Policy

Operators Cash In Wireless Chips

12/05/2011 8:01 AM Eastern

It’s official: U.S. cable operators don’t want
to own the airwaves.

SpectrumCo — a joint venture of Comcast, Time Warner
Cable and Bright House Networks — will sell its 122
Advanced Wireless Services spectrum licenses, covering
259 million people in the U.S., to Verizon Wireless for $3.6
billion, the companies announced last week.

The companies also said they have entered into several
agreements that will let the MSOs and Verizon Wireless
become agents to sell one another’s products and, in 2015,
the cable companies will have the option of selling Verizon
Wireless service on a wholesale basis.

“With this deal, the cable industry tacitly acknowledges
that they cannot do wireless on their own,” Miller Tabak &
Co. analyst David Joyce wrote in a research note.

Verizon Wireless will offer the cable operators’ TV, voice
and broadband services through its distribution channels
— meaning the carrier will be promoting services
that compete head-to-head with one of its parents, Verizon
Communications. (Vodafone owns 45% of the wireless
carrier.)

Under the terms of that deal, Verizon Wireless will be
the exclusive wireless provider for those MSOs. That means
Comcast and Time Warner Cable within six months will no
longer offer wireless-broadband services through Clearwire,
although they will continue to support high-speed
wireless Internet customers who have already signed up.

The end of the MSOs’ selling arrangement with Clearwire
“obviously hobbles not just Clearwire, but also parent
company Sprint,” Sanford Bernstein senior analyst Craig
Moffett wrote in a research note.

Clearwire declined to comment. Both Comcast and
TWC (as well as Bright House) are investors in Clearwire.
But the deal with Verizon Wireless indicates that they pull
out of Clearwire may unwind, according to Moffett.

Last week, Sprint Nextel and Clearwire reached an
agreement that potentially could provide up to $1.6 billion
in payments and funding to Clearwire over the next
four years — helping to resolve some financial uncertainty
for the cash-strapped company.

HELD SINCE 2006

At the outset, in 2006, the SpectrumCo JV partners included
Sprint Nextel and Cox Communications. Sprint sold its
5% interest in SpectrumCo in 2007. In January 2009, SpectrumCo
redeemed the 10.9% interest held by Cox, which
received AWS licenses primarily covering areas in its cable
footprint and approximately $70 million in cash.

Cox retains ownership of AWS licenses as well as spectrum
licenses in the 700-MHz band, which it acquired in
the Federal Communication Commission’s 2008 auction
of the digital-TV airwaves for $304.6 million.

Cox had intended to build its own 3G — and, eventually,
4G — wireless networks, but ended those plans in May,
saying it would rely on Sprint’s 3G network to provide mobile
voice and data services.

Then, last month, Cox threw in the towel, announcing it
would exit the wireless retail business altogether and discontinue
service effective March 30, 2012 (see “Cox Hangs
Up on Wireless,” Nov. 21, 2011).

SpectrumCo paid $2.37 billion for 137 AWS licenses in October
2006 in an FCC auction; excluding the Cox licenses, the
total was $2.2 billion. That means the three cable companies
in SpectrumCo earned a healthy 64% profit on the deal.

The sale of the licenses resolves Wall Street’s worry that the
MSOs would attempt to engage in an expensive — and timeconsuming
— wireless buildout, ISI Group analysts Vijay Jayant
and Judah Rifkin wrote in a research note.

“[I]n addition to this being an economically accretive
transaction for the cable companies, we also have gotten
some clarity on their longer-term wireless strategy, which
we believe investors will greet positively,” the analysts said.

The SpectrumCo partners never articulated specifically
what they planned to do with the AWS holdings, telling investors
they had options to build a wireless network if they
chose to do so. The spectrum licenses have 15-year terms,
which the FCC allows to be renewed if the owner has built
out “substantial service” using the spectrum.

The SpectrumCo AWS licenses sold to Verizon Wireless
cover more than 80% of the U.S. population. The AWS
band covers frequencies in two segments — from 1,710 to
1,755 Megahertz for uplink, and from 2,110 to 2,155 MHz
for downlink — and is intended to be used by mobile devices
for data, video and messaging services.

The sale also has positive implications for Dish Network,
which now owns about 46 MHz of nationwide spectrum of
its own (although, like the MSOs, Dish has not said what
it intends to do with the
wireless licenses).

“There’s clearly a thirst
for spectrum on the part of
the wireless carriers, and
given the average price
paid by Dish, at the very
least, they probably got a
good deal for an asset with,
again, ‘optionality,’ ” Jayant
and Rifkin said.

In a statement, the three
cable companies and Verizon
Wireless said, “This sale
of spectrum is an important
step toward ensuring
that the needs and desires
of consumers for additional
mobile services will not
be thwarted by the current
spectrum shortage.”

In addition to the sale
of the spectrum and the
reseller agreements, the
cable companies and Verizon
Wireless formed an “innovation technology joint
venture” for the development of technology to better
integrate wireline and wireless products and services.

MOBILE FUTURE

“These agreements, together with our Wi-Fi plans, enable
us to execute a comprehensive, long-term wireless strategy
and expand our focus on providing mobility to our Xfinity
services,” Comcast president Neil Smit said in a statement.

Verizon Wireless president and CEO Dan Mead said that
buying the AWS spectrum “now solidifies our network
leadership into the future, and will enable us to bring even
better 4G LTE products and services to our customers.”

The deal is subject to approval by the FCC and Department
of Justice, along with other customary conditions.


Mike Farrell contributed to this report.

EYES ON THE SKY

Under the terms of the deal between Verizon Wireless and the three cable companies:

Verizon Wireless acquires 122 Advanced Wireless Services spectrum licenses,
covering a population of 259 million, from SpectrumCo.

Comcast, which owns 63.6% of SpectrumCo, will receive $2.3 billion from the
sale; TWC, which owns 31.2% of the JV, will receive $1.1 billion; and Bright House
Networks, with a 5.3% stake, will receive $189 million.

The parties will establish an “innovation technology” joint venture, 50% owned by
Verizon Wireless and 50% owned by the MSOs, to integrate multiple services, potentially
including new mobile video applications.

Starting in 2015, Comcast, TWC and Bright House have rights to offer their own
branded wireless services using Verizon Wireless networks.

Verizon Wireless and the MSOs will offer each other’s products and services
through their retail channels.

SOURCE: Company reports

March