Post

DOJ Releases Confidential Information; Verizon/Cable Deal As Bad As We Thought

August 23, 2012

As we process
the FCC’s approval of the deal between Verizon, Comcast, and other cable
companies, it’s worth taking a closer look at the actual agreements, based on
the details that the Department of Justice (DOJ) recently released in its
analysis of the deal.  Although the DOJ
expressed concerns about the deals it still decided to approve it.

On
August 16, 2012 the Department of Justice announced its approval
of the Verizon/SpectrumCo Deal
, a disappointing outcome for those of us
fighting for greater competition in the broadband marketplace.  Check out Jodie Griffin’s thorough
analysis
for a full rundown of Public Knowledge’s concerns with the DOJ
approval, including the conditions imposed on Verizon and the cable companies. 

The
DOJ also released a Competitive Impact Statement that it filed along with its Proposed
Final Judgment in the antitrust proceeding. 
This Statement includes previously confidential details about the deals,
which is disappointing to read given the DOJ’s approval and lackluster
conditions.  Everything the DOJ mentions
in this Statement further emphasizes PK’s position
that this deal is bad for consumers and potentially crippling for innovation in
the broadband and wireless marketplaces. 

The commercial
agreements allow Verizon Wireless and the cable companies to (1) cross-market
each other’s services; (2) create a new company for them to develop new
products and services that integrate wireline and wireless services; and (3)
create a future option for each of the cable companies to operate a virtual
wireless network using Verizon Wireless’s network.  The DOJ found these agreements violate
provisions of the Sherman Act and unreasonably “restrain trade and commerce.”

Here are some of
the DOJ Statement’s observations about the most anticompetitive consequences of
the Verizon/Cable deal.  The commercial
agreements:

  1. Harm competition in the video, broadband, and wireless
    markets because they impair the ability and incentives for Verizon and the
    cable companies to compete aggressively against each other.
  2. Contractually require
    Verizon to have a financial incentive to market and sell the cable
    companies’ products through Verizon Wireless channels in the same local
    geographic markets where Verizon also sells FiOS.
  3. Unreasonably diminish
    competition between Verizon and the cable companies—competition that is
    critical to maintaining low prices, high quality, and continued
    innovation.
  4. Unreasonably diminish future
    incentives to compete for product and feature development pertaining to
    the integration of broadband, video, and wireless services.
  5. Unreasonably restrain the
    ability of the cable companies to offer wireless services on a resale
    basis.
  6. Unreasonably restrain
    competition due to ambiguities in certain terms regarding what Verizon can
    and cannot do to compete in the marketplace.
  7. The aspects of the JOE
    unreasonably reduce the companies’ incentives and ability to compete on
    product and feature development, and create an enhanced potential for
    anticompetitive coordination.

Below
are several provisions in the agreements that the DOJ identified as potentially
harmful for competition in the broadband, video, and wireless services markets.

Verizon Wireless Selling Cable Companies’
Products Even in Areas where FiOS is Available

Currently,
Verizon offers its voice, video and broadband FiOS service in certain parts of
the country where one of the cable companies also sells the same services.  In these areas there are two separate
companies offering the same services and competing
for the same customers.  Hooray,
competition!

However,
under the commercial agreements, Verizon Wireless (which is majority-owned by
Verizon Communications) would sell its own services AND a cable company’s
services in two competing quad-play offerings. There would literally be a
situation where Verizon Wireless would sell its wireless service and Comcast
quad play services in one corner and would sell Verizon Wireless and Verizon
FiOS services in another corner.

Essentially,
Verizon would have been joining with a competitor AND competing against itself
in a house-divided scenario that even the DOJ defines as an “unusual
structure.”

Verizon Wireless Selling Its Services
along with Its Competitors’ Services

The commercial
agreements include an explicit restraint on Verizon FiOS sales and mandate that
Verizon Wireless may not market or sell Verizon FiOS services unless it also
offers the cable companies’ services on an “equivalent basis.”  According to the DOJ Statement, this “equivalent
basis” provision restricts Verizon’s ability to “offer, promote, market, and
sell FiOS services in competition with the Cable Defendants’ services through
any Verizon Wireless distribution channel.”

In
other words, Verizon (A) can’t sell its own products and services unless it
also promotes its (former) competitors’ products and services at the same time,
and (B) can’t plug its own products over the cable company’s products.  Imagine Ford and Chevy joining together in a
small town where they’re the only two dealerships around for miles.  Now imagine that Ford can’t sell its own cars
unless it also promotes Chevys to the same degree.  What if those two jointly decide to raise the
price of their products?  Who would match
or beat the other’s lowest offer to provide a competitive alternative?  Oh that’s right, no one.

Cable Guys NOT Allowed to Partner with
Other Wireless Companies

The commercial
agreements include a long-term exclusivity provision that prohibits the cable
companies from partnering with any other wireless company.  What if T-Mobile wants to join with the cable
guys and utilize more of its recently acquired spectrum?  Too bad, this deal prohibits it.  What if there’s a smaller wireless company
like MetroPCS that could benefit from a quad-play arrangement in select
markets?  Unfortunately, MetroPCS would
also be SOL.  If there were a new entrant
into the wireless marketplace that could benefit from this arrangement, the new
entrant would also be locked out of the deal.

After a Period of Four Years, Cable Companies
May Resell Wireless Services on Verizon’s Network Under Their Own Name

Cable
companies will eventually be able to resell wireless services on the Verizon
network after four years under the name of their new joint venture.

Behold, the Joint Operating Entity (the JOE)

Finally, the commercial
agreements creates a Joint Operating
Entity (the JOE)
, which is a joint research and development venture to generate
and market integrated wireline and wireless technologies, like new ways to
stream online video.  As long as Verizon
Wireless, Comcast, Time Warner Cable, and Bright House Networks remain in the
JOE none of them can independently research or develop products or services within
the JOE’s exclusive field, even on projects that the JOE declines to pursue. 

Members of the
JOE have exclusive use of the technology developed within the JOE and that
privilege potentially may be extended to other cable companies that also agree
to sell Verizon Wireless services.  So
much for innovative cross-carrier handsets in the wireless marketplace.

We cannot state
it any plainer: the Verizon/Cable deal is anticompetitive and bad for
consumers.  Public Knowledge made the same
argument in our Petition to Deny several months ago and has been reiterating ever
since.  The findings in the DOJ’s
Competitive Impact Statement only validate our argument.

The FCC and DOJ
seem poised to impose
a number of conditions
designed to decrease the companies’ anticompetitive
incentives and avoid opportunities for collusion.  However, as we mentioned in our August 16
press release, the DoJ and the FCC acknowledge the failure of broadband competition
policy in the United States. Verizon and the cable companies scored a huge
victory last week.  Unfortunately, the
consumers, competitive pricing, and wireless innovation were the ones they
defeated.

Check back with
the PK Policy Blog for forthcoming information on the FCC’s decision.