Special Election T-365 Issue: A Warren Presidency and Our Sector: What, We Worry?

The election is one year away[1]We have titled this issue the Special Election T-365 Issue. We recognize that due to the Leap Year, our publication date is actually T minus 366.  But 366 doesn’t imply a year as artistically as 365.  Besides, when the subject is politics, getting it 365/366 right is good enough as it is even more unusual than a Washington DC baseball team winning the World Series.   (OK.  That was a long and over wrought way to get a reference to the Nats miracle in this update but now we’re done.) but investors are already wondering about the impact of a potential Warren Presidency on the Telecom, Mobile and Cable Sectors.  In this note, we address that question, concluding that while Title II reclassification is likely, investors’ worst fears, particularly price regulation and unbundling, are overblown. 

In the first section, we analyze the overall prospects for Warren inspired legislation, concluding that the make up of the Senate, the limited time before the mid-terms, and Warren’s own priorities create an environment in which legislation that would hurt the carriers is unlikely, but that to the contrary, there is some prospect for legislation creating a national framework for privacy and net neutrality, as well as infrastructure legislation, that we think could be mild positives for the sector. 

In the second section we analyze the prospects for executive action, specifically at the FCC and DOJ Antitrust division.  This is where investors’ fears are most concentrated but we think those fears ignore a number of factors that make actions of material consequence unlikely. For example, while fears about more aggressive antitrust enforcement are well grounded, we think the domestic deals where antitrust might be relevant are largely done and Warren’s target will be the tech sector, which may create a collateral benefit for those in the data transmission business.  We think it likely the FCC will undertake some actions that the companies will oppose, such as in consumer protection, truth-in-billing and transparency, but we don’t see those actions as material to equity values.  Spectrum is more complex, with some potential upside for cable and smaller mobile carriers and downside for larger mobile enterprises by virtue of Warren’s appointees likely being more sympathetic to unlicensed spectrum needs and favoring smaller spectrum licenses.  Again, however, we regard these as unlikely to be material to the equity values of the larger players.

In the third section, we discuss three largely overlooked factors—the courts, a change in market dynamics, and a change in the perception of the greatest corporate threat to the public—that provide an additional safety net to mitigate potential legislative and executive action that might materially damage companies in our sector. 

A Warren Presidency: The Big Picture on Odds and Major Legislation.

Investors are beginning to contemplate the implications of Senator Elizabeth Warren becoming President.  We think it is too early to move capital in anticipation of what the post election world will look like, as this coming year may be more unpredictable than any in modern political history.[2]Though November ’67 to ’68 as well as ’91-92 and ’15-16 would certainly give this year ahead a run for the money.  Still, given the volume of questions, we think it may be helpful to provide an overview of the practical realities of a Warren (or other Democrat with a similar ideological slant) presidency on the sector.  We are not attempting to address broader economic issues (such as the impact of Warren’s tax or governance policies) but will stay focused on what we can expect specifically affecting the companies we cover.

What are the odds of Warren becoming President?  We tend to trust betting markets more than polls.  As of this writing, such markets have her as having about a 37% chance of winning the Democratic nomination and a 22% chance of winning the Presidency, though the same odds makers have the chances of a Democrat beating Trump at 60%.  We probably would have picked a slightly lower numbers for Warren and a generic Democrat on all three but we think it roughly right, and, importantly, very volatile.  That is, she is more likely than any Democrat at this moment to win the nomination and the outlook for the general election is close, though we also think the Electoral College gives an advantage to Trump that is often overlooked in national polling.

Impact on the Senate.  What most investors[3]And, as far as we can tell, most of the Democratic Party.  But we are not suggesting the Venn diagrams of investors and the Democratic Party are significantly overlapping at this moment in time. ignore is what would be the impact on top of the ticket on the control of the Senate.  To the extent that parts of Warren’s agenda requires Congressional action, she has to be successful in helping get a number of Democratic Senate candidates successfully across the finish line.  While there are been considerable focus on the question of her popularity on the key swing states in the Electoral College, we have seen little analysis of her impact on the key Senate races.  We think the Democrats are likely to pick up Colorado but in the top tier Senate races (North Carolina, Arizona, and Maine) and second tier races (Iowa, Georgia (2), Kentucky, and Tennessee)[4]Alabama is an interesting case but that race seems more about the Republican primary than the top of the ticket.  Our view of the competitiveness of races is largely based on the Cook Political Report assessment, with our view of the impact of Warren on the specific senate races based on our own sources and assessment. we don’t think Warren will be helpful and indeed, we’d guess she’d prove a negative for those races.  For purposes of this analysis, we think Warren is unlikely to enjoy a Senate majority, but if the Democrats do win the Senate back, the margin is likely to be very thin.[5]Given the massive uncertainties about the election, including among other things the impact of the impeachment proceedings and the state of the economy, we can see scenarios in which the Democrats do well in Senate races regardless of who heads the ticket or the reverse.

Further, even if Democrats regain a Senate majority, Warren would face two significant problems.  First, there are a number of more moderate Democratic Senators (such as Manchin,[6]In what we see as a precursor for the potential dynamic, we note a story from the other day Senator Sanders, when asked if Senator Manchin and other moderate Democrats would vote for Sanders’ Medicare for All bill, responded “Damn right they will.”  Manchin, when asked about it, said, “Bernie is damn wrong.” Tester, King, Sinema and Coons) who are unlikely to give her the kind of loyalty she will need to pass her certain key legislative initiatives.[7]Their opposition to her agenda is more likely to be in the realm of taxation and corporate governance than, say, net neutrality legislation but our point is Warren is unlikely to have votes to spare in getting support in the Senate, even if the Democrats control the chamber.  Second, Democrats in the Senate will fear that the 2022 election could create the kind of backlash that the 1994 and 2010 midterms produced.  Given that the Senate map in 2022 is not favorable to Democratic incumbents as 2020[8]As opposed to 2020 where arguably only Doug Jones from Alabama is the only Democratic incumbent under a serious threat, in 2022, Democratic incumbents are likely to face competitive races in a number of states, including Colorado, Nevada, New Hampshire, and Illinois. and midterms elections after a Presidential victory have generally been problematic for the party of the President,[9]We say problematic.  Obama called the 2010 election a “shellacking.” We think Democratic Senators are more likely to have Obama’s word ringing in the back of their heads than ours. Warren’s window for legislative achievements is both likely to be narrow and time-limited.

Her Plans for Those Other Things.  As of 10/14/19, the Warren website listed 50 plans.  Only one touches directly on broadband and the broadband components are really all about rural broadband.  Whatever one thinks of the plan[10]The plan, which can be found here, does contain some non-rural elements that we discuss later in this note.—which in short calls for Congress to appropriate $85 billion to rural broadband deployment to be provided to public, non-profit entities—the rural target means that it is unlikely to materially affect the companies we cover, who make their money largely in urban and suburban areas, as well as with enterprises.

Further, other issues—such as campaign finance, taxes, healthcare, and financial and tech regulation—are more important to Warren and therefore will be a higher priority for the use of her own political capital.  Putting together the limited political capital and time, we think it unlikely a Warren-driven broadband legislative proposal that would materially damage equities in our sector will pass through Congress.

Legislation that might help industry will be on the table in 2021.  On the other hand, Congress may pass two bills in 2021 that will be generally favorable to industry.

Infrastructure.  The first is an infrastructure bill.  As communications capability is now an essential part of many infrastructure efforts, we think a large infrastructure package, unthinkable now but possible in 2021, could be useful to industry in increasing both the geographic and total demand for 5G connectivity.  Warren’s rural broadband plan suggests significant funding that could be used for overbuilding, but we think that is unlikely to be part of any legislation, for both budget and policy reasons, and if it happens it is likely to restricted to rural areas.[11]We note that at the recent House hearing on the C-Band, a number of members on both sides expressed a desire for more government spending for rural broadband networks but explicitly objected to having that spending fund over-builders.

A national framework for privacy and net neutrality.  The second is legislation that creates a national framework for privacy and net neutrality.  With both subjects, we think the affected industry is now willing to accept a somewhat tougher federal regime to avoid the possibility of states and municipalities adopting a diverse set of requirements on both topics.

Specifically on net neutrality, there is a general agreement among stakeholders that it is appropriate to adopt rules providing for no blocking, no throttling, and no unreasonable paid prioritization by ISPs.  There has been disagreement on whether state laws should be preempted, the role of states in enforcing federal laws, whether to adopt a general conduct rule and which federal agency (FTC or FCC) should have jurisdiction to enforce the law.[12]On privacy, there are similar issues on the relationship between the federal and state frameworks and enforcement powers.  In addition, with privacy, there is a question of to what extent, if any, there should be private rights of action.

We are not sure those gaps can be bridged, but with both the tech and the communications industries agreeing on the need for national rules, we think the odds of legislation in the sector in 2021 are greater than generally understood.  The odds go up if industry is willing to accept tougher rules on both fronts than they have agreed to in the past, which is possible if the prospect of Warren agency action, as well as state action, is a significant possibility.  If there is legislation, it is likely to directly or implicitly eliminate the authority of the FCC to do the things investors fear most, including price regulation and unbundling (discussed further below.)

Executive Action: Where the Big Action Will be but Big Downsides Unlikely

Investors are not merely concerned about legislative action.  They are concerned as well about executive action, particularly at the FCC and the DOJ Antitrust Division.  Just as the Trump Executive Agencies turned their sights immediately to undo the damage they believed was done by Obama Administration actions and otherwise to serve the narrative of the 2016 campaign promises, we have no doubt that the Warren agencies would similarly act to reinforce the new President’s campaign message; specifically taking actions that they can describe as taking on the big and powerful and helping the middle class.  As discussed below, we think these actions in our sectors are not the ones investors most fear.  Further, while the companies will not be happy with some of the likely actions, they do not represent a material threat to revenues, growth, investment, or margins.

The FCC and Title II: Everything really, really old will be new again.  Warren has articulated some sector specific policies that industry will oppose. The most obvious is the reinstatement of Title II.  One certainty is that whoever she appoints to Chair the FCC will view her highest priority as reclassifying ISPs as Title II carriers, much as the current FCC Chair saw his highest priority as reclassifying carriers from the Title II classification that Obama’s second term FCC Chair Tom Wheeler.

Sidebar on timing and the Chair: Does Warren prioritize speed or ideology? One of the most important questions any President faces in terms of policy affecting our sector is who should be Chair of the FCC.  While Warren will no doubt be presented with a long list of candidates, the process will actually begin with a simple choice: does Warren want someone who can begin immediately to take actions she favors or does she want someone who is closer to her own sense of activism and ideology?  If the former, she will pick one of the current Democratic Commissioners as they do not have to go through a security clearance and Senate review process.  Both of the current Democrat Commissioners would support a Title II reclassification and could start the process immediately, but neither, in our view, would be as close to Warren’s view on other issues[13]For example, while we think both of the current Democratic Commissioners would favor more money for rural broadband deployment, we would guess neither would favor restricting the eligible recipients to public and non-profit entities. as other candidates,[14]We think it’s way too early to speculate on who the Warren FCC Chair would be but in our conversations with sources at least a dozen names have been mentioned.  We also think the analysis in this note would apply to all the candidates.  That is, while some may want to do some things that others would not, all would face the same political imperatives and constraints we discuss here. particularly those issues of greatest concern for investors.  But if Warren decides to choose someone not currently on the Commission, that could delay the process[15]While it is possible that the interim Chair could start the processes, as an historic matter interim chairs focus on maintenance and housecleaning, rather than starting major new proceedings.  Further, interim chairs are relying on existing staff, while new staff generally awaits the new chair, which also adds to the timing issue. and as discussed in this note, could result in the politics shifting so that those actions are no longer possible.  Indeed, if the Republicans keep control of the Senate, the nominee for FCC Chair could be held up for a considerable time.

Timing of reclassification process, including litigation.  There are two basic scenarios for reclassification.  If the issue remains unsettled at the FCC in terms of the remands the court ordered, the new FCC majority could move immediately to reverse the Pai order, finding that there is no way to resolve the remands under the current classification.

If the remands and the litigation are completed, however, there will have to be a new FCC process.  That decision will no doubt be appealed.  The most recent District of Columbia Circuit decision indicates that the Court will likely give deference to the FCC and uphold the reclassification.  While theoretically a different panel might think differently, the precedents suggest Chevron deference will again be applied to uphold the decision.

The Supreme Court’s conservative majority might find different grounds to overturn the decision, such as Justice Kavanaugh’s theory that such regulation violates the First Amendment.  It may, however, be difficult to get cert granted and gain a conservative majority.  Chief Justice Roberts has now twice recused himself on FCC cases involving IP-related services.  If Roberts recuses himself on an appeal from Title II reclassification, there may be only four votes for cert and overturning the Circuit Court decision, resulting in the reclassification being upheld.

The heart of the fear: price regulation and unbundling.  So, an initial FCC order is a given.   A legally sustained reclassification is not, but we think the odds favor the Warren FCC order being upheld.  Reclassification in and of itself, however, does not change much. [16]We realize that the FCC majority and a number of conservative think tanks see it differently, arguing that the mere classification will have a material impact on investment.  We don’t think it is worth anyone’s time to re-litigate that issue here.  We simply note that many of the studies on both sides ignore the first rule of statistical analysis: correlation does not imply causation.  (To be fair to the FCC majority, which constantly ignores this principle, everyone in DC has violated this principle since then candidate Reagan ignored this principle in his debate with President Carter, brilliantly and effectively asking “are you better off than you were four years ago?”)What industries, and therefore investors, fear is how the FCC will enforce the classification.  The fear is not that the FCC will do what Wheeler explicitly said he would do, which was to punish companies engaging in any blocking, throttling or unreasonable paid prioritization.[17]We don’t believe that returning to the classic net neutrality restrictions would have a material impact on the stocks.  We don’t see blocking or throttling as being a sustainable business practice.  The question mark would be on the issue of what constitutes an unreasonable use of paid prioritization.  A Warren FCC would likely define that differently than a Trump FCC but we don’t think it would be material.  We note that the combination of streaming video packages and 5G may make that question more important but we think it too early to speculate how that might play out.The fear is that the Warren FCC will go beyond that to engage in price regulation [18]The Wheeler FCC choose to forbear from the mechanisms that would have facilitated price regulation. and/or some version of unbundling.  To do either would likely require a new proceeding after the reclassification.  It could potentially be done at the same time as reclassification.  To do so however, would increase the odds of either a legal or political reaction that would eliminate Title II as an option.  To wait until after the courts resolve the Title II question, however, risks the putting those proceedings on a timetable in which market and political conditions are likely to be less hospitable to those efforts for reasons discussed below.

In addition to timing, political, and market reasons, we think both price regulation and unbundling are unlikely for policy reasons.

Pricing: How does an agency price regulate a dynamic product?  There are multiple policy obstacles to price regulation.  First, there is a definitional issue.  Section 201 of the statute (section 201) says that rates, terms and conditions must be “just and reasonable.”  There is significant FCC case law from the telephone era on what constitutes just and reasonable rates.  The FCC technically does not have to find that current rates are unreasonable to make rules.  For example, the FCC might say that it thinks rates should be going down because underlying costs are going down, and put a price cap in place that ratchets down prices.   Alternatively, it could say current rates are not unreasonable, but they require providers to report rates if they go up by more than a certain amount.  But the current case law involves different technologies and markets, so any FCC action would face a legal challenge as to how the principles built around telephone voice networks apply to data networks.[19]We express no view on what we think a court should do if presented with the issue.  Our point is that what is reasonable is in the eye of the beholder and there are all kinds of different metrics that could lead persons to different conclusions.

Second, it is difficult to price regulate a multi-factor product that is constantly changing.  For example, if the government were to hold that the monthly price for a 25Mbps down/3Mbps up broadband service cannot be more than, say $40, providers could then do any number of things to avoid the price regulation regime, including increasing the upload speed, increasing the download speed, adding security features, bundling with other products, among many other tactics.[20]While the 1994 FCC price regulation of cable packages, explicitly required by the 1992 Cable Act, was upheld by the courts, the value of the regulation in keeping prices low was undercut by cable companies adding programming, which in turn allowed the companies to raise prices.  It proved impossible for the FCC to structure the “going forward” rules that both encouraged the addition of quality programming while keeping prices low.  In 1996 Congress repealed the 1992 rate regulation provisions.  We think both dynamics—the difficulty of price regulating a changing product and a Congressional counter-reaction—would come into play if we are wrong and the FCC does proceed with price regulation.

Third, from a policy perspective, what regulators would care most about would be the lowest price for entry level services, in order to help low income persons.  But there are already a number of voluntary low cost programs for low-income persons that are likely well below whatever a “just and reasonable” price level would be.[21]A number of the low-income programs offer a service at speeds below the 25M down/ 3M up metric, again adding to the difficulty of the apples to apples comparison.  Our point is more about the political optics of what would appear to be price regulating at a price point higher than a price at which millions already are buying a broadband service.  It would be odd—and probably politically tone deaf—to propose a price regulation regime that sets a price that is actually higher than what some companies are already offering to low-income persons.

For all the reasons noted above, in addition to others we have not mentioned, price regulation is simply very hard to do in a rigorous and defensible manner.  That was even true years ago when the FCC had the staff and the data to do it reasonably well.  Arguably, and understandably,[22]Since the 1996 Act, and the Congressional mandate to facilitate competition, the FCC has had less need for the data and expertise to do price regulation. the FCC no longer has the staff and data to do so.

Finally we note that we there is a traditional divide between those who look to regulation, like price regulation, to address market dominance, and those who look to antitrust remedies.  We think the Warren Administration is more likely to look to antitrust remedies, something she has discussed often on the campaign trail (and that we discuss below.)

Unbundling: Been there, done that.  Unbundling was at the core of the 1996 Act, with the fundamental trade-off being various ILEC unbundling (many parts of which were incorporated into the 14 point check list) being required as the entry price for offering long-distance service in a state.  One can argue about its effectiveness but for our purposes, the effort ended when the major long-distance companies were bought by the bulked up ILECs (SBC and Verizon) and the country essentially relied on what was called inter-modal competition (telco v. cable v. satellite v. wireless) to achieve the public objectives.[23]The conference report for the 1996 Telecommunications Reform Act stated that the goal of the Act was "to provide for a pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced information technologies and services to all Americans by opening all telecommunications markets to competition."  In another episode in the late 1990’s, AOL, supported by local telephone companies, sought to convince the FCC to force cable to unbundle to create broadband competition.  That effort failed as well when the Kennard Commission unanimously choose not to require the unbundling.

In considering efforts now, unbundling should be seen as being relevant to two different markets: consumer and enterprise.

Consumer Unbundling.  Since the failure of AOL’s open access unbundling effort in 1999, there has not been any significant effort to force new unbundling requirements on ISPs.  We don’t see any political momentum for it today.  Any such effort would be technically complicated (what part of the network should be unbundled?) and economically challenging (what is a legally sustainable price for each unbundled network element?)  We see no signs that Warren supports such an approach or that it would emerge as a principal policy objective in a more progressive Administration.  Indeed, within the progressive community, the focus on wireline competition has moved away from unbundling and is now coalescing around community broadband, including open access community networks, initiatives Warren supports.

Business Data Services Unbundling.  The one place unbundling did have some recent momentum was with Chairman Wheeler’s effort to reinvigorate the old special access rules with new rules known as business data services.  The new rules would have put new unbundling requirements on cable as part of his effort to accelerate 5G.  As Wheeler said in May 2016, “access to competitive backhaul is important to the build out of wireless networks, to investment in wireless networks and to the creation of 5G – the next step in wireless innovation. And that’s why we’ve heard from the great swath of the wireless industry – the joint letter from Verizon and Incompas offering a proposed regulatory framework and then Sprint, T-Mobile, U.S. Cellular, and the Competitive Carriers Association urging ‘the Commission to adopt policies to ensure reasonable access to high capacity Business Data Services.’”

Wheeler did not succeed in his effort, and the Pai Commission went in the opposite direction.  Could a Warren FCC bring back the Wheeler effort?  It’s possible but we doubt it.  For one thing, in 2016, Wheeler, as noted above, had the support of certain industries for his efforts.  Now, however, those supporters have largely looked to other solutions for their high capacity bandwidth needs.  Further, by the time the Warren FCC gets going, there will be enough 5G deployment that it will be difficult to make the case that Wheeler made.  Additionally, Commissioner Rosenworcel was not a supporter of Wheeler’s effort.  We see no indication that she has changed her views, meaning that even if a new Warren FCC Chair were to support such an effort, it might have difficulty obtaining a Commission majority.

Other Regulatory Actions. While we don’t think investors worst fears will be realized, we do think there are a number of actions a Warren FCC would pursue that the companies will oppose.  We don’t think these will be material to the stock performance but we think these may have some incremental impact on different companies’ performance.

Consumer Protection.  We expect a Warren FCC to be more aggressive on traditional consumer protection issues such a truth-in-billing, transparency, and privacy.  We note that Consumer Reports recently accused cable companies of overbilling consumers.[24]Comcast is not alone.  A recent amended complaint filed in New York includes allegations of fraudulent account creation against AT&T.  We have no opinion on the truth, falsehood or extent of any such practices.  Our only point is that while the Trump FCC assumes someone else will address any such problem, a Warren FCC might think they should both investigate and determine whether there is any action it should take. That is the kind of accusation that would likely attract much more attention from a Warren FCC than it did from the Trump FCC.  In a similar consumer protection vein, if Congress does not adopt a new federal framework for privacy, as discussed above, we would expect a Warren FCC to adopt its own framework.  ‘While the parameters of the potential rules depend on the resolution of the Title II issue, it is safe to assume a Warren FCC would adopt tougher rules on the issue than the Trump FCC has done.

Information.  We think a Warren FCC would try to obtain more information from the companies than the Trump FCC has done.  There is some extra expense in providing such information, but the larger concern from the companies would be how the FCC would use the information to justify new or expanded regulations.  Again, we see these as immaterial to equity values.

Competition. There are a number of issues that various parties have suggested would improve the competitive landscape.  A Warren FCC would be more pro-active on such issues.  In her plan, Warren stated, “It’s time to crack down on all that the giant ISPs have used to steamroll the competition. We will return control of utility poles and conduits to cities, prohibit landlords from making side deals with private ISPs to limit choices in their properties, and ban companies from limiting access to wires inside buildings. We will make sure that all new buildings are fiber-ready so that any network can deliver service there, and we will also enact “Dig Once” policies to require that conduit is laid anytime the ground is opened for a public infrastructure project.”  These issues have been long debated and some, such as Dig Once, have bi-partisan support.  We simply note that while these efforts could lead to increased competition in some situations[25]While Warren would support community broadband and preempting state laws banning community broadband efforts, we don’t think Congress would pass such legislation.  We further remind readers that the FCC’s efforts to preempt state laws that restricted community efforts was overturned by the courts.  Finally, most municipal efforts that would create a new competitor involve small communities rather than big cities.  So again, we don’t see the policy of supporting community broadband as having any likelihood of creating a material new competitive threat. (such as in apartments) and increased costs (by enabling cities to control their rights of way), the changes Warren is proposing largely return the rules to what they have previously been, rather than stimulating a material set of new competitors.  The companies welcomed the changes imposed by the Trump FCC, but we don’t think they have been material to their stock performance and we don’t think reversing them will be material either.

In addition, while Warren didn’t mention Set-Top Boxes, we would not be surprised to see a Warren FCC try to resurrect Chairman Wheeler’s Set-Top Box effort.  We should note that Commissioner Rosenworcel never signed on to that effort and we think it unlikely that such an effort would gain momentum while she is on the Commission.  We also think the movement of consumers to watching streaming video changes both the market realities and the politics of that issue.

Spectrum.  Traditionally, spectrum has been handled on a bipartisan basis, though that has broken down a bit in the CBRS proceeding and in the pending C-Band process, with the Republicans favoring a private auction and at least one Democrat favoring an FCC auction.  We think that generally spectrum would be done on a bipartisan basis but we could see three slight differences if Warren were to defeat Trump.  First, to the extent that that there are battles between licensed and unlicensed, we think a Warren FCC would start off being predisposed to favor unlicensed, which would be good for cable and other wireline providers and negative for the mobile incumbents.

Second, we think a Warren FCC would be more concerned than the Trump FCC about one or two mobile providers obtaining a dominant spectrum position.  That is, we think a Warren FCC would be more likely to impose caps on what a single entity could buy in an auction.[26]While none of the Republican Commissioners have expressed any concerns about that issue in the C-Band proceeding, the Democratic Chair of the House Antitrust Subcommittee, David Cicilline, sent a letter to Chairman Pai expressing concern about the post auction market structure without such a cap.  We further note that Mr. Cicilline’s majority counsel is Lina Khan, who has been credited with helping Warren develop her antitrust policy.  That would be a benefit to smaller carriers.  In the same vein, a Warren FCC is likely to address rural broadband through smaller geographic and spectrum license sizes. Her broadband plan demonstrated an aversion to benefiting private broadband providers but we think she would work more closely with rural and small wireless carriers who have shown more appetite for serving rural areas. Her FCC would likely be more aggressive about trying to address access, affordability, and competition issues by slicing spectrum licensing differently -- more "use or share" and "use or lose" or "use or partition what you don't use" type license rules. While the large wireless companies would likely oppose those changes, any impact would be limited and we don’t see such changes as being material to the stock of the largest mobile carriers.

Third, we think that in terms of the ongoing disputes between government users, particularly in the Defense Department, and the private sector, the Defense Department may have less influence on these issues than they have had with Trump Administration, which would be positive for the wireless sector.  In a similar vein, we think a Warren FCC would push back more strongly regarding interference claims made by the auto industry or energy sector related to certain spectrum bands, again a positive for the wireless sector.

Media Ownership.  While we don’t cover broadcasters, our coverage is indirectly impacted by rules that directly affect broadcasters and media ownership limits.  We expect a Warren FCC would retain broadcast ownership limits, consider eliminating the UHF discount again, and launch new proceedings on ownership with a view to strengthening local diversity.  We think Sinclair would find it particularly difficult to achieve its expansion hopes, given the need to obtain license renewals, the previous finding of lack of candor, and a general anti-media concentration push.

Wild Card: Contribution Reform.  Finally, Warren’s plan included a sentence that raises more questions than it answers: “I will require all telecommunications services to contribute fairly into the Universal Service Fund to shore up essential universal service programs…”  As we have noted before (LINK), the contribution factor has risen to new heights and the trend is unsustainable.  Warren appears to acknowledge the need for change, without specifying the details of the reform.  There are a number of different ways of doing so, each with very different consequences for different providers.  It is too early, however, to speculate on what those critical details would be.  Further, if Warren is successful in getting the $85 billion she will seek for rural broadband support, it will be possible to reduce the funds going into CAF, making the politics and policy issues of funding the remaining universal service programs easier.

Antitrust Comes Back But Will It Matter to Our Sector?  There is no doubt that Warren will seek to bring more teeth to antitrust, both in terms of company behavior and mergers.  In her June, 2016 speech in which she first laid out her analysis of the failure of current antitrust policy, she also articulated her policy prescriptions: “First: Hold the line on anticompetitive mergers….Number Two: Closely scrutinize vertical mergers….Number Three: Require ALL agencies to promote market competition and appoint agency heads who will do so.”

We think that approach has some bearing on our sector but probably will not end up being material for the following reasons.

The main target is tech, with health care and finance as the secondary targets.  From the beginning of her effort to reinvigorate antitrust enforcement, Warren has prioritized other sectors.  In the speech noted above, the examples she used were far more about big technology than broadband. And certainly on the campaign trial, she has expressed much more concern about big tech than big broadband.   While much of the press attention on her and antitrust have focused on her twitter debates with Facebook, as the New Yorker reported, “The Amazon example has since become a recurring feature of Warren’s campaign speeches.”

This is not to say that Warren has ignored broadband.  For example, in that 2016 speech, she attacked Comcast.[27]Specifically, she said “Consider Comcast, the nation’s largest cable and internet service provider. Comcast has consolidated its position by buying up rivals. Today, over half of all cable and internet subscribers in America are Comcast customers. And last year was Comcast’s best year in nearly a decade. But while big telecom giants have been consuming each other, consumers have been left out in the cold—facing little or no choice in service providers and paying through the nose for cable and internet service. Over a third of Americans who theoretically have access to high speed internet don’t actually subscribe because the price tag is too high.  And the data are clear: Americans pay much more for cable and internet than their counterparts in other advanced countries and, in return, we get worse service.”  But unlike in other parts of the speech where she had specific criticisms of government decisions and proposed remedies to address those harms, with Comcast, she simply alleged harms without citing policies she could reverse or adopt policies that would have the impact of reversing those harms.  Further, unlike with tech, the Comcast example has not been a staple of her campaign speeches.[28] As a rough measure of the difference between the Warren campaign’s focus on Facebook versus its focus on Comcast, a Google news search of “Elizabeth Warren” and Comcast yielded 19,200 results while the similar search with Facebook yielded 11.8 million results.

Further, there are some advantages to our coverage universe of the Warren antitrust effort.  The ISPs have long seen the large tech platforms as adversaries in terms of policy initiatives, such as net neutrality, and in actual markets, such as advertising.  Recently, for example, a Comcast subsidiary accused Google of using privacy concerns as a pretext to limit Comcast’s ability to sell ads on behalf of its clients’ YouTube channels.  This suggests to us that Comcast, and others similarly situated, may benefit from a more aggressive antitrust policy aimed at Tech, while having confidence that such advocacy will not boomerang.

Our sector does not have that many horizontal deals left.  The principal investor concern here is that the antitrust division may seek to block deals that in the past it would have approved.  We see that happening in the tech, health care and finance sectors.  We are more skeptical in our space as there simply aren’t that many horizontal deals left.  Of course, a cable company or telco expanding its geographic reach—the more likely deals—are generally not horizontal deals and are more likely to be approved.

The horizontal deal most speculated about that could be affected would be some kind of tie-up between DirecTV and DISH.   Investors have been interested about this in the context of Elliot Management’s effort to slim down AT&T, though AT&T management has said it does not have an interest in such a transaction.  We have written about this in detail (LINK), concluding that while a number of market trends improve the odds for such a deal since the last time it was unsuccessfully attempted, it would still be tricky to get the deal done, regardless of the election outcome.  In the case of a Warren victory, we think the odds would go down, though not by much as we think the Trump Administration would likely bring a suit to block any big deal involving AT&T.[29]At least we think that as long as AT&T continues to be the parent company of CNN, a situation we don’t belief mitigated by the news networks’ hiring of Trump defender Sean Duffy. If, however, the new streaming services from Disney, Comcast, and AT&T exceed expectations in taking market share, it may be that market forces either compel the DOJ to say yes or increase the odds of successfully challenging a denial in court.

The other horizontal deal that is speculated about is Verizon/Charter.  We think that would face difficulties under a Warren Administration, but even if Trump is re-elected, it will face difficulties from the states, unless there is a very significant agreement to divest assets.

On the other hand, if the states lose the TMUS/S case, it is likely that the trial court—or if appealed, the appellate court—would be making new law in terms of approving horizontal deals under the Clayton Act.  We think that some of the claims by the companies in terms of the merger creating new efficiencies through greater capacity would, if upheld, create a precedent that others could use to justify mergers or challenge denials in court, making it tougher for the feds and/or the states to block even horizontal deals, regardless of who is President.

The courts may not allow the government to block vertical deals.  We think the more likely deals are those involving vertical deals, in which companies, like AT&T with its TWX deal, seek to enter adjacent markets.  As noted above, Warren wants tougher scrutiny of vertical deals.  As we saw with the AT&T/TWX case, however, there is a considerable body of law that will make challenges to vertical deals difficult.  To block such deals, Warren would not only have to insert leadership in the DOJ willing to challenge such deals, she would also have to install a number of judges willing to step away from the judicial precedents that suggest that it is the rare vertical deal that endangers consumer welfare.

Silver linings from a Warren DOJ: Tech and Fairness.  While we do think a Warren DOJ would be more aggressive on antitrust, we also think there are two silver linings for investors in our sectors.  First, as discussed elsewhere in this note, the principal thrust of enhanced antitrust enforcement will be the tech sector.  To the extent that companies in our sectors are competing with big tech to purchase smaller tech companies, those companies may calculate that they should accept a bid from an ISP rather than accept the bid from the tech company and risk a longer process at, or possible rejection from, the DOJ.  Second, we think a Warren DOJ would be tougher but would not base its antitrust policies on partisan political motives.  For example, we don’t think, from an antitrust perspective, it would treat a deal affecting the parent of CNN differently from the parent of Fox News or MSNBC.[30]As we noted in the summer of 2018, the DOJ seemed to be going out of its way to help Rupert Murdoch quickly sell to Disney and raise flags about a deal with Comcast, even though from a normal antitrust perspective, Comcast was probably easier.  (LINK) Similarly, the government action to try to block a vertical deal—AT&T/TWX--had its genesis in the President’s anger at CNN coverage on the campaign trial and many were suspicious of the motive of the DOJ in bringing the case.

Three Safety Nets: Courts, Markets and Public Attitudes

We believe there are three additional forces that mitigate the risk of a Warren Presidency on our sector.

The Courts are moving in the other direction on regulation and antitrust.  If and when Warren becomes President, she will find, like FDR, that she will have to deal with a judicial branch more hostile to regulation and her views on antitrust than currently exists.  President Trump has certainly had his share of losses in court but he has named—and will name more—a significant number of judges to the District and Circuit Courts.  Moreover, the Supreme Court appears to have a very conservative majority that likely will be around even if Warren serves two terms.[31]By 2029, the oldest conservative, Clarence Thomas, will be 81, younger than Ginsburg is now.  We have already seen the Court adopt antitrust views[32]The Court’s decision in the American Express case will make it difficult to pursue some actions against big tech. that will make it difficult for Warren to achieve some of her goals, and we suspect it could act in the same way with other initiatives, particularly in our sector.[33]Two potential court rulings that would reduce regulation significantly would be to find that ISPs have first amendment rights in the data that crosses over their infrastructure, and that state and local regulation of internet data and networks violates the interstate commerce clause.

The markets are moving in a direction in which it will be harder to justify, politically and legally, government intervention in our sector.  The two most important developments in our sector over the next few years will be the movement of mobile customers to 5G and the movement of video customers from buying multi-channel video platform distribution (MVPD) bundles to buying Over-the-Top streaming packages from the likes of Disney, NBCU, Netflix, Amazon, and AT&T.[34]There are other developments, such as fixed wireless and a new generation of satellite-delivered broadband, which also will re-enforce the sense that the market is becoming more competitive. We are skeptical that 5G will significantly undercut Cable’s broadband advantages (LINK) but skepticism is different from certainty.  Moreover we have no doubt that in a number of markets, and in public policy forums, there will be considerable advertising and advocacy that articulates a view that multiple 5G offerings do compete with wired broadband.  That undercuts the legal justification to regulate prices or mandate unbundling, as well as the political message that wired broadband is a monopoly.  We may end up being right—or wrong—in our prediction of what markets will bring, but during the years of a first Warren term, the market uncertainty will make it harder for government to act against a market power in MVPD and broadband markets that appear to be under new assaults.

As to the second trend, that too undercuts the kind of political dynamic that lead to the 1992 Cable Act.  Indeed, as cable providers increasingly find no margins in the MVPD services, it becomes harder to argue that government needs to protect the public against some kind of price gouging.

The public’s changing perceptions of the corporate “Public Enemy Number One” make it politically less likely that the Warren Administration will use political capital against the sectors we cover.  As noted above, Warren’s efforts to reinvigorate antitrust are likely to focus more on big tech than big broadband.  What is true in antitrust is true in the broader political landscape.  That is, cable arguably occupied the position of corporate public enemy number one in the run up to the 1992 Cable Act, and Cable and telco ISPs were perceived in a similar way in the first decade of this century due, in part, to the net neutrality debate.  During that period, tech companies were broadly perceived as forces for good and the political environment largely favored keeping tech unregulated and regulating others for the benefit of tech.

In the last few years, that dynamic has changed.  While tech retains a firm grip on the most popular brands,[35]According to Morning Consult, the top three of the most loved brands are Amazon, Google and Netflix. the political class has now evidently seen an advantage in advocating government constraints on technology’s market and social power.  With 50 states joining in an investigation of Google, a similar number joining in an investigation of Facebook, and Republican politicians feeling no backlash from advocating new forms of regulation, politicians must have the view that there is more upside in attacking big tech than big broadband.  That will have implications across the board, and in every policy setting.

Bottom line: Changes will be modest, not major.  There is a tendency inside the Beltway to exaggerate the importance of policy as the driver of economic activity.[36]To be more accurate, there is a tendency in DC to see policy as a driver of economic trends when a) its your policy; and b) the results are good.  If the results are not good, it is either the results were the result of a policy you opposed or resulted from non-policy factors.  One the very rare occasion, some political figures can simultaneously claim credit for a result (greatest economy of all time!), while blaming others for the same result (it’s the Fed’s fault.)  Our point is all three efforts have in common an exaggeration of the importance of policy.  As interpreters of policy for capital markets, it is not in our interest to say this so hopefully, by this point in the document you have stopped reading the footnotes.  During election years this framework seeps out into the broader public and capital markets.  Part of the reason it does so it there is some truth to it.  There would be significant differences in terms of economic policies and outcomes between a second Trump term and a first Warren term.  But we think those differences will be reflected more in other sectors than in ours.  While Warren’s ambitions for large, structural change are real, the likely changes in our sectors will likely be significantly more modest, with some of the changes actually helping various enterprises in the sectors.

1. We have titled this issue the Special Election T-365 Issue. We recognize that due to the Leap Year, our publication date is actually T minus 366.  But 366 doesn’t imply a year as artistically as 365.  Besides, when the subject is politics, getting it 365/366 right is good enough as it is even more unusual than a Washington DC baseball team winning the World Series.   (OK.  That was a long and over wrought way to get a reference to the Nats miracle in this update but now we’re done.)
2. Though November ’67 to ’68 as well as ’91-92 and ’15-16 would certainly give this year ahead a run for the money.
3. And, as far as we can tell, most of the Democratic Party.  But we are not suggesting the Venn diagrams of investors and the Democratic Party are significantly overlapping at this moment in time.
4. Alabama is an interesting case but that race seems more about the Republican primary than the top of the ticket.  Our view of the competitiveness of races is largely based on the Cook Political Report assessment, with our view of the impact of Warren on the specific senate races based on our own sources and assessment.
5. Given the massive uncertainties about the election, including among other things the impact of the impeachment proceedings and the state of the economy, we can see scenarios in which the Democrats do well in Senate races regardless of who heads the ticket or the reverse.
6. In what we see as a precursor for the potential dynamic, we note a story from the other day Senator Sanders, when asked if Senator Manchin and other moderate Democrats would vote for Sanders’ Medicare for All bill, responded “Damn right they will.”  Manchin, when asked about it, said, “Bernie is damn wrong.”
7. Their opposition to her agenda is more likely to be in the realm of taxation and corporate governance than, say, net neutrality legislation but our point is Warren is unlikely to have votes to spare in getting support in the Senate, even if the Democrats control the chamber.
8. As opposed to 2020 where arguably only Doug Jones from Alabama is the only Democratic incumbent under a serious threat, in 2022, Democratic incumbents are likely to face competitive races in a number of states, including Colorado, Nevada, New Hampshire, and Illinois.
9. We say problematic.  Obama called the 2010 election a “shellacking.” We think Democratic Senators are more likely to have Obama’s word ringing in the back of their heads than ours.
10. The plan, which can be found here, does contain some non-rural elements that we discuss later in this note.
11. We note that at the recent House hearing on the C-Band, a number of members on both sides expressed a desire for more government spending for rural broadband networks but explicitly objected to having that spending fund over-builders.
12. On privacy, there are similar issues on the relationship between the federal and state frameworks and enforcement powers.  In addition, with privacy, there is a question of to what extent, if any, there should be private rights of action.
13. For example, while we think both of the current Democratic Commissioners would favor more money for rural broadband deployment, we would guess neither would favor restricting the eligible recipients to public and non-profit entities.
14. We think it’s way too early to speculate on who the Warren FCC Chair would be but in our conversations with sources at least a dozen names have been mentioned.  We also think the analysis in this note would apply to all the candidates.  That is, while some may want to do some things that others would not, all would face the same political imperatives and constraints we discuss here.
15. While it is possible that the interim Chair could start the processes, as an historic matter interim chairs focus on maintenance and housecleaning, rather than starting major new proceedings.  Further, interim chairs are relying on existing staff, while new staff generally awaits the new chair, which also adds to the timing issue.
16. We realize that the FCC majority and a number of conservative think tanks see it differently, arguing that the mere classification will have a material impact on investment.  We don’t think it is worth anyone’s time to re-litigate that issue here.  We simply note that many of the studies on both sides ignore the first rule of statistical analysis: correlation does not imply causation.  (To be fair to the FCC majority, which constantly ignores this principle, everyone in DC has violated this principle since then candidate Reagan ignored this principle in his debate with President Carter, brilliantly and effectively asking “are you better off than you were four years ago?”)
17. We don’t believe that returning to the classic net neutrality restrictions would have a material impact on the stocks.  We don’t see blocking or throttling as being a sustainable business practice.  The question mark would be on the issue of what constitutes an unreasonable use of paid prioritization.  A Warren FCC would likely define that differently than a Trump FCC but we don’t think it would be material.  We note that the combination of streaming video packages and 5G may make that question more important but we think it too early to speculate how that might play out.
18. The Wheeler FCC choose to forbear from the mechanisms that would have facilitated price regulation.
19. We express no view on what we think a court should do if presented with the issue.  Our point is that what is reasonable is in the eye of the beholder and there are all kinds of different metrics that could lead persons to different conclusions.
20. While the 1994 FCC price regulation of cable packages, explicitly required by the 1992 Cable Act, was upheld by the courts, the value of the regulation in keeping prices low was undercut by cable companies adding programming, which in turn allowed the companies to raise prices.  It proved impossible for the FCC to structure the “going forward” rules that both encouraged the addition of quality programming while keeping prices low.  In 1996 Congress repealed the 1992 rate regulation provisions.  We think both dynamics—the difficulty of price regulating a changing product and a Congressional counter-reaction—would come into play if we are wrong and the FCC does proceed with price regulation.
21. A number of the low-income programs offer a service at speeds below the 25M down/ 3M up metric, again adding to the difficulty of the apples to apples comparison.  Our point is more about the political optics of what would appear to be price regulating at a price point higher than a price at which millions already are buying a broadband service.
22. Since the 1996 Act, and the Congressional mandate to facilitate competition, the FCC has had less need for the data and expertise to do price regulation.
23. The conference report for the 1996 Telecommunications Reform Act stated that the goal of the Act was "to provide for a pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced information technologies and services to all Americans by opening all telecommunications markets to competition."
24. Comcast is not alone.  A recent amended complaint filed in New York includes allegations of fraudulent account creation against AT&T.  We have no opinion on the truth, falsehood or extent of any such practices.  Our only point is that while the Trump FCC assumes someone else will address any such problem, a Warren FCC might think they should both investigate and determine whether there is any action it should take.
25. While Warren would support community broadband and preempting state laws banning community broadband efforts, we don’t think Congress would pass such legislation.  We further remind readers that the FCC’s efforts to preempt state laws that restricted community efforts was overturned by the courts.  Finally, most municipal efforts that would create a new competitor involve small communities rather than big cities.  So again, we don’t see the policy of supporting community broadband as having any likelihood of creating a material new competitive threat.
26. While none of the Republican Commissioners have expressed any concerns about that issue in the C-Band proceeding, the Democratic Chair of the House Antitrust Subcommittee, David Cicilline, sent a letter to Chairman Pai expressing concern about the post auction market structure without such a cap.  We further note that Mr. Cicilline’s majority counsel is Lina Khan, who has been credited with helping Warren develop her antitrust policy.
27. Specifically, she said “Consider Comcast, the nation’s largest cable and internet service provider. Comcast has consolidated its position by buying up rivals. Today, over half of all cable and internet subscribers in America are Comcast customers. And last year was Comcast’s best year in nearly a decade. But while big telecom giants have been consuming each other, consumers have been left out in the cold—facing little or no choice in service providers and paying through the nose for cable and internet service. Over a third of Americans who theoretically have access to high speed internet don’t actually subscribe because the price tag is too high.  And the data are clear: Americans pay much more for cable and internet than their counterparts in other advanced countries and, in return, we get worse service.”
28. As a rough measure of the difference between the Warren campaign’s focus on Facebook versus its focus on Comcast, a Google news search of “Elizabeth Warren” and Comcast yielded 19,200 results while the similar search with Facebook yielded 11.8 million results.
29. At least we think that as long as AT&T continues to be the parent company of CNN, a situation we don’t belief mitigated by the news networks’ hiring of Trump defender Sean Duffy.
30. As we noted in the summer of 2018, the DOJ seemed to be going out of its way to help Rupert Murdoch quickly sell to Disney and raise flags about a deal with Comcast, even though from a normal antitrust perspective, Comcast was probably easier.  (LINK) Similarly, the government action to try to block a vertical deal—AT&T/TWX--had its genesis in the President’s anger at CNN coverage on the campaign trial and many were suspicious of the motive of the DOJ in bringing the case.
31. By 2029, the oldest conservative, Clarence Thomas, will be 81, younger than Ginsburg is now.
32. The Court’s decision in the American Express case will make it difficult to pursue some actions against big tech.
33. Two potential court rulings that would reduce regulation significantly would be to find that ISPs have first amendment rights in the data that crosses over their infrastructure, and that state and local regulation of internet data and networks violates the interstate commerce clause.
34. There are other developments, such as fixed wireless and a new generation of satellite-delivered broadband, which also will re-enforce the sense that the market is becoming more competitive.
35. According to Morning Consult, the top three of the most loved brands are Amazon, Google and Netflix.
36. To be more accurate, there is a tendency in DC to see policy as a driver of economic trends when a) its your policy; and b) the results are good.  If the results are not good, it is either the results were the result of a policy you opposed or resulted from non-policy factors.  One the very rare occasion, some political figures can simultaneously claim credit for a result (greatest economy of all time!), while blaming others for the same result (it’s the Fed’s fault.)  Our point is all three efforts have in common an exaggeration of the importance of policy.  As interpreters of policy for capital markets, it is not in our interest to say this so hopefully, by this point in the document you have stopped reading the footnotes.