Verizon's $3.6 billion spectrum deal: Who wins and who loses?

Verizon Wireless' move to buy 20MHz of AWS wireless spectrum from cable operators has caused a seismic shift in the wireless industry.

The deal announced today will give Verizon access to spectrum licenses that cover about 259 million potential customers. The company plans to pay the cable consortium SpectrumCo--which consists of Comcast, Time Warner, and Bright House Networks--$3.6 billion for the spectrum licenses.

In a market where wireless operators are all jockeying for more spectrum resources, Verizon has scored a major win by taking a huge swath of unused spectrum for itself. Spectrum is the lifeblood of the wireless industry. And with this deal, Verizon ensures its dominance and also takes resources off the table for the remaining players.

As consumers flock to new devices, such as smartphones and tablets like the iPad, they're consuming more wireless resources than ever before. Every wireless operator in the market says it will need more spectrum in the future to keep up with the demand. The problem is that most of the usable spectrum has already been carved up into licenses and sold. The Federal Communications Commission is looking for more spectrum to auction, but any auction of additional spectrum is still years away, forcing carriers that need spectrum in the short term to scramble for deals.

So who ends up a winner out of this deal and who are the losers?

The Losers

T-Mobile USA (and parent company Deutsche Telekom): Craig Moffett, an analyst with Sanford Bernstein said it best in his research note to investors: "Pity poor T-Mobile. Verizon just ran off with the last pretty girl in the bar."

Indeed, this latest move by Verizon means that T-Mobile will have fewer options if Deutsche Telekom's deal to sell T-Mobile to AT&T falls apart. A deal between T-Mobile and the cable companies looked particularly sweet since the spectrum the cable companies own is in the AWS band, which is the exact same spectrum band that T-Mobile is using to build its 3G wireless service.

But now it looks like T-Mobile's options are dwindling. The Department of Justice is suing to block the $39 billion merger with AT&T. And last week, the FCC said that it also opposes the merger. Regulators want to see T-Mobile remain a fourth competitor in the national wireless market. But without additional spectrum, the carrier will likely be unable to continue to compete. Without additional spectrum available for auction anytime soon, T-Mobile and other carriers looking for more spectrum will have to strike deals to combine resources. If regulators approve the deal between Verizon Wireless and the cable operators, T-Mobile will have one less option for a partnership.

AT&T: AT&T is also a loser for the same reason that T-Mobile is. With the chances of closing its deal with T-Mobile now at less than 10 percent, AT&T now has fewer options for getting its hands on desperately needed spectrum to fuel the growth of its services.

The No. 1 reason that AT&T cited for its proposed $39 billion merger with T-Mobile is its need for additional spectrum. AT&T, the second largest carrier in the U.S., has struggled to alleviate congestion in some parts of its network. And the company has argued that T-Mobile's spectrum would give it more wiggle room, especially in large cities. The company also said T-Mobile's additional spectrum would pave a quicker path to new more efficient 4G LTE services.

But regulators aren't buying AT&T's arguments. The FCC said in its report against the merger that in 99 out of 100 markets competition would harmed if AT&T and T-Mobile combined networks. And the agency also said it would result in a massive loss of jobs.

As the second largest wireless provider in the U.S., AT&T could have also been a strong contender for the SpectrumCo licenses. Instead, AT&T's largest competitor has the licenses, strengthening its spectrum position. This can be viewed as a negative for AT&T.

On the flip side, some analysts think this might be a positive for AT&T in the long run. Bernstein's Moffett believes that AT&T will actually do better in a duopolistic market. And as Verizon gobbles up more wireless spectrum, it looks like the market is clearly headed in that direction.

Metro PCS and other smaller wireless players: Smaller wireless operators, such as MetroPCS are also trying to grow their wireless networks to compete against the big boys. Now that it looks like Verizon will get 20MHz more of wireless spectrum, there is less spectrum available for the smaller players. MetroPCS has said publicly that it was interested in buying some, if not all, of the SpectrumCo licenses. But now that option is off the table.

But what is likely more troubling for Sprint is that these companies will likely be forced to sell their stake in Clearwire at some point, leaving more of the financial burden to build out Clearwire's 4G network on Sprint's shoulders.Sprint Nextel: This deal is really a mixed bag for Sprint. On the one hand, Comcast and Time Warner Cable, the No. 1 and No. 2 cable operators in the U.S., had been Sprint's partners in Clearwire, a company building a nationwide 4G wireless network. Sprint has the largest stake in the company and is the largest wholesale customer of the Clearwire 4G service. But Comcast and Time Warner were also wholesale customers, albeit with far fewer customers. Now that they are selling their spectrum to Verizon, they will no longer resell Clearwire's 4G service, which hurts Sprint, too.

"The cable operators will stop reselling Clearwire's service within the next six months. That obviously hobbles not just Clearwire, but also parent company Sprint," Moffett said in his research note. "This deal means the cable industry will almost certainly have to exit the Clearwire venture, and raises troubling questions about whether Sprint will have to take on additional equity in the venture, and potentially have to begin consolidating it money-losing income and debt-laden balance sheet. Potentially having to finance such a transaction would come at a time when Sprint already faces a highly uncertain cash flow outlook."

Winners

Verizon Wireless: The most obvious winner in this transaction is Verizon Wireless. The carrier seems to have outfoxed its competition. Most analysts hadn't expected Verizon to buy more spectrum until late 2012 or 2013. So for the most part, the market was not expecting Verizon to make a major play for more spectrum so soon. The company has said that its current spectrum position would be sufficient at least through 2015.

There is a possibility that demand for its 4G LTE and 3G services are increasing so quickly that it needs more spectrum sooner, but it's also conceivable that the company was simply looking to get a leg up on its competition.

With the SpectrumCo licenses, Verizon will now have 110MHz of spectrum nationwide, which is more than AT&T, notes Jonathan Chaplin, an analyst with Credit Suisse. AT&T has about 90MHz of spectrum.

This clearly gives Verizon a capacity advantage, he added. Verizon also already has some AWS spectrum of its own. In the future, the carrier could use the additional AWS spectrum from SpectrumCo to complement its existing holdings to provide faster services and more capacity using next-generation 4G LTE technology.

The operating agreement Verizon has worked out with the cable companies may also prove to benefit Verizon in the long term, as well. Now, Verizon will be able to bundle its wireless service with cable broadband, TV, and voice service in parts of the country where it doesn't offer its own broadband service. And there is also an option for the cable companies to become reseller customers of Verizon's service in the future.

SpectrumCo cable companies -- Comcast, Time Warner, and Bright House Networks: The SpectrumCo cable companies get to have their cake and eat it too. In addition to Verizon Wireless, they are also the biggest winners in this deal. For one, these companies will earn a good return on the spectrum that they bought in 2006. JP Morgan analyst Philip Cusick estimates that the SpectrumCo companies got a 54 percent premium on what this same spectrum sold for in the 2006 auction.

But what's probably more important for the cable companies is the strategic benefits that come along with the other parts of the agreement with Verizon Wireless. As part of this deal, starting immediately the cable operators will also be able to sell and market Verizon Wireless service as part of a quadruple play bundle to their customers. And Verizon Wireless will also be marketing and selling their broadband, TV, and voice services in Verizon Wireless retail stores. This deal even includes the marketing and sale of cable services in areas where Verizon competes with its Fios services.

Additionally, the agreement also stipulates that four years from now, the cable operators will be able to get access to all of the Verizon Wireless network at wholesale rates so that they can sell wireless service under their own brands.

For these cable operators, the marketing and reselling aspects of the arrangement could be more valuable than the spectrum sale itself, because it still gives the cable companies a wireless strategy without the risk and expense of building and owning their own wireless networks.

Clearwire: Clearwire is both a winner and a loser as a result of this deal. It's a loser because it will lose Comcast and Time Warner as customers that resell its service. It may also lose because it could lose Comcast and Time Warner as investors. But Clearwire is also a winner because it is sitting on another huge swath of unused wireless spectrum, which has just increased in value as the supply for spectrum gets tighter.

If AT&T is not allowed to buy T-Mobile and the companies cannot form a partnership, the industry will be looking for other sources of wireless spectrum. And Clearwire has plenty of it available.

Dish Network: Just like Clearwire, Dish is a winner because it also owns a lot of unused wireless spectrum. It holds about 40MHz of wireless spectrum, which it could use to build its own network, sell to others looking for spectrum, or combine with other players in a partnership. Dish is now a leading candidate to partner with T-Mobile or even AT&T should the merger between those carriers fail.

Possible winners

The Federal Communications Commission: The FCC may also be a winner here because it solves an important, if not, embarrassing question for the agency. What to do with companies that have bought wireless spectrum but not yet done anything with it?

FCC Chairman Julius Genachowski has been beating the bushes about a spectrum shortage for two years. And his agency has been haranguing TV broadcasters and some government agencies with unused spectrum to give up that spectrum for auction. And yet the agency has not pressed other spectrum license holders to get their unused spectrum into use.

Analyst Craig Moffett called the "warehousing" for SpectrumCo's unused AWS spectrum an "embarrassment for the FCC." He went on to say that "getting that spectrum into use expeditiously would be a clear win for the FCC."

Consumers: There are a couple of ways to look at this. Consumers will likely benefit from the sale of this unused wireless spectrum since these resources can be put to use to ensure there's enough capacity and growth for existing services.

"It is good news that Verizon is paying $3.6 billion to buy useful spectrum from the cable company consortium," Harold Fed, legal director for Public Knowledge said in a statement. "Spectrum is better held in the hands of those who will use it, as opposed to those who don't."

But other consumer advocates say that allowing Verizon Wireless, the largest wireless operator in the U.S., to acquire this spectrum hurts competition, because there won't be enough resources for smaller companies to buy and potentially become a competitor to Verizon and AT&T. They also worry about the side deal that Verizon has made with the cable companies to co-market services.

"Today Verizon announced a deal to pay $3.6 billion to buy spectrum from the largest cable companies, who had purchased it intending to enter the wireless business," Mark Cooper, director of research for the Consumer Federation of America, said in a statement. " Instead, they will launch a venture to jointly develop and market products with the cable companies, effectively ending any prospect for serious head-to-head competition in the cable-telco space. The deal signals bad news for consumers."

What's next?

The transfer of the spectrum licenses must get regulatory approval from the Federal Communications Commission. Specifically, the FCC will need to review the transaction to make sure that it meets certain requirements regarding marketing concentration. Instead of looking at market share, the agency will evaluate whether there is still enough spectrum in the markets where SpectrumCo owns licenses to allow for competition.

The regulator review could take anywhere between six months and 12 months to complete. While it's unclear how the FCC will rule in this case, it's a good sign that the agency recently approved the transfer of spectrum licenses to AT&T from Qualcomm. Like the SpectrumCo spectrum, Qualcomm's 700MHz spectrum was not being used for service.

What's more, Verizon, in addition to AT&T and T-Mobile, were allowed to and did win spectrum licenses in the same auction in which Spectrum Co. bought its licenses. So this may also bode well for Verizon as it seeks approval for these new licenses.

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Western Digital restarts hard disk production

Western Digital Scorpio mobile HDD.

(Credit: Western Digital)

Hard disk giant Western Digital said today that it has partially restored production at a facility that had been shut down because of the flooding in Thailand.

The world's largest HDD manufacturer in terms of volume, Western Digital was one of the hardest hit by the flooding. The company has 37,000 workers in Thailand, and production in the country accounts for 60 percent of the company's total capacity, according to IHS-iSuppli.

"This facility had been submerged in some six feet of water since October 15, the estate was pumped dry on November 17, main power was restored on November 26 and production restarted November 30," according to a statement.WD restarted production of hard drives this week in one of its buildings in Bang Pa-in, Thailand, one week ahead of internal schedules, the company said.

WD went on to say that it expects to begin head slider production (the slider allows the HDD's head to maintain a consistent flying height above the disk) in Bang Pa-in during the March 2012 quarter and also begin production at a new slider fabrication facility in Penang, Malaysia, in the same timeframe.

Other facilities in Thailand, however--at Navanakorn--remain under two feet of water. Those facilities are expected to be pumped dry within 10 days, then decontamination and refurbishment will begin, WD said.

For the industry as a whole, WD expects that hard drive shipments in the December quarter will be limited to approximately 120 million units, including units that were in inventory at the beginning of the quarter. Demand for the December quarter is in the range of 170 million to 180 million units. WD "believes that significant industry supply constraints will continue in the March quarter and beyond."

For the December quarter, the company expects revenue of at least $1.8 billion and gross margins above the high end of its business model range of 18 percent to 23 percent. Unusual charges related to the floods are expected to be in the range of $225 million to $275 million for the December quarter, exclusive of any insurance recovery, the company said.

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Kindle Fire already headed for No. 2 in the tablet biz

The Kindle Fire has proven to be an instant hit.

(Credit: Sarah Tew/CNET)

Well, it certainly didn't take long for Amazon's Kindle Fire to bring on the heat.

After only two weeks in the market, the Kindle Fire has skyrocketed ahead of many of its tabletcompetitors, according to IHS iSuppli. The market researcher is so confident in the Kindle Fire's success, that is already projecting it as the second-most popular tablet in the world, behind onlyApple's iPad.

The success of the Kindle Fire answers what had been a lingering question about the tablet business: whether consumers wanted tablets, or just iPads. The Kindle Fire's $200 price tag, along with other tablets that saw heavy discounts around Black Friday, are resetting expectations about how much consumers will pay for such a device.

That may bode poorly for manufacturers looking to compete directly against the iPad with more expensive components, larger and brighter displays, and even cellular service. So far, those companies have only seen middling interest in their products.

IHS projects Amazon will ship 3.9 million Kindle Fire tablets in the fourth quarter, giving it 13.8 percent of the global market, well ahead of No. 3 Samsung, which is expected to have 4.8 percent of the market despite offering a wide range of Galaxy Tab tablets. Both are still far behind Apple, which will hold 65.6 percent of the market.

"Nearly two years after Apple Inc. rolled out the iPad, a competitor has finally developed an alternative which looks like it might have enough of Apple's secret sauce to succeed," said IHS analyst Rhoda Alexander.

The Kindle Fire was largely helped by its more affordable price tag, significantly undercutting most other tablets. Amazon has an advantage because it can sell the product at a loss or minimal profit and make it up later by selling products and services through the device.

In fact, the most successful tablets have either started low, or dropped to a more affordable level. Nielsen had previously pegged the Hewlett-Packard TouchPad, which due to a fire sale that brought its price down to $99, as the second most popular tablet.

The BlackBerry PlayBook also performed well over Thanskgiving weekend, thanks to a massive discount that brought its price down to $200. Best Buy said it sold out of the devices.

As a result of the Kindle Fire's strength, IHS upped its forecast for total global tablet shipments by more than 4 million to 64.7 million units, representing a 273 percent increase over a year ago. Likewise, IHS boosted its longer term forecast, with shipments now expected to rise to 287.2 million by 2015.

Related articles

• Amazon Kindle Fire already headed for No. 2 in the tablet biz (news.cnet.com)

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Man builds girlfriend $125 iPad

We are great supporters of love here at Technically Incorrect.

Which is why this tale of amorous electronic ingenuity far beyond using pepper spray on Black Friday, brings us to a state close to stinging tears of wonderment.

The way China Daily hums it, Wei Xinlong, a college student at the Northeast Normal University in Changchun, really wanted to make his girlfriend, Sun Shasha, very happy.

He knew she would love to be in possession of the world's No. 1 passion possession, the iPad. However, he didn't have the money to effect that love. So he set about building an iPad from scratch.

So imagine something that looks a little like this, but thicker and with rhinestones.

(Credit: CC Pedro Eugenio Artunes/Flickr)

Like all resourceful students, he took to the Web and learned as much as he could about the way tablets are built.

Then he bought a touch screen and a battery--online, naturally--and set to work. He reportedly cobbled together parts from an old laptop he bought, also online: the motherboard, the display, and the memory, for example. Then he finished it off with some pretty little rhinestones all the way round the outside. (A picture is here.)

"One can read, download, watch movies, play games by just touching the screen," he told China Daily News.

Oddly, though the home-made creation is Windows 7 enabled, it does seem to have an Apple logo on it-- something that might amuse a few lawyers and stimulate a few counterfeiters.

The whole cost of the homemade machine was 800 Yuan, which, at today's inflated prices seems to be $125.

Sun Shasha, for her part, couldn't have been more deliriously happy. She told China Daily News: "This is the best gift I've ever had, and I will keep it forever."

Surely, with so many vast technical brains in the U.S., some dashing gent must have tried to make his lover a personally crafted iPad.

Or has love lost its creative power over here in the West?

Related articles

• Man builds girlfriend $125 iPad (news.cnet.com)

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With Pixar, Steve Jobs changed the film industry forever

In this archival photograph, Pixar CEO Steve Jobs is seen with the studio's other lead executives, Ed Catmull (left) and John Lasseter (right).

(Credit: Pixar)

There's never been a movie studio with an unbroken streak of hit movies like Pixar. From the original "Toy Story" to "Finding Nemo" to "Cars," "Ratatouille," and "Toy Story 3," the animation wizards at Pixar have won over the industry, forcing Hollywood to change how it makes films, and it's made billions in the process.

And it never would have happened without Steve Jobs.

Pixar began as a division of George Lucas' LucasFilm, working on the development of imaging technology and its own imaging computer. But inside, some were more interested in making animated films than expensive machines, and LucasFilm soon lost interest in the project.

According to "The Pixar Touch," by David Price, LucasFilm in late 1985 was on the verge of selling the unwanted division to a partnership of Philips Electronics and General Motors subsidiary Electronic Data Systems. Only a boardroom spat started by EDS founder and GM board member Ross Perot over a $5.2 billion buyout of Hughes Aircraft--and the subsequent souring of GM on anything Perot and EDS were involved in--scuttled the deal.

And along came Jobs to save the day. Brandishing a $5 million check, the Apple founder--by then kicked out of his own company--bought Pixar on January 30, 1986, setting in motion a string of events that would generate some of the best-loved films of the late 20th century and result in Disney's 2006 acquisition of Pixar for $7.4 billion. Jobs' initial $5 million purchase price, plus the additional $5 million in capital he invested in his new baby made him Disney's largest shareholder and instantly one of the most powerful people in Hollywood.

Won over
To Price, Jobs was an "accidental visionary" in the film industry. Speaking to CNET by phone Thursday, the author said that though Jobs had at first bought Pixar mainly because he was enthralled by the outfit's computer technology, he was soon won over by the passion of John Lasseter, an animator who had flamed out in an initial stint at Disney in the 1980s, but who found a home at Pixar. Lasseter, Price said, "wanted to build an animation studio, and it's a great tribute to [Jobs'] genius that he was flexible enough to put aside his original idea of being a computer company owner with Pixar [and to] turn it into the incredible artistic powerhouse it is."

This is Steve Jobs' mailbox in the Pixar mailroom, as seen in May 2010.

(Credit: Daniel Terdiman/CNET)

By now it's common knowledge that over time, Jobs held the CEO titles at both Apple and Pixar. But where he was the everyday leader at 1 Infinite Loop, he let his lieutenants--Lasseter and Ed Catmull--run things at Pixar.

Still, it may well be that Jobs' general approach to completing projects, his insistence on waiting until something was good enough to be released, was what gave Lasseter and Catmull the confidence to put in the time and energy to make so many of Pixar's films as good as they are.

"Steve Jobs was an extraordinary visionary, our very dear friend, and the guiding light of the Pixar family," said Lasseter and Catmull in a public statement upon news of Jobs' passing. "He saw the potential of what Pixar could be before the rest of us, and beyond what anyone ever imagined. Steve took a chance on us and believed in our crazy dream of making computer-animated films; the one thing he always said was to simply 'make it great.' He is why Pixar turned out the way we did and his strength, integrity, and love of life has made us all better people. He will forever be a part of Pixar's DNA."

Creating a new industry
In the 1990s, Pixar was "not the only [studio] working on [computer animation] for movies," said David Cohen, an editor at Variety. But "they were the ones that succeeded and showed everybody how to do it, both technologically and creatively, and the extent [to which] that changed the entertainment landscape is hard to overstate."

After all, Cohen explained, until "Toy Story" hit theaters in 1995, Disney had been pretty much the only maker of animated films in the United States. And based on the success of "Toy Story" and subsequent Pixar films, a whole animation industry was born in Hollywood. Today, Cohen pointed out, there's a Best Animated Feature Academy Award, meaning that there is at least one such film released a month on average. "That's a completely different world than before Pixar," Cohen said. "Would that have happened without Pixar? Well, somebody had to come along and show it could be successful."

Driving Pixar
Because Jobs had a creative team at Pixar led by Lasseter and Catmull, there was no need for him to try to drive that process. Over the years, Jobs was known to spend about a day a week at Pixar's Emeryville, Calif., headquarters, just across the Bay Bridge from San Francisco. But he most likely wasn't sitting in animation meetings, or working on scripts. "Steve's major impact was on the strategic direction of the company," Price said. "He had the crucial insight that Pixar could one day be the equal of the Walt Disney Company in animation. He made this vision a reality by overseeing the IPO of Pixar stock in 1995, a week after 'Toy Story' was released. He foresaw that if they had that capital, it would give them the independence to create a body of work and to become a brand that would become as powerful in entertainment as Disney. He was very explicit about this."

And obviously, he was able to pull off that vision. Over the years, Pixar's 12 feature films have generated about $7.2 billion worldwide, according to The-Numbers.com. And Jobs succeeded in selling the studio to Disney, a move that was celebrated within the ranks at Disney's animation house. Lasseter's and Catmull's arrival at Disney was "greeted with cheers," Price recalled. "People within Disney animation knew that the studio had fallen on terribly hard times, and that its films were not doing well. And they knew that they needed something and they rightly saw John Lasseter and Ed Catmull as their best hopes in bringing Disney animation back to life."

The entire Pixar team, with Jobs, Lasseter, and Catmull in front, photographed at studio headquarters in Emeryville, Calif., for its 20th anniversary.

(Credit: Pixar)

Yet even without the library of films and influence on the wider computer animation industry, Pixar's impact on Hollywood may still have been profound. That's due, said Cohen, to RenderMan, the computer rendering software that the company developed in 1987. Today, that software is not only used in-house at Pixar, but also at studios throughout Hollywood and the global film industry and the software alone "would have made Pixar a significant company to the movie business," Cohen said.

Still, what will always be Pixar's calling card is its long history of turning out top-quality films that make hundreds of millions of dollars--notwithstanding the mediocre reviews for 2011's "Cars 2." And the studio's ability to succeed again and again and again, when almost everyone in Hollywood falters most of the time, is likely due to the ethos that Jobs instilled there--and at Apple--that Pixar would take whatever time was necessary to get each film right.

"His experience with Pixar was representative of the same kind of acumen and vision that he showed at Apple," said Doug Seibold, president and publisher of Agate, which will soon release "I, Steve: Steve Jobs in his Own Words." "One of the things that comes up over and over again in 'I, Steve' is his belief that in order to really satisfy what people wanted, you had to look beyond what people were doing right now, and even beyond what people were telling you they wanted, in order to see the next thing."

That may manifest, Cohen explained, in Pixar's challenge to traditional Hollywood business rhythms. "The movie industry has to fill a [release] pipeline, and Steve Jobs and Pixar have not been willing to put something out just to fill a pipeline...and meet a release date," Cohen said. "They've always been willing to [wait until a film] was great. I think that's a huge challenge to Hollywood, because Hollywood doesn't run that way. James Cameron works that way [and] there's a handful of powerful auteurs that work that way, but for the most part, it's [usually] good enough, get it out the door, get it into theaters. There's a lot of settling, and [Jobs] didn't settle."

Yet, despite Pixar's tremendous success, that model may not have the lasting influence some might expect. That devotion to quality--without worrying so much about the bottom line, or tight schedules--is not compatible with most corporate structures, which is how Hollywood tends to operate. "It is very difficult for corporate environments...to adapt to the Pixar model," Cohen said, "because it's artist driven. The artists have control."

As such, Cohen lamented, "I wish I could say that all of Hollywood had looked at Steve Jobs, [at] his absolute conviction in his own vision, his passion for what he did...and determined [it would do the same]. I don't think that's remotely true."

Still, Jobs' reach in the world of film is vast, and will likely continue to grow, long after his death. His commitment to the development at Apple of devices like the iPad, as well as cloud services like iTunes and the increasing availability of streaming movies, will almost certainly be felt in consumers' living rooms and inside studios for years. "I think the influence that Steve Jobs had on Hollywood has not even been fully realized," Cohen argued. "I think we won't fully appreciate it for 10 or 15 years....He was a master of disruptive technologies. His innovations were feared as much as admired [in Hollywood], and for good reasons."

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