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Is the DOJ holding up Verizon's $3.9B cable-spectrum deal?

The Wall Street Journal reports that the Justice Department is concerned about co-marketing arrangements in Verizon's $3.9B bid to buy wireless spectrum from cable operators.

The U.S. Justice Department is holding up Verizon Wireless's $3.9 billion bid to buy wireless spectrum from a consortium of cable operators, the Wall Street Journal reported Friday.

The Federal Communications Commission, which also has to sign off on the deal, is ready to approve the deal, sources have said. Verizon announced in December that it planned to buy about 20 MHz of Advanced Wireless Services wireless spectrum from a group of cable companies that includes Comcast, Time Warner Cable, Cox Communications and Bright House.

The deal is the largest spectrum transfer the FCC has ever considered outside of a merger. Verizon has worked closely with the FCC to address its concerns over controlling too much spectrum in certain markets. In April it agreed to sell some of its 700 MHz spectrum in the lower A and B blocks. And last month it announced a deal to sell T-Mobile USA some of its existing AWS spectrum. Verizon's promised spectrum divestitures are contingent on upon the completion of the license transfers from the cable operators.

Sources close to the FCC say that the agency has been pleased with Verizon's responsive and willingness to work with the agency to address concerns over concentrating too much spectrum under one carrier. Most experts are confident that the FCC will sign off on the deal with only a few other minor conditions, which would likely include data roaming requirements and a shorter time frame for building the network using this spectrum.

The deal will give Verizon additional spectrum that it can use to build its 4G LTE network. The company already has begun building this network with 700MHz wireless spectrum it bought in 2008. The cable companies' spectrum will allow it to add capacity in a higher frequency so that it can better cover large urban markets.

But the spectrum sale is only one piece of the overall deal, which was announced in December. In exchange for getting the spectrum, Verizon has also agreed to a co-marketing arrangement with the cable operators selling the spectrum. As part of this deal, Verizon Wireless can sell and market cable broadband and TV services to its customers, while cable operators can include Verizon Wireless service in its bundle of choices.

The problem with this deal for regulators is that Verizon Wireless's parent company Verizon Communications also sells broadband and TV services in markets where it competes with the cable operators. Regulators at the Justice Department fear that this deal means the cable operators and Verizon Communications have effectively agreed to not compete, according to the WSJ.

Neither the Justice Department nor the FCC would comment on these issues or state where the deal is in their regulatory approval processes.

Verizon Wireless has already begun marketing cable services from Comcast and Time Warner along with those of other cable partners in some markets where Verizon's Fios broadband and TV services do not compete. But the companies have said that eventually the cross marketing deal will be in effect throughout the country, including areas where cable operators compete with Fios services.

Mike Ritter, the chief marketing officer for Verizon Communications, said in a recent interview with CNET that Verizon will have to compete more aggressively with cable operators when the co-marketing deals go into effect in Fios territories.

"We are going to have to be better and more on our game to aggressively compete for customers," he said. "The way I look at it is that the cable companies will be in Verizon Wireless stores, and we'll be there too."

Ritter explained that today, Verizon's Fios service is only sold in about 100 Verizon Wireless stores. But he said that the deal with the cable companies will push the wireless side of the business to look at Fios and other video services more strategically. And he said this means that distribution for Verizon Fios services will also increase as it ramps up for the other cable companies too.

"We will be more aggressive than ever in selling our Fios services," he said. "And we'll have wider distribution than we've had previously."

The Wall Street Journal reports that officials at the Department of Justice don't seem to be buying this argument. They are particularly concerned with the joint marketing arrangement within Verizon's Fios territory. And they are also concerned with the language of the deal, which would extend the marketing pact for years.

It's still unclear whether objections to the joint marketing will unravel the spectrum deal as well. Verizon's chief technology officer Tony Melone said at a conference last month that the deals are separate. And that the approval of one has nothing to do with the other.

But Comcast's head of regulatory affairs, David Cohen, has already testified before Congress that if one aspect of the deal is changed too much, it could jeopardize the entire deal. In a conversation earlier this year with CNET, Cohen reiterated the importance of the marketing piece of the deal.

"There is no secret that our interest is not just in selling spectrum," he said. "This is a strategic asset to enable us to develop a complete wireless strategy. When our Plan A of building our own network didn't work out, we still planned to leverage this valuable asset to help us strategically. That's what the Verizon deal gives us."

The FCC was originally expected to issue a decision on the deal in July. But with the new agreement with T-Mobile to also consider, the earliest the agency could make a decision is late August. The Wall Street Journal reports that FCC Chairman Julius Genachowski plans to recommend the approval of the spectrum transfer to the rest of the FCC commissioners in late August.