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Cable Technology Feature Article

January 23, 2012

Are Verizon-Cable Deals a Lead Indicator?

By Gary Kim, Contributing Editor

Policy groups and competitors of Verizon Wireless and major cable companies are worried about new commercial agreements between Verizon and Comcast, Time Warner Cable, Cox (News - Alert) Communications and Bright House Networks.

Specifically, there is concern the agency agreements, which allow the cable companies to sell Verizon products, and Verizon to sell cable products, will undercut a major source of competition in the fixed network business, namely Verizon’s need to compete with cable, and cable to compete with Verizon. 

Those are legitimate concerns, but also illustrate a perhaps-troublesome and growing reality in the fixed line business globally. Simply, there is a growing disconnect between required new investment and investment return.

To a growing extent, ensuring adequate competition also has to be balanced against a robust climate for continued investment. 

To be sure, the extent of competition in communications is, and ought to be, a concern of policymakers. But that isn’t easy. A reasonable argument also can be made that it is getting harder to justify new fiber to home investments.

Promoting competition remains an important concern. But for the first time ever, one might also raise questions about the basic ability of any common carrier telecom provider to sustain itself, much less keep investing in more advanced facilities.

That is a very serious question indeed. In Europe, policymakers are calling for more investment in the face of falling revenues, as users switch to services such as Skype to make calls, hurting revenue from fixed-line services.

Total revenue generated by telecom companies in the EU is expected to have dropped two percent in 2011, following a 1.4 percent fall in 2010 to EUR274.9 billion, according to the European Telecommunications Network Operators' Association.  Since 2005, fixed-line revenue has dropped 28 percent.

ETNO, which mainly represents former state-owned monopolies in the telecoms industry, said a continuing decline in revenue could hurt spending on Europe's telecoms infrastructure, and called on European authorities to create a supportive environment.

"Looking at the persistent decrease in revenue, we see a high risk in terms of future investment capacity," said Luigi Gambardella, ETNO's executive board chairman.

Promoting investment in telecoms -- in particular the rollout of high-speed broadband -- is a key aim for European Commission. After repeatedly rapping companies for failing to invest, EU commissioner for the digital agenda Neelie Kroes last year said the EU would provide EUR9.2 billion to support broadband investment and pan-European digital public services for the 2014-20 period.

The basic reason, of course, is that the traditional revenue supporting those networks clearly is eroding.

In that light, the Verizon deal with top cable companies might make a great deal of sense, as it gives all the participants the ability to sell a wider range of key products, without investing in infrastructure. And that is the concern.

Reseller and agency agreements are quite common in the communications business. That isn’t the issue so much as the fear that the deals will mean all of the companies can get by without spending so much on infrastructure.

In fact, some would argue that  the agency agreements (resale of Verizon services under cable brand names will not happen for five years, at least) are not within the proper purview of the Federal Communications Commission, though there is uncertainty about the matter.

The parties point out that the spectrum Verizon Wireless is buying from those firms is not related contractually in any way to the agency agreements, though some fear there is a de facto quid pro quo.

Also, it arguably makes a big difference where the agency deals are followed by actual sales efforts. In areas where Verizon has no fixed network assets, it isn’t so clear that there is any effective diminution of Verizon’s investment in fixed resources, as it owns no such assets in most regions of the country.

Cable operators have no retail wireless operations, so adding the ability to sell Verizon Wireless services, under Verizon’s brand name, similarly would not pose any particular change in competitive dynamics.

There is concern about the potential impact in areas where Verizon does own and operate fixed networks, though. On the other hand, in most such areas Verizon already has built out its FiOS (News - Alert) network, so the “depressing” impact of any agency deals does not seem to represent a restraining impact on investment, either.

The key areas where there might be legitimate concern are Verizon fixed-line service areas that do not yet have FiOS builds underway. On the other hand, in principle, the deals would not be dissimilar from deals AT&T (News - Alert), Verizon and many other telcos have with satellite providers that allow bundling of satellite video with fixed network voice and broadband access.

There are policy issues here, no doubt. But among those policy issues is what should be done to ensure healthy investment in facilities at a time when revenue prospects arguably are declining.

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Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Rich Steeves