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

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:

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. 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. Unreasonably diminish

competition between Verizon and the cable companies—competition that is

critical to maintaining low prices, high quality, and continued

innovation. Unreasonably diminish future

incentives to compete for product and feature development pertaining to

the integration of broadband, video, and wireless services. Unreasonably restrain the

ability of the cable companies to offer wireless services on a resale

basis. Unreasonably restrain

competition due to ambiguities in certain terms regarding what Verizon can

and cannot do to compete in the marketplace. 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.