Verizon’s Spectrum Purchase Being Investigated (VZ, VOD, CMCSA, TWC, T, DTEGY, S)

Earlier this month Verizon Wireless, the joint venture between Verizon Communications Inc. (NYSE: VZ) and Vodafone plc (NASDAQ: VOD), paid $3.6 billion for spectrum licenses belonging to SpectrumCo LLC, a joint venture of Comcast Corp. (NASDAQ: CMCSA), Time Warner Cable (NYSE: TWC), and privately held Bright House Networks. Verizon Wireless’ application for review of the transaction by the Federal Communications Commission could turn out to be much more than either company expected.

The US Department of Justice is investigating the spectrum deal to determine whether or not it is anti-competitive and could jeopardize competition in the telecommunications industry. AT&T Inc. (NYSE: T), Deutsche Telekom AG (OTC: DTEGY), and Sprint Nextel Corp. (NYSE: S) will be watching this very closely.

The Washington Post reports that the DoJ has confirmed the investigation, and an unidentified official has said that the department is most concerned about the cross-marketing aspects of the deal. In the press release announcing the deal, Verizon Wireless had this to say about the cross-marketing arrangement:

The companies also announced that they have entered into several agreements, providing for the sale of various products and services. Through these agreements, the cable companies, on the one hand, and Verizon Wireless, on the other, will become agents to sell one another’s products and, over time, the cable companies will have the option of selling Verizon Wireless’ service on a wholesale basis. Additionally, the cable companies and Verizon Wireless have formed an innovation technology joint venture for the development of technology to better integrate wireline and wireless products and services.

The DoJ does not want Verizon to give up on its fibre optic network, called FiOS, and focus entirely on the wireless market. The cross-marketing agreements also gives former competitors little reason to keep competing. Verizon gets to continue building out its 4G LTE network and to add value by getting access to Comcast and Time Warner content. The cable companies get to expand into wireless services without having to build a costly physical network. The spectrum licenses held by SpectrumCo were sold with the intention that they would spur competition, not kill it.

A month ago we could have said that it is unlikely that the DoJ will kill this deal. But now that the AT&T/T-Mobile USA merger is dead due to the mere threat of anti-trust litigation, it’s not out of the question that the DoJ will at least force some changes to the Verizon-SpectrumCo deal.

Paul Ausick