisition by ATT falls through. T-
Mobile would have been able to enhance its competitive position
by buying cable’s spectrum, said Moffett. Deutsche Telekom fell
3.1 percent to 9.26 euros.

Regulatory Approval

The partnership still needs approval from regulators. The
Federal Communications Commission will “undertake a thorough,
fair and fact-based review of the proposed transaction,”
according to FCC spokesman Neil Grace.

The FCC and Justice Department are likely to approve the
deal, though they may require the sale of assets in certain
markets, said Jeff Silva, senior policy director for
telecommunications, media and technology at Medley Global
Advisors LLC in Washington.

“This deal is likely to eventually get approved with
possible divestitures in any markets that the FCC and Justice
Department find that Verizon would have excessive spectrum
concentration,” he said.

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