Thursday, April 01, 2010

FCC Regulating Outside Its Orbit

Late last week the FCC served up another instance of "regulation by condition" through its merger approval process. Through its decision in the Harbinger-SkyTerra merger, the FCC claims authority to not only bind transacting mobile satellite service providers but also to give itself a power of sole discretion over the approval of future business dealings with the two largest wireless carriers--who are not even parties to the merger. Call it a feat of regulatory rascality.

Three FCC bureaus issued a Memorandum Opinion and Order and Declaratory Ruling that gives the green light for SkyTerra Communications to transfer control one if its subsidiaries and its licenses to operate a mobile satellite service ("MSS") and ancillary terrestrial component ("ATC") facilities to Harbinger Capital Partners Fund. As the FCC observed, "Inmarsat is the leading MSS provider," offering low-speed data and voice services and the only provider of high-speed data services over North America. SkyTerra competes with Inmarsat by providing low-speed mobile satellite data and voice-grade MSS. The private investment firm Harbinger, through a series of funds, holds voting shares of Inmarsat and debt instruments issued by Inmarsat subsidiaries. So the FCC maintained that the proposed transfer of SkyTerra's licenses to Harbinger did "raise some competitive concerns for customers of current mobile satellite services and for potential customers of future services might use the MSS bands."

However, the FCC concluded the transaction would likely have no anticompetitive effects on the current MSS market. As for future MSS, the FCC conceded that "there is considerable uncertainty about what new products all of these firms will roll out and what customer segments they could profitably serve" and that "these markets are not yet mature enough to allow us to determine the competitive effects, if any, of this transaction." Furthermore, according to the FCC:

it would be premature to evaluate the effect of this transaction on 'next-generation' mobile satellite services. Next generation services have not yet been commercially launched, and no customers yet exist. Indeed, the MSS companies' business plans, and the very nature of the service offerings, are fluid. The fact that companies have changed their plans over the past years, both in response to changing economic times and to changes in Commission rules, weighs against making any predictions about any potential harms that might arise from this transaction. Accordingly, it would be speculative as to whether any competitive harm would occur, and if there were harm, the extent of its magnitude.
The FCC pointed to significant potential benefits for consumers from the transaction: "Through Harbinger’s role as a wholesale provider, it may be a catalyst for market-changing developments in the use and sale of innovative new mass-market consumer devices." And: "If realized, Harbinger’s plans to offer 4G wireless broadband services will achieve substantial public benefits, relating to the build out and deployment of a new facilities-based broadband player that will serve more than 80 percent of the U.S. population by the end of 2015."

Ultimately, the FCC concluded that those potential benefits outweigh any potential harms. But it nevertheless made its grant of the transfer subject to conditions:

In a letter dated March 26, 2010, Harbinger made a number of commitments to the Commission and, by extension, to the public, that give us greater confidence that the promised benefits will occur. Because our conclusion that Harbinger’s acquisition of SkyTerra is in the public interest is dependent on those benefits being achieved, we are adopting Harbinger’s commitments, in Attachment 2 of its March 26, 2010 letter, as conditions to our approval. The first condition requires that if the Applicants seek to make spectrum available to either of the two largest terrestrial providers of CMRS and broadband services, they must obtain Commission approval. The second condition requires the Applicants to build a terrestrial network using Skyterra's ATC authorizations. The third condition requires the Applicants to obtain Commission approval before traffic to these largest terrestrial providers accounts for more than 25 percent of SkyTerra’s total traffic on its terrestrial network in any Economic Area.
Keep in mind that the commitments were offered by Harbinger one year after it submitted the application for transfer. And the application for transfer was placed on Public Notice by the FCC back on May 1, 2009. Such a lengthy agency delay in resolving potential anticompetitive concerns is reason enough to question just how voluntary those voluntary conditions really were. This delay and conditional approval puts the Harbinger-SkyTerra in company with other FCC merger approvals that have resulted in what has been fittingly named "regulation by condition": the FCC lets its 180-day shot clock to approve license transfers lapse, and puts the parties in a precarious position that prompts them to make "concessions" to the FCC after lengthy delays. Here, the FCC can stick a "voluntary" label on those commitments, but that doesn't negate the fact that it chose to impose them as key conditions for approval. The voluntary commitments following a year-long delay resulted in the FCC imposing itself on future MSS and wireless broadband market transactions that it would otherwise have no authority to impose.

One also has reason to ask how the FCC's conditions remedy the perceived potential anticompetitive threat posed by the transfer. The FCC pinned its hopes on Harbinger providing additional facilities-based competition in the wireless broadband market. After analyzing the current and future MSS markets, the FCC imposed conditions limiting Harbinger's ability to enter into marketplace arrangements with the two leading wireless carriers—currently AT&T and Verizon, respectively. Exactly how would such limiting conditions prevent competitive harm to the current and future MSS markets characterized by the FCC as uncertain and fluid? No market analysis or public interest analysis tied to mobile wireless broadband networks appears in the ruling or public notice.

What's more, the "voluntary" approval conditions imposed by the FCC bind not only the parties involved in the merger but also third parties or potential new third parties who had no reason to expect to be implicated by the FCC's decision. Otherwise, does anyone doubt that either of those two major wireless carriers or any of their major rivals would have weighed in during the merger's comment period? But no comments were filed in the proceeding by either of the two largest wireless carriers or their leading.

The FCC has now set up haphazard and unprincipled precedent for specifically regulating an industry or its key players through merger approvals involving smaller entities competing in the same market or in adjacent markets. Should every company, association or interest group now submit comments in merger approvals that do not directly implicate them or appear to even indirectly implicate them, just to be on the safe side? Unsurprisingly, AT&T has now filed a petition for reconsideration with the FCC.

As the FCC's Paul de Sa blogs, the conditional approval technically doesn't prevent any particular transaction. Still, it gives the FCC new oversight powers it never possessed before – and without even seeking public comment before doing so. The FCC has devised a backdoor method for inserting itself into the regulation of MSS and wireless broadband networks. The Commission should shut that backdoor on reconsideration.