Why Verizon needs AT&T-Mo to just disappear

Sprint may have popped open champagne on Tuesday after the Federal Communications Commission denounced AT&T’s proposed merger with T-Mobile USA and recommended it go to administrative hearings, but Verizon Wireless executives uttered a few sighs of relief as well. Of all of the possible outcomes in the AT&-T-Mo fallout, the FCC approving the merger with a laundry list of new regulations would have been the worst-case scenario for Verizon. It appears to have dodged a bullet.

The FCC could have required AT&T to divest spectrum and networks in numerous markets – FCC staffers had competitive concerns in 99 of the top 100 markets. It could have imposed deadlines for deployments and stricter requirements on the population and geographic areas those networks covered. It might even have dictated commercial terms on how it used that spectrum, spelling out the terms of data roaming agreements and maybe even imposing restrictions on what AT&T could charge for data service. All of these would have been anathema to Verizon.

Why? Because whatever restrictions and stipulations AT&T is forced to abide by if this merger goes through would return to haunt Verizon down the road. Verizon may be sitting pretty on a big fat LTE network today, but it readily admits it must go back to the market for more spectrum at some point. That means acquiring another operator, buying spectrum from a competitor or picking up new licenses at auction. Verizon may even weighing a bid on Sprint. Given the current regulatory environment, such a purchase would out of the question today. But there are plenty of smaller players that VZW likely is eyeballing. Any future bid Verizon makes on a competitor or spectrum would be clouded by whatever requirements the FCC and U.S. Department of Justice would impose on AT&T-Mo today.

What’s Verizon really thinking?

Verizon’s official stance is that it’s “unopposed” to the merger so long as no new requirements are imposed on U.S. operators. Last week, at a Morgan Stanley investor conference in Barcelona, Verizon EVP and CFO Fran Shammo reiterated that stance: “There needs to be consolidation. And as long as there’s consolidation without regulation we don’t have an objection to it.” (You can read the full transcript here).

A merged AT&T/T-Mobile would be a threat to Verizon just like it would be to Sprint. AT&T would gain enormous scale and it could field an LTE network with twice the capacity of Verizon’s. Big Red has never lacked for confidence, though. It has no trouble competing against AT&T today when it has 100 million subscribers. What’s 34 million more that AT&T would gain from T-Mo? Verizon probably also feels it can take advantage of the inevitable chaos of a merger transition period to scoop up a lot of T-Mobile customers.

I think Verizon’s position on AT&T-Mo comes down to cold, hard Realpolitik: The enemy of my enemy is my friend. The biggest threat to Verizon’s future business isn’t AT&T; it’s the FCC and other regulators. Verizon’s interests are aligned with that of its archrival but that doesn’t mean Verizon is supporting the merger outright. In fact, it’s playing a bit coy.

Verizon executives aren’t naïve enough to believe that a AT&T-Mo could have flown through the FCC and DOJ unfettered. The public, political and regulatory outcry against AT&T guarantees that, if the deal were somehow to win approval, it would be loaded down with new regulations. Verizon’s aim was to minimize the damage.

The best outcome for Big Red

FCC Chairman Julius Genachowski

The FCC had three options: Approve AT&T-Mo outright, approve the deal with conditions or send it off to an administrative law judge for a hearing – the closest thing the FCC can do at this stage to denying the petition. The first option was off the table, so Verizon’s best hope was that the FCC and DOJ approve the deal with minimal requirements – some market divestitures here, some spectrum sales there.

Sending the merger review to an administrative hearing doesn’t bode well for AT&T, but it’s not an outright denial. AT&T can still save face by withdrawing its position. With no official decision made, there’s no precedence. AT&T would be free to try again with another potential acquisition, and Verizon could pursue its own consolidation agenda without a failed AT&T-Mo hanging over its head.

That doesn’t mean AT&T didn’t inflict any damage on Verizon. On Tuesday, FCC Chairman Julius Genachowski didn’t just recommend that the commission shuttle AT&T-Mo off to an administrative hearing, he also circulated a draft asking commissioners to approve AT&T’s pending purchase of Qualcomm’s 700 MHz FLO TV spectrum “with conditions.” The FCC didn’t elaborate on what those conditions might be but whatever they are neither AT&T, nor Verizon, is going to like them.

From Verizon’s perspective, the longer AT&T continues to press its case the more damage it can do. Verizon just wants this deal to die.

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