In this weekend update we review the Senate hearing on the C-Band, which did not cause us to change our projections but did raise questions about details, timing, a Trump Wildcard, and above all, where is the actual plan, as none has yet been filed that meet the FCC objectives. Then we invoke Zeno’s Paradox to explain why, though all the FCC Commissioners have voted, we may not see the order approving the TMUS/S deal for another few weeks. We close with quick updates on 5G international competition and the ongoing discussions between Elliot and AT&T.
C-Band: Kennedy Hearing a Constant Glass Half-Empty/Half Full Proposition, with Little New Ground Uncovered and Big Questions Remaining
(Note: Call Monday on C-Band litigation risk. Senator Kennedy (R-La.), a critic of the current direction of the FCC on the C-Band recently noted “They say we’ve got to do a private deal because it’ll be faster. You ever heard of courts? Duh, you don’t think anybody’s going to file suit over this? Any Tom, Dick, Harry, John or Julie can figure that one out.” He also said a CBA run auction would risk litigation “out the wazoo.” Is he right? Join us Monday, October 21st, at 10 am ET for a call on C-Band Litigation risk and a follow-up from the Kennedy hearing with guest speaker Jeff Carlise, (BIO) partner in the law firm of Lerman Senter. Jeff is a longtime communications expert and former head of the FCC Wireline Bureau with extensive experience in litigating on behalf of and otherwise with the FCC. He will lay out a map to evaluate the different litigation risks different FCC decisions might have. Call details available from your New Street sales representative.)
Kennedy hearing: No material change. The biggest event this week relating to the C-Band was the hearing before Senator Kennedy’s Appropriations subcommittee. The hearing featured Chairman Pai as the principal witness. We agree with the assessment offered by our New Street colleague Vivek Stalam right after the hearing (LINK) that nothing at the hearing should be seen as causing a material shift in any of our current thinking about the outcome: a December decisionPai was a little less certain of that than he has been in the past, saying he was “hoping” to get something out by the end of the year, rather than his previous commitment to show progress this fall. Still, we believe the FCC staff has been told to have the draft order ready to be provided to the other Commissioners three weeks prior to the December 12th meeting., at least 300 MHz to be reallocated, and the sale likely to be run by the CBA, with the amount of the CBA members’ contribution to the Treasury still to be negotiated between the CBA and the FCC Chair. Pai stayed largely on the script he had used before, enunciating the four principles guiding his decision: (1) ensuring a significant amount is made available, (2) making the spectrum available quickly, (3) revenue to government (amount unstated), and (4) preservation of existing C-Band services. He also said the FCC favors a “market-based approach” to re-purposing spectrum for 5G. While “market-based” has traditionally described an FCC run auctionPerhaps we have a generation that knew not the prior FCC allocations by comparative hearings or lotteries. By comparison (and by the intellectual heritage of Ronald Coase) the FCC auctions are market based., in the context of the C-Band proceeding, it has meant a CBA run auction, though even there Pai said all options were still on the table.
Details still missing. We were struck by the number of things that were not nailed down, given that the timing of the December meeting requires that the item be released to the other Commissioners by November 20th, leaving the staff a little more than a month to fill in the details. Such details, among others, include:
- The auction structure;
- The license size;
- Reserve prices;
- Caps, if any; and
- The timing and a myriad of other details related to how the transition will proceed.
We were also a bit surprised that Chairman Pai, who is usually very able and smooth in Congressional hearings was visibly unnerved by certain questions we regarded as, perhaps, odd but easy. For example Senator Kennedy asked whether Chairman Pai knew if the CBA had conditionally sold the spectrum already and whether CBA could sell the spectrum to a party that raised national security concerns. We would have thought Chairman Pai could have easily said that the Order would address those concerns and that further, no licenses would be granted to entities raising security concerns. We are not worried about the specific concern but Pai’s lack of clarity causes us to wonder if there are a myriad of other questions that simply have not been raised in the process to date and may down the line cause delays as the details of the eventual plan go through a more rigorous vetting process.
Timing. The biggest area of dispute was on the question of the time saved by a CBA run process versus a FCC run auction. On this question, Kennedy and Pai appeared to talking past each other. While everyone agrees that enabling carriers to use the spectrum as soon as possible is a positive good, there is significant confusion as to the details, including that the auction timing is one, but not the only, variable, as there are also issues regarding licensing, clearing, and a variety of tasks related to equipment acquisition and clearing. Further, as noted above, there are issues related to litigation risk. In any event, Kennedy seemed deeply dissatisfied with Pai’s answers on the subject and we expect further back and forth on this topic in the weeks ahead.
Two-Directional Data. We were also struck by a number of things that could be interpreted as either half full or half empty for CBA:
- Senator Kennedy did not have a large number of other Senators join him (other than Senator Moran) but CBA did not get any Senators out to offer their support for the CBA proposal.
- As noted above, Chairman Pai deflected Senator Kennedy’s concerns about a private run auction but did not convince Senator Kennedy that Pai’s timetable for the difference in timing between a CBA and FCC run auction is accurate.
- There is not much time left but Senator Kennedy indicated he wished to have further hearings on the timetable for different auction proposals.
- The Democrats, for the most part, have been sitting on the sidelines. While House member Matsui sent a letter continuing her efforts to assure an FCC run auction and the proceeds principally going to the Treasury, the letter did not have signatures from other House members and Democratic Senators did not show up for the Kennedy hearing, but by the same token, no Democrats voiced support for the CBA plan.
Trump Wildcard:Pretty much every story written from Washington DC these days could include the phrase “Trump Wildcard.” We, however, are not writing ours out of FOMO but rather because this process actually is subject to a Trump Wildcard, as described in the text.Let CBA Pay for the Wall!!!??? Perhaps the most interesting moment in the hearing was when Senator Kennedy said he was going to raise the issue of the use of sales proceeds to build the Wall with the President, as “this would solve all the President’s problems.”Based on our reading of last week’s papers, “all” might be a slight exaggeration but we get the Senator’s point. That raises the question of what would happen if the President were to tweet out support for the Treasury getting most of the proceeds.We have in mind something like “FCC paying $50BN to FOREIGN satellite companies. SAD! Congress should use that money to BUILD THE WALL!”? We also feel compelled to point to the Senator that if our New Street colleagues are correct that the auction will raise something in the neighborhood of $50 billion, there will even be enough to afford that alligator filled moat! (Hey, anything that’s fodder for late night comics ought to be fair game for our footnotes. And if you think that joke is going too far, we have what are now our three favorite words from this Administration: “Get over it.”) We regard that as a low probability/high impact event. If Kennedy were to succeed, however, we think at a minimum, Pai would go back to CBA and say they have to adjust their understanding of the word "significant" upward. Of course the politics of the Wall and spectrum would make any legislation difficult but we would expect the Pai to fall in line on this issue to White House wishes, if those are expressed through a Presidential announcement.
Big Question: Where is the Actual Plan? For us, the big question after the hearing is where is the actual plan? What we mean is that with about a month before the staff has to finish its work, there is no comprehensive plan that is in the record that has the support of a majority of the Commissioners.Some might suggest that the majority supports the CBA plan. That is actually not true. The current CBA plan as filed at the FCC is for a single round, sealed bid auction of 200 MHz. There are no Commissioners that support either that sales method or that amount of spectrum. Of course the FCC can pick and choose parts of others’ plans but we expect that before this is over, CBA will have to file a more comprehensive plan. There are hints that CBA is going to file a revised plan soon that will gather the support of the majority. That may be the case, but we wonder why it hasn’t happened yet. We have two theories, both of which, in our view, have about equal plausibility but have different implications for investors.
The plan awaits the optimal timing to reduce scrutiny. First, the reason why CBA has not filed a plan may be that it wants to minimize the time others will have to evaluate it. Repeating the playbook the Chairman used with the TMUS/S deal in MayThe facts are different in terms of the item, but the fundamental tactic is the same. There, TMUS met with the Chair on a Friday and filed a 28 page set of conditions. On Monday, the Chair and the two Republican Commissioners announced their support before anyone could file anything or lobby about those conditions. Of course we still haven’t seen the actual order, but the tactic of a late filing and minimal lobbying time has proven effective in the past., CBA will file the detailed plan just before the staff finishes it work, the item will be sent to the other Commissioners on November 20, and the combination of Thanksgiving and the Sunshine period will mean there is very little time for opponents to study and lobby about any objections prior to the vote at the December 12th meeting.
The plan awaits an agreement on 300 MHz with the programmers/broadcasters. Second, the reason why CBA has not filed a plan may be that it doesn’t yet have one. As Pai noted in his comments at the Senate, two of his principles involve reallocating a sufficient amount of spectrum (which we take to mean at least 300 MHz) and preserving existing uses. The problem is that those two goals are in tension. We know that CBA is trying to come up with a plan that enables the reallocation of 300 MHz but that some of the existing users, particularly broadcasters, continue to object that any reallocation beyond 200 will degrade their existing uses.
If the first theory is accurate, we can expect relative quiet until mid-November and then some fairly intense action the week after Thanksgiving at the FCC. If the second is the actual reason, there is a more significant risk that the vote is delayed until sometime next year and even some risk that Pai will have fall short of one of his goals, which itself, could increase the litigation risk.
CBA still in pole position. In short, CBA continues to occupy the pole position in terms of achieving its goals, the Congressional risk is slightly less than it was before the hearing, but has the item heads for the home stretch, there are still risks in terms of timing and details.
TMUS/S/DISH: FCC Order Done, Not Done, As Process Imitates Zeno’s Paradox. Plus Minority Support and More on Tunney Act Review
FCC Order voted but not released. Last week we suggested that this week the FCC order would be voted, the two Democrats would dissent and we would finally be able to read it. Well, we got two out of three.While we strive for perfection, in this case we agree with Meatloaf that “two out of three ain’t bad.” The item was voted. The Democrats dissented. As to the release, however, we assumed, incorrectly, that the Chairman would then release the item, particularly so that company lawyers could incorporate its analysis in their briefing for the upcoming trial. Instead, the Chairman has held the item, apparently so that the item and supporting statements of the three Republicans who voted for it can be revised to address some of the points in the dissent.
And the rewriting begets rewriting begets….. Of course, when that happens, the Democrats would be within their rights to insist on an opportunity to revise their own comments to reflect the changes the Republicans made, which itself can lead to another cycle.We use the word “rights” loosely. Certainly, they have an equitable principle on their side but at this stage, there are no rules beyond the ability of the Chair to call the question and release the item (or the right of three Commissioners to overturn that decision.) In other words, the rules now are whatever the Chairman says in terms of rewrites. In this regard it reminds us Zeno’s paradox the tortoise and AchillesZeno’s paradox involved a hypothetical race between a tortoise and Achilles in which the tortoise is given a head start. As Aristotle recounts how the paradox would play out, “In a race, the quickest runner can never overtake the slowest, since the pursuer must first reach the point whence the pursued started, so that the slower must always hold a lead.” That is Achilles would never catch the tortoise, as by the time Achilles reached the tortoise’s starting point, the tortoise would be further ahead. As that cycle would continue to repeat itself, Achilles would always be behind, though in increasingly infinitesimal distances.For reasons best discussed over stiff drinks, the principle of running incredibly fast but still never reaching a goal reminds Blair a lot of his stints in government. as there is a theoretical chance that the cycle of revisions is never ending. In the real world, however, Achilles catches the tortoise and the item will be released when the Chairman decides the cycles of revisions must end. But it difficult, at this time, to predict with confidence the release date.
It is not difficult to ascertain, however, that the longer the delay, the less likely it is that the item will play a significant role in the Judge’s analysis. As we have noted before, the expertise of the FCC on Clayton Act issues has already been undercut by the majority’s initial expression of support for a deal the DOJ rejected as well as Mr. Delrahim’s testimony before the Senate. (LINK) It will further be undercut by the dissents. Thus, while we reserve judgment until we read the item, the odds favor the item not being significant in terms of evaluating the probabilities of the trial’s outcome.
T-Mobile Gains Support of Major Civil Rights Groups. T-Mobile announced this week that a coalition of civil rights groups had struck a deal with the company in which the company agrees to certain practices to improve diversity and service in low-income communities and the civil rights group express support for the deal. (The deal did not include such commitments by DISH.) We don’t think this agreement will be relevant in the trial; nothing in the agreement touches upon the competition issues. The agreement, however, will no doubt be used by the company in its ongoing efforts to get some of the current attorneys generals opposing the deal to settle prior to the trial commencing. We think such efforts are unlikely to succeed for reasons we have outlined before (LINK) but the agreement is a sign that the company has not given up on that effort, and we see the agreement as being marginally valuable in some of those discussions.
The Tunney Act Proceeding. As we noted last week, there were a number of filings last week in the Tunney Act Proceeding by which the deal and the DOJ settlement need the approval of Judge Timothy J. Kelly of the D.C. District Court to move forward. Given the legal framework of the Tunney Act and the background of the Judge, we expect that the Judge will approve the deal. Because of the different standards and process of the Tunney Act Review and the Clayton Act trial, we don’t believe Tunney Act approval by Judge Kelley will greatly influence the decision of Judge Marrero in the New York trial, the Kelley’s decision is published before Marrero reaches his decision, though Marrero would likely have to address issues where there disagreement between how the two view similar evidence. If, however, in what would be something of a surprise, Kelley says that the DOJ has not made the case that the settlement would be sufficient to address the harms to competition identified in the DOJ complaint, we think that would influence Marrero in a direction of blocking the deal.
Elliot and AT&T Negotiations Continue But Deal Environment Cloudy. The WSJ has reported that Elliot Management and AT&T have met to discuss the activist firm’s concerns and objections, including board changes, strategy and potential transactions. As to transactions, we have discussed before that the legal and market environment for a DISH/DirecTV transaction is becoming more favorable. (LINK) We should note, however, that the political environment might be moving in the opposite direction. That is, in the short-term we think the President still bears an animus against AT&T as the owner of CNN and while it was somewhat subtle in the litigation against the AT&T/TWX deal, subtly and restraint appear to be less in vogue in the White House these days.See, for example, the Mulvaney press conference, and the original Doral announcement. Longer term, the prospect of a Warren presidency is starting to loom as a real possibility,As we will discuss in an upcoming note, we think the risks of a Warren presidency to the sector are generally exaggerated, but we do agree that she is likely to increase antitrust scrutiny of deals. and with it, significantly more aggressive antitrust, and in particular, merger enforcement. While we expect a number of the deals the Elliot and the company would consider would involve divestitures and therefore as efforts at deconsolidation, we think in general deal risk is getting higher, not lower, as the election year raises uncertainties on both sides of the aisle.
5G and International Competitiveness. We want to bring to everyone’s attention a blog post published yesterday by our New Street Colleague Andrew Entwistle on the topic of international competitiveness and 5G. (LINK) This topic has driven a lot of discussion in DC circles. We think the most interesting and thoughtful DC analysis was provided by the Defense Innovation Board, which in April published a 33-page paper detailing the potential security risks of China’s ascendency in developing and deploying 5G networks. Recently, Commissioner Carr has been doing a number of press interviews with the theme that the U.S. is decisively beating the Chinese, while Pai has been suggesting that China silencing the NBA is evidence of the danger of Huawei equipment. We think Andrew’s piece, which provides interesting data on what is actually happening in the markets, demonstrates why investors have to pay attention to what is happening in Asia to be able to understand what is likely to happen in the U.S., as well, in our view, on why the current FCC framework for evaluating competition misses critical issues in the reality of markets are developing.