In this weekend update, we attempt to unravel the mystery of why the FCC order on the merger has not yet emerged (hint: rhymes with TarAficionados of the history of North Carolina, known as the Tar Heel state (and also where this update is being written) will get the additional meaning of the hint.) and why DISH has not yet made announcements of corporate deals that would help the merger get through the state litigation. We also provide quick takes on Pennsylvania’s entry as a plaintiff, the California PUC, news flowing from investor conferences, and disagreements over the trial calendar. We also try to interpret the vague messages being sent by Congress to the FCC on C-Band and close by noting a new case that could (but probably won’t) lead to a significant deregulation of cable, telephone, and mobile companies.
TMUS/S: A Special Weekend Update SCOOP!We assume Charles Gasparino has trademarked this phrase but hope he will indulge us this one time use. On Who (but Maybe Not What) is Holding Up the FCC Order and Quick Takes on New Data Points
The Sounds of Silence (from the FCC and DISH). Since the DOJ announced its support for the T-Mobile/DISH deal in late July, we have been expecting two actions designed to improve the odds for the deal at trial: first, the FCC Order, and second, announcements from DISH demonstrating its commitment to, and the likely success of, its mobile strategy. Yet nearly two months later, nothing has been announced. We think we have answers to both mysteries. As discussed below, however, there are still puzzle pieces to be filled in.
Background on the FCC order. On May 20th, the Chairman of the FCC, Ajit Pai, announced his support for the deal. Within hours, his two fellow Republicans joined him. At that time, no staff analysis had been circulated; nor was one circulated thereafter. On July 26th, the DOJ announced its opposition to the deal that the three FCC Commissioners had voiced approval for but at the same time, the DOJ announced the transaction with DISH and due to that and other conditions, announced a consent decree to allow the deal to proceed. On August 14th, Pai circulated an item for his fellow Commissioners to vote. Under FCC tradition, once three Commissioners have voted for an item, any remaining Commissioners have ten days to vote the item and file any dissent or concurring statement.
We would have expected a speedy vote by the three Republicans to limit the time for the Democrats to draft their dissent and to assure the item got minimum publicity, due its publication in August when much of DC and the media is on vacation.We assume Pai wanted minimal publicity because if he wanted maximum publicity he would have put the item on the September agenda and voted it at a public meeting. As to why he wants minimal publicity, well we don’t know, but there is no scenario in which seeking to limit publicity is a good sign for the deal’s prospects at trial. Instead, nothing happened. As we are writing this, the item almost certainly still lacks three votes.
Who is holding up the FCC Order? Commissioner Brendan Carr.
How do we know? Since Pai announced the circulation of the item, there was one ex parte in which company executives talked to the Commissioners, two ex partes in which lawyers talked to Chief of Staff Matthew Berry and other staff, no ex partes for the offices of PaiWhile Chief of Staff Berry is part of Pai’s office the ex partes suggest to us that in those meetings, he was more correctly described as working on behalf of the institution rather than just the Chair. and O’RiellyThis should surprise no one. O’Rielly signaled that he probably would have accepted the deal without any conditions. In our experience, companies are very grateful for such regulators but do not waste corporate resources on lawyers to sell past the close. and nine ex partesIf there were a Book of Records for the FCC, and we are grateful there is not, the nine ex partes would likely hold the record for the greatest number of ex partes for a single commissioner on a circulated item (we’re guessing the previous record was, at most, three) and the most ex partes per day (averaging about one per every other working day.) These are Ruthian in their blowing past previous records. relating to conversations with Carr aide Will Adams, with the latest being September 18th.Blair recalls with great fondness his American History Professor, Edmund Morgan, forcing the class to read original sources, instead of histories, to teach the students the importance of thinking for themselves about how to interpret written materials. While this lesson is very useful in life, it is almost never useful for reading ex partes, as they are usually designed to hide, rather than reveal, the actual events they purport to describe. Still, to honor the saintly Professor Morgan and give you all a chance to see if you can find meaning where Blair failed, the ex partes in question can be linked to as follows: August 19, August 23, August 27, August 29, September 6, September 11, September 12, September 13, and September 18.
Why is Carr holding up the FCC Order? That is a harder question. The most recent ex parte simply says, “During the calls, the representatives of T-Mobile discussed several issues addressed in the Applicants’ previous submissions regarding their network and economic modeling.” The other ex partes are similarly vague.
We can only think of four reasons Carr is holding up the final vote on the item:We welcome thoughts on additional reasons.
- He is considering voting against the deal. Usually, nine ex partes would signal danger. In this situation, however, the odds of Carr being against the deal are somewhere between zero and a number that begins with zero.
- He is seeking a new condition. In most other deals, delays near the end involve a Chair or Commissioner seeking a public interest condition, such as a low-cost program for low-income persons. In this case, the odds of Carr seeking such a condition are somewhere between zero and a single digit.
- He is seeking to fix the item related to DISH. Commissioner Carr is well known within the FCC as a DISH Hawk; that is, he wants to take aggressive action against the company on a number of issues on which he believes they have not been in compliance with FCC rules. We are certain he was disappointed in the DOJ for conditioning approval of the deal on DISH obtaining both a deal with T-Mobile and, arguably, relief from the FCC. He may be seeking to assure that the item does not, in his view, grant DISH more relief than necessary. We think the odds of this are a double-digit number beginning with a three.
- He is seeking to fix the item to protect the reputation of the FCC who supported the merger in May while helping the companies at trial. We think the fundamental problem is that the FCC majority verbally approved a deal that the DOJ and states representing a majority of the population have characterized as illegal under the Clayton Act. In that light, the FCC order has to thread the needle of justifying the views of the majority while also helping the companies at trial. The item could say that the views expressed on May 20th only reflected the public interest test, but that would render the order irrelevant to the trial.As we noted last week (LINK), DOJ Antitrust Division Chief Makan Delrahim essentially made that argument to the Senate last week, already undercutting the value of the order to the companies at the trial. The item could say the FCC majority was wrong but now stands corrected, but that would undercut the majority’s reputation as experts. The item could say the Commissioners were right on their original competition and that they are even more right in light of the conditions negotiated by the DOJ, but that would open the door to criticism by the DOJ of the FCC’s competitive analysis. In addition, we have heard that the Republican Commissioners have expressed concern to staff that the economic analysis in the first part of the order, which is in line with DOJ/FCC rejection of the T-Mobile/AT&T deal and argues that the deal without conditions harms the public interest, is much stronger than the second half which argues for approval, and in that way, could hurt the companies at trial. We acknowledge that there may be arguments that thread the needle in ways we haven’t thought of, but our point is, it isn’t easy. We think the odds of Pai asking Carr, Pai’s former General Counsel, to work with T-Mobile’s lawyers to address the fundamental problem are somewhere between 45-60%.
We have been of the view for some time that the FCC order will be less important to the outcome of the trial than investors generally believe. (LINK). The delay in finalizing the item, and number of meetings fixing the item has required strengthens our conviction in that view. We don’t see this as decisive but we do think this should cause many who believe the FCC’s order will be persuasive with the Judge to think again.
The Silence of the DISH. As we have noted before, the legal test for the efficacy of the fix is whether it is “timely, likely and sufficient.” The states are likely to present evidence suggesting that DISH is not likely to actually build a fourth competitor to replace the competition lost by Sprint leaving the market, including evidence from T-Mobile and Makan Delrahim.As we also noted last week (LINK), Delrahim testified to the Senate that DISH had to do the deal to avoid litigation and losing spectrum. This suggests that Delrahim believed that DISH had in some way not honored its commitments to the FCC. There are counters to that evidence, including the analysis of our colleagues at New Street. (LINK)
We anticipate that DISH would want to strengthen that counter by announcing various deals that show that it is “all in” to build and operate a network, and is not just creating more option value. Such deals could include agreements related to construction, financing, enterprise customers, and operations.By operations, we mean either bringing on leadership or a team of persons who have experience running a consumer facing mobile services company. The current DISH bench does not have such persons, a fact that can be used by the states to cast doubt on DISH’s intentions.We expect that sometime before trial DISH will announce some agreements in the area of construction. We think it would improve the odds of success for the companies at trial if other deals were announced. We suspect that neither DISH nor the counter-parties wish to extend the time and effort necessary to reach such deals when the odds of the deals coming to fruition are questionable. We certainly understand the business reasons on both sides for delaying negotiations until there is greater certainty but note, the failure to reach such deals affects the probabilities at trial.
Quick Takes on New Data Points. In addition to silence, there were also new data points on the merger, about which we provide our short reactions here.
Pennsylvania joins opposition to deal. While providing an optic boost to the opposition, it does not change the odds of settlement or the odds at trial. At this point, there is a critical mass of opposition so the incremental addition of a state to either side is unlikely to change the odds.
Companies ask California PUC to expedite approval. The companies have made a filing with the PUC arguing that the DISH deal did not change the nature of the deal and therefore the PUC should expedite approval. We don’t have a view on the PUC process, other than to say that we think the PUC will ultimately approve the deal if the court does so, and if the court doesn’t the PUC will not be material. We do find it curious that the companies think that the DISH deal doesn’t change anything, as it feeds into the narrative that the DISH deal does not fix the competitive harms identified in the DOJ and States’ complaints.
Conference comments on DISH entry. Statements at investors’ conferences should be taken with a grain of saltBut nonetheless taken more seriously than statements about the state of business at the FCC. There are penalties for misleading investors but the bar for lack of candor at the FCC is very high. but we thought it interesting how little discussion there was about the potential impact of DISH entering the market. Typical of the comments was a Verizon executive saying, among other things, that as to DISH the “exam question is can, and when” DISH will become a network operator and that as to that question “It’s shown no evidence of that to date.” That, again, feeds the narrative noted above that the fix will not meet the legal test to approve the deal. To be clear, Verizon’s comments will not be evidence at trial, but it does suggest to us that the public narrative may signal difficulties in presenting a different narrative at trial.
Trial date debate. The parties are conceding that the trial is likely to last three, not two, weeks. Given that the trial start date is currently set for December 9th, that would require the last week being in the holiday period, delaying the final week until after the new year or starting the trial earlier, on December 2nd. The companies favor the third option with the states favoring the second, or if not that, the first. If the companies win on the issue, it gives them a slight edge in terms of trial preparation, but if they lose, we don’t see it as significant, beyond moving back the expected decision date. In any event, we are unlikely to change our odds on the outcome either way.
C-Band: What does the Oracle of Louisiana mean?We admit it. We went with that headline because we thought the phrase “the oracle of Louisiana” both fit and was a Googlenope that would turn up zero Google links. (As to the first, we hope you agree. As to the second, it turns out to be true.) In last week’s weekend update, we noted that there are many ways Congress could affect the upcoming negotiations between the CBA and the FCC leadership over the distribution of the spectrum sale proceeds. As our New Street colleagues reported last week, Senator Kennedy (R-LA) inserted in a budget bill language on the C-Block encouraging “the FCC to prioritize resources toward exploring opportunities for spectrum to help accelerate the deployment of 5G to rural communities. The mid-band spectrum, specifically the C-band, is particularly well-suited for 5G services. However, the Committee remains concerned by proposals that entail limited FCC oversight and public input, and contain no guarantee that taxpayers and the U.S. Treasury benefit from revenues generated by the sale of 5G licenses. The airwaves are a public resource, and the Federal Government has a responsibility to exercise appropriate oversight of its allocation. Therefore, the Committee encourages the FCC to conduct a public auction of the C-band spectrum that is fair, open, and transparent." (LINK)
We agree with the assessment that the language could have been a lot worse for the CBA members hope of garnering most of the revenues from the spectrum sale and that the language, by itself, is unlikely to change the current dynamics at the FCC. We think, however, that this was not the final word from Senator Kennedy. Rather it represents an opening salvo. But what does the Senator want? That, of course, is less than clear, both in terms of what the Senator means by a public auction or appropriate reimbursement to the Treasury. Our best interpretation of the Delphic like language is that the Senator expects the Chair to consult with him and others before agreeing to anything, with the Senator reserving the right to be publicly critical of anything the FCC doesIt is an iron-clad rule of inside the beltway protocol that members of Congress always reserve the right to publicly criticize actions of agencies like the FCC, even if the agencies did precisely what that members proposed.and even work to pass legislation overturning the FCC’s rules.
Cable Companies Go For First Amendment Deregulation. Finally, we note that since the 1996 Act telephone and cable companies have attempted on several occasions to argue that the information that passes over their networks constitutes a form of speech that provides the companies with a First Amendment right, therefore nullifying on constitutional grounds regulatory efforts, such as net neutrality or access provisions, to mandate rules of carriage. So far, such efforts failed, though the companies now have an advocate for that legal reasoning on the Supreme Court. The Cable industry—joined by a number of content partners—is trying again, this time in an effort to over-turn a Maine law mandating cable provide an a la carte option. We suspect Cable will be able to overturn the law on the grounds that the federal law preempts the state statue but will lose the constitutional argument. Still, it is a case worth watching. As the judiciary is reshaped by Trump appointees, arguments that previously failed are being given new life, and a victory on constitutional grounds could lead to a big bang deregulation that could reshape a number of relationships in the industry.