In this weekend update, we answer the top questions we received this week on developments affecting the C-band policy and the TMUS/S/DISH transactions. On C-band, there were several important filings on the amount of spectrum and principles for an auction that help improve CBA’s prospects for a successful outcome at the FCC’s December meeting. A House hearing, however, raised the prospect of bipartisan legislation opposing the CBA plan. Moreover, an extensive ex parte by AT&T raised the prospect that neither CBA nor the FCC are in a position to act quickly, as AT&T noted a number of details that it argues need to be revealed and subject to public comment that are not yet in the record. We also speculate—because in this case speculation is the only approach—on what might have transpired between Senator Kennedy and the President on the C-band policy. On the big mobile deal, we didn’t see anything that we moved the odds, but we answer questions about the FCC order, the Sprint Lifeline investigation, the California PUC process, and a canceled conference between the parties and the Magistrate. We close with a brief meditation on another Gasparino tweet, that is informative about where things are headed, but probably not in the way he intended.
C-band: Lots of action, little change, but big mysteries linger. The C-band proceeding was the subject of lots of activities this week. Everything that happened was consistent with our general view of the direction, but critical mysteries are yet to be resolved, with the biggest one being whether the CBA strategy of not publicly revealing certain details until the end of the process will succeed or backfire.
Did the proposal to reallocate 300MHz change the odds of the ultimate outcome? No, though it reduced the risk that CBA would not be able to meet the FCC’s minimum requirements. The week began with the CBA filing a letter with the FCC outlining a plan for reallocating 300MHz. This was a positive for CBA but not a surprise, as FCC officials have been signaling since the spring that they believed 300MHz was the minimum amount necessary to proceed. The challenge has long been finding a way to do so that was acceptable to broadcasters and the content community. The CBA proposes to do so by using high efficiency video coding (HEVC) compression. The broadcaster trade association, which had taken the position that 200 was the maximum amount that could be reallocated, filed a vague response reiterating the importance of protecting existing uses while neither endorsing nor opposing the new proposal. We think this indicates something of a divide among its members, but ultimately we think that set of stakeholders will not stand in the way of reallocating 300MHz, so that political and legal risk is reduced, though not eliminated.
Did the letter on the auction principles change the direction of the proceeding? No, as it has been clear that the original CBA auction proposal was dead on arrival. This week also saw a filing jointly signed by five wireless carriers, including AT&T and Verizon, and CBA laying out a number of principles for an auction. Again, this was a positive for CBA but not a surprise. The principles involve using traditional FCC methods and abandoning the earlier CBA proposal for a single round sealed bid auction. As we noted shortly after CBA rolled out its original proposal, no one supported it and the buyers wanted an auction with procedures they were familiar with. Of particular significance was an agreement between the parties that the reserve price should be set to “ensure that the sale of repurposed spectrum will generate enough revenue to (1) recoup the costs of conducting the auction, and (2) fairly compensate incumbent satellite providers authorized to use the C-Band as well as effectuate reasonable relocation/reconfiguration/modification costs for themselves and all C-Band earth station users (including reimbursing programmer costs associated with procuring, testing, and installing new encoders).” We find that significant in part because it addresses an earlier concern about reserve prices being set unilaterally by CBA potentially to reduce supply and drive up bidding tension. But of greater significance to us is that it requires a clear understanding of what the programmer costs will be prior to starting the auction. As discussed later in the question about AT&T’s ex parte, we think there may be a significant amount of work that needs to be done before there is clarity on what those costs will be.
Did the House hearing change anything? Slightly, but the likely outcome remains the same, except with the contribution to the Treasury likely to be increased, and certain steps have to be taken to reduce litigation risk. In our view, the most important question about the hearing is what was Chairman Pai’s reaction to it? We think he is generally supportive of CBA’s effort but is also concerned about his political risk. We think the key things he would have noticed would be that there was bipartisan support for an FCC sale and the US Treasury, rather than CBA members, getting the bulk of the revenues. He also would have noticed a bipartisan concern about litigation risks. Pai has to worry that if his proposal appears to not take into account the concerns of the committee, there is a decent chance of a bipartisan bill passing the House that, in effect, criticizes him. While the bill may die in the Senate, Pai would clearly prefer no such legislation emerging from the House. We doubt the hearing will cause Pai to change his general direction but he will likely push CBA to articulate ways in which its own auction plan is a close mirror of what the FCC would have done,The auction principle letter noted above goes a long way to doing that but the statement of principles is still short of the kind of details that the FCC itself would provide before it commences an auction. increase its view of what constitutes a significant voluntary contribution to the Treasury would be, and take steps to reduce litigation risk.For example, Pai might push CBA harder to settle with the small satellite operators, who testified at the hearing, and who have standing to sue if excluded from participating in the proceeds.
What is the relationship between multi-party auction letter and AT&T’s ex parte filing? The auction letter represents a significant step forward but the ex parte filing suggests the FCC and CBA have a significant ways to go. The auction proposal that AT&T signed indicates both a consensus and progress. The week before, however, AT&T filed an important ex parte detailing a number of concerns AT&T has about the transparency and details of the plan revealed to date.AT&T also posted a blog explaining its filing here. All quotes that follow are either from the filing or the blog. Our big takeaway from the filing is that a significant stakeholder (with considerable influence) has suggested that the record is far from complete and that, while speed is important, getting it right is more important. This undercuts the message that other stakeholders, particularly CBA and Verizon,The difference between Verizon and AT&T’s positions may be explained by many things, including a difference in spectrum needs and the difference in assets. Many of AT&T’s concerns relate to the Warner Media side of its business. are making that speed trumps all other considerations.
AT&T noted that it doesn’t really care about who runs the auction or receives the proceeds, other than to note that it supports “ensuring that all reasonable programmer relocation costs get reimbursed, including the cost of adopting new compression technologies that will make the use of the remaining part of the satellite C-Band more efficient.” What matters to AT&T is “getting the auction format, platform and rules correct.” As AT&T noted “these rules, as well as service rules including interference thresholds, should be established by the FCC well in advance of the auction so bidders have clarity and confidence around the spectrum being sold.”
AT&T comments were not limited to the auction. AT&T argues that it is imperative that the Commission and stakeholders “provide the content industry—both the networks like Warner Media and the affiliates across the country—with transparency on: (i) the overall process, (ii) the roles of different stakeholders, (iii) overall cost estimates as well as a full understanding by all affected parties of the types of expenses that would be reimbursable to various stakeholders; and (iv) timing. For precisely these reasons, AT&T has urged that the transition plan be introduced on the record and stakeholders be permitted to comment.” AT&T then detailed a three-phase framework—involving research and design, Band plan-Specific Transmission Engineering, and Transition Plan Execution—that it says will be necessary. While AT&T agrees with supporters of the CBA plan that “wholesale, mandatory replacement of C-band FSS with fiber networks is not feasible in any reasonable timeframe,” which indicates its opposition to the ACA proposal, AT&T also is not on board yet with the new CBA 300MHz proposal. It notes, “the complexity of an HEVC/SD transition, in AT&T’s view, compels a comprehensive plan that is subject to public notice and comment.”
In short AT&T’s ex parte lays out an agenda that suggests the FCC is not currently in a position to adopt a final order nor provider stakeholders the information they need to bid in the auction or efficiency plan for and execute a transition. If the FCC were to agree, it would push back the date at which the FCC would adopt an order.An alternative would be the FCC adopting a general framework document in December, having a public comment period on detailed questions, and then adopting a more detailed order in March or April. While this would be consistent with the Chairman’s promise to show “progress” in the fall, the FCC’s own failure to develop a detailed record after several years would be in tension with arguing that speed is so important that a private auction would be preferable to a FCC run auction. If the FCC does not agree, it raises both politicalIf AT&T were to join in a Congressional effort, it would have the ability to bring a number of Republicans to support Democrats in an effort to direct the FCC how to proceed. and legal risks.If the details are not made public in time for comment, there would be an Administrative Procedure Act issue on appeal. There may be substantive issues as well.
Why hasn’t CBA filed a plan to address how it would run the auction and the other issues AT&T raises? We are not sure but it looks like a four-corners strategy.For those of you from a generation that knew not the great Dean Smith, four corners refers to a strategy in college basketball of running out the clock when one has the lead. It worked for awhile for UNC and it may work for CBA. Despite the progress of the week, there are key questions that still need resolution. CBA still has not filed its own detailed auction or transition plan nor defined what a significant contribution would entail. As we noted several weeks ago, this could be a function of a tactical decision to make such a detailed filing as late as possible to reduce the time the proposal is subject to public commentary. (LINK)
While we see some tactical advantages of this approach, it does entail some risks.
We think those risks are on display in AT&T’s ex parte that we discussed. AT&T is suggesting that while it wants to support key elements of the CBA’s plan it does not want to give CBA a blank check. By laying out the details that need to be subject to public comment, AT&T is undercutting CBA’s strategy of not revealing the details until the end of the process. But CBA may be counting on the FCC’s desire to simply move forward, despite the limited time for comment and limited details, to get what it needs to hold the private sale and negotiate the contribution when it has the leverage of the FCC thinking it has no alternative.
What will result from the Kennedy conversation with Trump? Who knows but if something does, we will all find out together on Twitter. Senator Kennedy apparently had a conversion with President Trump about C-band. Kennedy’s aide described the conversation as “positive.” A White House aide that the President will continue to listen to and work with others “to ensure the United States dominates 5G.” In a normal world, we would interpret the White House message, emphasizing 5G leadership instead of taxpayer return, as a positive sign for CBA. But we are not living in a normal world. Still, we are skeptical that Kennedy will be successful in convincing the President to join his side, so we continue to think of a Presidential intervention as a low probability/high impact possibility.
TMUS/S/DISH: Little action behind the scenes, lots of positioning for trial. Things were relatively quiet on the wireless merger front but issues collateral to the core competition issues indicated that a lot is going on behind the scenes.
When will the FCC order come out? This week. As we noted several weeks ago, while the item was voted several weeks ago, the Republican Commissioners have been rewriting their statements to respond to various criticisms incorporated in the Democratic Commissioners statements. (LINK) We understand that process is now either done or almost done and the item will be released this coming week. We don’t believe it will have a significant influence in the trial but it may provide a good preview of the arguments the parties are likely to raise in the trial.
Are Sprint’s lifeline problems relevant? Yes to the valuations but not to the trial. The FCC is currently working on an enforcement action against Sprint for the company’s accepting Lifeline funds it was not entitled to receive. The enforcement process is secret but it could result in fines in the low billions of dollars. This, in turn, could result in some restructuring of the deal between T-Mobile and SprintThe enforcement action is not on any predetermined time-table, but we doubt it will be resolved quickly. There are multiple ways for the parties to incorporate it into the deal, such as creating a reserve at closing that is used to adjust the final payments depending upon the outcome of the enforcement action. so that if there is a change, it will be done on the basis of some kind of reserve that is used for the final payments, as adjusted pursuant to a preset formula. but it is not relevant to the competition issues that will be at the core of the trial.There are some issues related to the Sprint’s character to hold FCC licenses and the ability of the public to comment on them that may also be raised in a challenge to the FCC merger order but we think it is unlikely to prove to be the grounds by which any court acts to block the license transfer.
Can the California PUC proceeding affect the outcome? Yes but it is highly unlikely. The California PUC set a schedule for its evaluation of the merger, with the companies (including DISH’s) written testimony due by Nov. 7, and opponents and other parties’ responses due Nov. 22. A final round of briefs from all sides are due Dec. 20. The Administrative Law Judge will then draft his findings. We think the findings will be ready for the CPUC to vote on by its February meeting. While this could cause a slight delay in closing, we don’t think it will be material. It is difficult for PUC’s to block a merger. Thus, if the trial court blocks the deal, the CPUC proceeding is not relevant. If the trial court approves the deal, the CPUC decision will be reached at roughly at the same time as the court decision and will, we would guess, focus on a few California specific conditions.
Why did the parties schedule a conference and then cancel it? We think because of a discovery dispute that the parties settled, probably with the companies agreeing to turn over additional documents. On October 28, the states filed a confidential document requesting a conference with the Magistrate. On the 29th, the Magistrate scheduled the conference for November 4th. Later on the 29th, the parties agreed to cancel the conference call. Because the substantive documents were under seal, we can’t know for sure the purpose of the conference but we understand that there have been a number of discovery disputes that, for the most part, have been resolved for the states. Based on that, we would guess that the request reflected another disagreement over discovery that was significant enough to request the Magistrate’s intervention. We suspect the threat and uncertainty of what the Magistrate would do caused the parties to settle, with the history suggesting that the companies provided at least some of the requested discovery.
Charles Gasparino tweeted “Scoop: CWA emerges as hidden force behind Dem AGs opposition to TMobile/Sprint merger—sources: Companies believe CWA is opposing them at the behest of competitors AT&T and Verizon.” Are the two assertions true and will it matter to the trial? Duh, no and no. The CWA is not emerging as a hidden force behind the opposition. They have been a public force against the deal from the beginning. It is doubtful that the Union is doing it at the behest of AT&T and Verizon. It is opposing the deal because it wants union jobs and as their leadership has testified publicly, the Union believes the merger would result in job cuts. Gasparino on the video report “revealed” that the union had made contributions to the state attorneys generals. This is also true and in that, they are far from unique.By not being unique we mean both not unique in enterprises contributing to candidates and not unique in unions contributing to Democrats. Though we admit that calling such a revelation a Scoop, well, that is unique. We expect the companies and their leadership have made some contributions as well.By that we mean beyond simply staying at the Trump Hotel, a factor we find not germane to anything involving the Clayton Act but very germane to the general atmosphere in DC these days. While we have been hearing allegations that the Union is simply a front for AT&T and Verizon opposition for sometime, and we understand the public relations value of having such theories being discussed in public,In today’s political environment, attacks on opponents’ motive rather than the policy argument, are very popular. You may have noticed. we are dubious the court will find such allegations relevant in the trial.
What is interesting to us is that Gasparino, who over the last year has consistently and accurately reflected what we have heard from the companies, and who for a long time dismissed the relevance of the state suit, is now saying that there is little chance of settlement and that the state suit could “blow up” the deal. On those two points, we agree. The first part—little chance of a settlement—is particularly interesting. While that has been our view since the states filed the litigation, we have heard from investors that the companies have been suggesting that the states, like the FCC and DOJ, will eventually see the wisdom in settling. If Gasparino is suggesting the states are unlikely to settle, it suggests to us that the companies are now clear that this merger will be resolved in the courts.