Yesterday, Sprint moved to acquire a majority stake in Clearwire (CLWR) in advance of SoftBank acquiring a majority stake in Sprint. Despite some earlier speculation that SoftBank might have strategies that don’t include CLWR, and despite disappointment from investors that Sprint won’t spend the extra bucks to acquire CLWR in its entirety, the move was pretty much expected. One of the main obstacles to Sprint in recent years has been its occasionally testy relationship with CLWR, and difficulties the two companies have had negotiating terms for Sprint’s use of CLWR’s spectrum and network.
What was odd, however, was the reaction from AT&T. Whereas the wireless world has generally been quiet, AT&T went out of its way to suggest the deal might night not be good for America. Brad Burns, an AT&T V.P., said in a statement:
“Softbank’s acquisition of Sprint and the control it gains over Clearwire will give one of Japan’s largest wireless companies control of significantly more U.S. wireless spectrum than any other company. We expect that fact and others will be fully explored in the regulatory review process. This is one more example of a very dynamic and competitive U.S. wireless marketplace, which is an important fact for U.S. regulators to recognize.”
So what’s up with that? Is AT&T simply sore because Sprint was the leading industry opponent to AT&T/T-Mo? Or, (as suggested by the last sentence), does AT&T have something more strategic in mind. And, given that Sprint is already “credited” with CLWR spectrum for spectrum screen purposes under the 2008 Order approving the current Sprint/CLWR deal, it is not clear what trouble AT&T (either directly or via proxy) could make.
I don’t think AT&T could get the deal blocked. But (as AT&T indicates) there are issues of foreign ownership that give a determined opponent with money and resources (and a grudge) a chance to make trouble. And there are some things AT&T could hope to extract that potentially make such a play worthwhile. Notably, if AT&T pushes regulators to view Sprint/CLWR’s combined 2.5 GHz spectrum as equal to AT&T’s much better spectrum, AT&T could hold off any hard spectrum cap limit in the pending FCC spectrum aggregation proceeding or in the upcoming incentive auctions. Perhaps more significantly, AT&T could sideline Sprint — the largest industry advocate of spectrum aggregation limits – from taking an aggressive position in these proceedings.
I explore this a bit below . . . .
As I’ve noted before, AT&T has some anger management issues over its blocked effort to take over T-Mo, and it is arguably a reasonable business strategy to make it clear that a fight with AT&T carries risks. But this only works if the fight has a chance of winning or otherwise causing serious pain. Picking a fight you will very publicly lose is not so much a “strategy” as it is “making a fool of yourself.” Sure, they could get one of their proxies to do the actual filing (I’m looking a you Louisiana Ballooning Foundation!), but that would be pretty obvious and thus even more laughable.
Whatever one may say of AT&T, they are not fools. So rather than decide this is just petty payback, lets take a look of what AT&T might raise and what they might hope to gain other than payback.
The Foreign Ownership Limits
The Communications Act, written as it was back in the days before WWII when we were all worried about evil Socialist propaganda flooding our airwaves through Bolshevik controlled radio licenses, contains a strict limit on the ability of foreign nationals or foreign corporations to own or control radio/spectrum licenses. Section 310(b)(4) (47 U.S.C. 310(b)(4)) states, in a rather confusing way, that the Commission will refuse to grant a license to a company where more than 25% of the stock is controlled, directly or indirectly, by an alien or foreign corporation — if it finds it in the public interest to refuse to grant the license. Traditionally, the Commission has been a real hard-ass on this with traditional media (occasionally causing problems for Rupert Murdoch), but not terribly concerned about this with regard to common carrier licenses (which is why Deutsche Telekom has ownership of T-Mo U.S.A.) Nevertheless, if the Commission decided it were in the public interest to prevent a “foreign carrier” from controlling “too much” domestic spectrum, it has the legal authority to do so if it wishes.
So AT&T has a legal grounds for causing trouble that does not sound uber-ridiculous. And foreign ownership (even from a friendly country like Japan) resonates better with Republicans (and even some Ds) than spectrum aggregation. But the reality is this is still a ridiculous claim with no chance of success. This isn’t Huawei, and everyone recognizes that an infusion of capital to Sprint and combining its spectrum with CLWR makes for a stronger competitor. AT&T’s objections would be doubly transparent (fear of competition, payback), so we still haven’t crossed the threshold from “making a fool of yourself” to “actual strategy.”
Establishing Precedent And Pushing For Headroom
The more likely explanation is that AT&T wants to emphasize how much spectrum its rivals (other than Verizon) control. Pointing out the foreign ownership is simply an accent for emphasis (if you will pardon the pun). “Look, the company that owns the most spectrum isn’t even American! How can you put U.S. carriers like AT&T at a disadvantage by limiting our spectrum while letting foreign carriers control oodles more spectrum than we do?” By forcing Sprint to formally argue how it needs this much spectrum, and getting the FCC to acknowledge that it serves the public interest to allow a foreign company to control this much spectrum, AT&T strengthens its hand (at least rhetorically) in the pending spectrum aggregation proceeding. One can just see every House Commerce Committee letter submitted into the record, signed by a good mix of Rs and Ds, pointing out that “you recently allowed SoftBank, a foreign company, to acquire squindoodles of MHz but you won’t let an American company like AT&T bid for another 40 or so in the incentive auction?”
The argument about whether Sprint/CLWR has “more” spectrum than AT&T and Verizon, and the counter argument that the 2.5 GHz spectrum is not nearly as useful because of its poorer propagation characteristics and because much of the spectrum is actually leased, not directly controlled, are as old as the formation of the Sprint/CLWR deal. In fact, the Commission used the Sprint/CLWR deal as the excuse to raise the spectrum cap and thus permit Verizon to acquire Alltel. But since 2008 the distinction between the “good” spectrum in the lower frequency bands (below 1 GHz in particular) and “less good” spectrum (above 2 GHz) has become much more generally accepted in the spectrum world. As AT&T discovered in the AT&T/T-Mo deal, the argument that Sprint/CLWR actually has more spectrum than AT&T doesn’t really resonate that well outside of the circle of true believers.
Spicing up the “Sprint is the real spectrum king” argument with a little protectionism/xenophobia could add some much needed zest to an anti-spectrum caps argument that has gone rather flat and stale. Under this theory, AT&T presses the foreign ownership issue in SoftBank’s acquisition, but not too seriously since the object is not to block the merger but to lay the groundwork for a political argument in other proceedings. AT&T may not even file a formal Petition to Deny, but simply talk this point up to the press and to members of Congress and Commissioners opposed to spectrum caps. I can imagine a McDowell statement in Sprint/SoftBank, for example, along the lines of “We welcome foreign investment as a sign that the American wireless market remains the most competitive and dynamic in the world. But we must be mindful in our future proceedings not to swing to the opposite extreme, and put American carriers at a competitive disadvantage through ill-considered regulatory interference in what is clearly a functioning and attractive marketplace. etc.” For this to not come totally out of left field, AT&T needs to get the issue out there.
Sidelining Sprint?
Whenever a company has a deal pending before the FCC, it tends to get kind of quiet on other stuff. The priority is to get the deal through and avoid making waves. Sprint, along with T-Mo, has been a major industry leader on pushing the FCC to adopt more pro-competitive safeguards. That especially includes spectrum aggregation limits, but also includes things like special access.
SoftBank hires excellent lawyers and I’m sure they know the score on how plausible an argument on foreign ownership would be (i.e., not at all). But why take even a small risk of delay and draw attention to itself as a foreign owner? Such soft forms of regulatory blackmail are common in FCC processes. If AT&T starts to raise a ruckus, but suggests privately to Softbank that the problem goes away if Sprint tones down its advocacy on spectrum caps and special access, what would SoftBank do? Would it say “How dare you try to blackmail me like this, now we are enemies forever!” Or would they say “Whatever, we just want to get our deal through.”
Sure, it would be crazy for SoftBank to leash Sprint given that (a) the foreign ownership argument has absolutely no chance, and (b) what happens in the upcoming spectrum aggregation proceedings is critically important for the long-term prospects of Sprint and other competitive carriers. But companies are not known for thinking long term. They are more generally known for playing it safe and avoiding conflict with powerful rivals. And even if it doesn’t work, it doesn’t cost AT&T anything to float a few statements, possibly get a supporting letter or two from others equally “concerned about foreign ownership of America’s airwaves,” and see how SoftBank reacts.
Conclusion
Bottom line, I see no threat to the actual transaction even if Randall Stephenson tries to go all Kahn Noonian Singh on Dan Hesse’s ass. But there is a method to AT&T’s madness, and it would not surprise me to see them try to stir the pot on the foreign ownership issue.
Stay tuned . . . .
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