Verizon/Cable Settlement with DOJ: A Closer Look

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Today, the Department of Justice (DOJ) announced that it will allow, with conditions, Verizon, Comcast, and other cable companies to cross-market each other’s products and establish a Joint Operating Entity to develop and control new technology. As part of the deal Verizon will also buy a substantial amount of wireless spectrum from the cable companies. Although only the DOJ's proposed settlement is officially available (pdf), the FCC is also expected to approve the deal next week with similar conditions. On the whole, these conditions fail to adequately address the many harms threatened by the deal, and the approval of this deal raises significant questions for the future of broadband competition policy going forward.

The Verizon/Cable Deal and the End of Facilities-Based Competition

These deals are very complex and the proposed settlement includes many individual conditions designed to alleviate specific competitive harms, but on a general level the DOJ and FCC seem to be acknowledging that the US's policies for broadband competition have failed. Especially since the 1996 Telecommunications Act, Congress and the FCC have hoped that direct competition between telephone and cable companies' wireline broadband services would protect consumers, drive down prices, and encourage new deployment.

With the approval of this deal, even with conditions, it is now clear that telephone and cable companies have laid down their arms and divided the world between them: Verizon with its wireless offerings and the cable companies with their wireline services. This deal cements that agreement by permitting Verizon and the cable companies to sell each other's services instead of competing, giving Verizon a substantial amount of additional spectrum, and establishing a new company in which the companies will jointly plan, develop, and control the next generation of technologies integrating wireline and wireless service.

Additionally, while Public Knowledge has focused mainly on the commerical agreements, this deal also contributes to the growing 'spectrum gap' between Verizon, AT&T, and the rest of the industry. Although some spectrum will be divested to T-Mobile, it's important to remember than much of the spectrum at issue will go straight to one of the two dominant wireless carriers in the country, further increasing the gap between Verizon and AT&T, and every other wireless carrier in the country.

Conditions on the Verizon/Cable Deals: An Overview

The DOJ's proposed settlement includes many conditions that attempt to alleviate some of the harms of this deal. Although the conditions still won't be as effective as blocking the deals in their entirety, the DOJ and FCC do deserve credit for trying to fix some of the harms from the deal and for rightfully asserting their authority over the transactions to begin with.

Joint Marketing Agreements Allowed in Part

One of the most blatant examples of how the deals established a truce between former competitors was the agreement between Verizon and the cable companies to begin marketing each other's services instead of launching and marketing their own competing services.

The DOJ settlement places significant limitations on these joint marketing agreements. Verizon Wireless will not be allowed to market for the cable companies (or permit another company to do so) within the "FiOS Footprint." This includes any area where Verizon has built out FiOS or is legally bound to do so, where Verizon has a non-statewide franchise authorizing Verizon to build out FiOS, or where Verizon has delivered notice of an intention to build out FiOS under a statewide franchise agreement. Starting in December 2016, Verizon Wireless similarly won't be allowed to market for the cable companies within its DSL service territory outside of the FiOS footprint, nor will Verizon Wireless be able to prohibit the cable companies from selling another wireless service.

The conditions also ensure that the parties will still be able to market certain services despite the joint marketing agreements. For example, Verizon Wireless will still be able to sell any Verizon Wireless service like Home Fusion or Home Phone Connect, and Verizon Wireless is free to sell Verizon Communications services without selling the cable companies' services on an equivalent basis.

These limitations attempt to preserve Verizon's incentive to invest in its wireline infrastructure and potentially build out fiber to new areas in preparation for when the joint marketing ends in DSL areas. Nevertheless, the joint marketing agreements still decrease Verizon's incentive to continue competing against the cable companies on wireline broadband services, resulting in fewer choices and higher prices for consumers.

The Joint Operating Entity Survives, But Limited

Many of Public Knowledge's core concerns focused on the JOE as the vehicle in which Verizon and the cable companies would get together, jointly strategize, and develop and control technology the could become the de facto standard for the next generation of telecommunications technology. Now the DOJ conditions specify that the JOE can continue to exist but the companies must leave the JOE by December 2016 unless they receive written advance permission from the government. A term limit, while better than an unlimited JOE, still gives the companies the ability and incentive to share information and stifle competition from third parties.

Some other conditions try to limit the extent to which the JOE ties the hands of its member companies from pursuing innovative new projects outside of the JOE. For example, the DOJ's conditions permit Time Warner Cable and Bright House Networks to independently develop technology after presenting it to the JOE first, but if the JOE decides to pursue the technology TWC and BHN could not also develop it independently.

Other conditions prohibit Verizon or Verizon Wireless from sharing competitively sensitive information about Verizon Communications with the cable companies, and vice versa. The conditions also note that no Verizon or Verizon Wireless employee can have access to the competitively sensitive information of both Verizon and one of the cable companies, but the condition does not include information sharing allowed under the JOE agreement. This seems to gut the entire condition because it is the JOE that raises the strongest concerns that the companies will improperly share information, particularly between Verizon and the media activities of the cable companies. This makes it even more important that the FCC enforce its own attribution rules and make the companies certify that they will not use the JOE to discuss programming or other media activities between the companies.

The companies are also not allowed to change most parts of the JOE agreement without advance permission. This is important because, given the secretive nature of the JOE and the anticompetitive incentives the JOE members have, there is the real danger that the JOE's members would manipulate the JOE to engage in behavior that would not pass scrutiny at the DOJ or FCC.

If any JOE member leaves the JOE, that member will get a perpetual, irrevocable, royalty-free non-exclusive license to use and sublicense the JOE's intellectual property up to that point. This is important because it allows JOE members to leave the JOE and pursue other initiatives without having to lose their entire investment in the JOE's technology, although the settlement notes that the license may still be subject to conditions like confidentiality, and the departing JOE member might lose that license if it brings certain intellectual property claims against the JOE or its licensees.

Finally, the conditions prohibit Verizon and the cable companies from entering into any technology joint venture or partnership that includes Verizon or Verizon Wireless and one of the cable companies, without advance permission from the DOJ. This seems intended to ensure that the companies don't simply create a new duplicate JOE to avoid agency oversight.

Ongoing Monitoring

The DOJ settlement also requires the companies to keep records of all of their communications with each other and submit to the DOJ reports detailing how they are complying with the settlement conditions. The reports will specifically include information on sales made through the joint marketing agreements, Verizon Wireless's sales of Verizon wireline services, Verizon's FiOS and DSL buildout, and the JOE's activities. Regarding the JOE, Verizon Wireless must detail the JOE's technology and products, pending patent applications, and intellectual property agreements entered into by the JOE.

Monitoring procedures are certainly a key part of the DOJ's ability to actually enforce the conditions listed in this settlement. As the industry's experience with other transactions like the Comcast/NBCU merger show, conditions are only useful to the extent that they are enforced.

But on the whole, it is not enough for the joint marketing and JOE agreements to be limited in time or scope--the agreements should have been blocked outright. When and if Verizon and the cable companies seek permission to continue the JOE or JMAs in four years the FCC and DoJ must seriously examine how the companies have used their agreements to stifle competition and how the agreements have diminished the companies' incentives to compete against each other.

Looking forward, there is now no way we can pretend that the broadband market is competitive. This means that Congress and the FCC should pursue new policies to stimulate competition in wireline internet access service--or resign themselves to regulating a broadband monopoly.

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