Verizon Wireless is purchasing 122 mobile spectrum licences from cable providers Comcast, Time Warner Cable (TWC) and Bright House Networks for $3.6bn. These AWS band licences which are in the 1700MHz and 2100MHz bands cover 259m people. The companies have also entered into service agreements allowing Verizon to become agents to sell the cable companies products and vice versa. The cable companies will also have the option to purchase Verizon's mobile service wholesale. This has led to both Comcast and Time Warner announcing they would discontinue offering Clearwire's wireless service. Additionally, the cable companies and Verizon Wireless have formed an innovation technology joint venture.
Verizon also announced a spectrum swap with Leap Wireless. Verizon will give Leap 700MHz spectrum in the Chicago area in exchange for more AWS spectrum in various regional markets including Seattle. The deal also includes a net payment of $16m from Leap to Verizon. Both spectrum deals are subject to regulatory approval from the Federal Communications Commission (FCC).
Analysis
The surge in smartphone usage has led to mobile operators struggling to deal with the bandwidth demands of their customers. IHS Screen Digest anticipates that mobile data traffic will grow at 90 per cent CAGR from 2010 to 2015. The process of releasing additional spectrum has been too slow to meet the demands of the market in the US. This has led to operators vigorously pursuing any underused mobile spectrum. AT&T is trying to purchase spectrum from Qualcomm for nearly $2bn as well as buying the entirety of T-Mobile in the US for $39bn, chiefly for its spectrum assets.
IHS Screen Digest expects that Verizon will use this new spectrum in the short term to provide additional capacity for its 3G network. With a limited range of 4G LTE devices available, the majority of its smartphone users, including the particularly data hungry iPhone users, will remain on 3G for the next couple years.
The cable operators' plans for their $2.38bn spectrum investment may not have worked out, but the current spectrum shortage means that now the cable companies will see a decent return. The spectrum cost $0.45 per MHz per person covered in the 2006 auction and is now being sold at a price of $0.695 per MHz POP. SpectrumCo's holdings represented the single largest tranche of unused spectrum in the US and so operators should expect to pay a hefty premium for any of the licences held by various holding companies. With AT&T's acquisition of T-Mobile looking less likely by the week, it was vital for Verizon to lock up any available spectrum before AT&T came back looking for more.
The deal also includes the option for the cable companies to buy wholesale capacity from Verizion. As Verizon currently has the largest 4G LTE network in the world, the decision by Comcast and TWC to end their relationships with Clearwire was an easy one. Clearwire offers a slower, WiMAX based service which only covers 130m people while Verizon's year old LTE network already covers more than 200m people. This decision makes Clearwire even more dependent on its majority shareholder Sprint. While Clearwire recently secured funding from Sprint for its LTE build out, Sprint is spreading its bets with its LTE roll-out. It will be building out a network itself as well as involving wholesale provider LightSquared. In this situation, Clearwire will struggle to maintain even the number of people using its service and after an expensive LTE build out with no additional wholesale partners, a complete takeover by Sprint may not be far away.
This deal marks the end of an era during which US pay TV companies aimed to develop their own mobile network. Quad-play offerings haven't been as successful as the cable industry hoped and it has been increasingly difficult to compete with leading mobile operators AT&T and Verizon. Cox recently announced the closure of its wireless services which will eventually bring more spectrum to the table for mobile operators.
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