Verizon/Cable Settlement with DOJ: A Closer Look

August 16, 2012

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

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

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