Verizon's $3.6 Billion Spectrum Purchase Signifies Growing Data Usage and Potential Entry of Outside Players

Verizon's acquisition of wireless spectrum from Comcast, Time Warner Cable, and Bright House Networks signals a significant shift in the telecommunications and cable industries. The deal, valued at $3.6 billion, has sparked concerns that the dance for market position may quickly draw in Apple, Google, and Microsoft, as once-fierce competitors turn into partners out of necessity to tie up spectrum capacity as it becomes more scarce. This move has significant implications for industry players, particularly Sprint and T-Mobile, as it limits their options for finding growth partnerships and removing cable's interest in reselling programs from Clearwire and Dish.

Key Takeaways:

• Verizon's acquisition of wireless spectrum from Comcast, Time Warner Cable, and Bright House Networks has huge implications on how other carriers and cable companies can partner to gain competitive footing in the increasingly data-heavy wireless world.
• The deal has three major impacts: acquiring spectrum to handle smartphone data loads, limiting options for industry bantams like Sprint and a standalone T-Mobile, and hastening the step of industry lockups.
• The move creates an opportunity for T-Mobile to purchase excess capacity from a wholesale provider like Clearwire or pick up spectrum from Dish Networks.
• The dance between wireless carriers and cable companies is driven by the need to wring out profits from customer smartphone usage, which will catalyze a second imperative – finding new ways to make money from these users.
• The current consolidation dance of spectrum and reselling partnerships may be a threat to future smartphone usage, and outside titans like Apple and Google may jump into reselling arrangements with a Clearwire, LightSquared, Sprint, or even Dish to add competitive spectrum.

Statistics:

• Verizon's profits, called average revenue per user (ARPU), lag that of competitor AT&T because its customers have been slow to adopt smartphones even as its network is seen to have better 4G service.
• Verizon only recently got rights to carry its service on Apple's iPhone, and as a result, its ARPU is over 25% lower than AT&T, which has 50% of its subscribers using smartphones compared with Verizon's 36%.
• By the first quarter of 2012, Verizon will push smartphone usage among its customers to 50%, according to Evercore calculations.
• The upside to its multi-billion dollar smartphone build out will be limited when adoption hits 75%.

Sources:

• Craig E. Moffett's Friday note assessing the impact of Verizon's AWS spectrum purchase and its marketing lockup with the largest cable provider in the U.S. and powerhouse Time Warner Cable.
• Mike Nelson of Mizuho Securities' note to clients that Verizon's spectrum purchase was a negative for Sprint because it expected Sprint to enter into a network hosting agreement with SpectrumCo and gain access to the spectrum.
• Jonathan A. Schildkraut of Evercore Partners' phone interview with TheStreet.