Trump, walls, trade in telecom services, and NAFTA

Posted July 21st, 2016 in AT&T, Donald Trump, Election 2016, NAFTA and tagged , , by Alton Drew

According to the World Trade Organization, global trade in telecommunications services accounts for $1.5 trillion in revenues.  Trade in telecommunications services includes entrance of new telecommunications companies, foreign direct investment, and the cross-border transmission of telecommunications services.  Donald Trump would like to build a wall around some of that trade, specifically the trade between Mexico and the United States promoted in the North American Free Trade Agreement (NAFTA or Agreement). I don’t think that is a good idea simply because it reduces the availability of additional choice of telecommunications providers and restricts the flow via foreign direct investment of additional capital that a fledgling telecom may need. Calling for a tearing up of NAFTA also shows Mr. Trump’s ignorance when it comes to global capital markets.

Take for example the Mexico-based telecom America Movil SAB de CV. America Movil is a beast, controlling 70% of Mexico’s wireless and internet access market, according to Morningstar strategist Michael Hodel. This market dominance is a red flag to Mexican regulators who have promulgated rules designed to reign in America Movil. Rules changes have provided United States-based AT&T an opening to enter the Mexican market, but it is expected that AT&T will have a tough go at profitability as it seeks to navigate the Mexican market.

NAFTA provides AT&T some help. Chapter 13 of NAFTA addresses access to public telecommunications transport networks by persons, broadcast station operators, cable system operators, or operators of private networks. Under Article 1302, AT&T is able to purchase, lease, and attach equipment to Mexico’s public telecommunications transport networks. AT&T can also interconnect its private networks to Mexico’s public telecommunications transport networks either from in the United States or from within Mexico. NAFTA, combined with changes in Mexican law, can be good for American telecommunications firms.

While NAFTA does not speak directly to listing of shares of corresponding stock exchanges, America Movil lists its American Depository Receipts on the New York Stock Exchange. ADRs are negotiable certificates issued by a U.S. bank representing a specified number of shares in a foreign stock traded on a U.S. exchange. If access to Mexican markets by American firms were curtailed as a result of tearing up NAFTA, the only beneficiaries north of the Rio Grande would be holders of ADRs or other securities issued by Mexican-based firms because their revenues would be left unchallenged.

If Mr. Trump is concerned about increases on return to American capital or increases in American jobs as he claims, tearing up NAFTA would be the wrong approach.

Comments Off

The FCC to explore the Spectrum Frontiers

Yesterday Federal Communications Commission chairman Tom Wheeler channeled President John F. Kennedy in his announcement that the Commission will be issuing rules that release additional spectrum for use by 5 G devices and services. The release will also include 14 GHz of unlicensed spectrum. Mr. Wheeler wants to make 5 G a national priority given the role it plays as a platform for the internet of things. Mr. Wheeler did not come to this point overnight or by himself.

Working groups in the private sector have been making regulators aware of the spectrum requirements necessary for deploying effective 5 G networks. For example in August 2015, 4 G Americas, a wireless trade association, released a whitepaper identifying the best spectrum bands for 5 G. The paper makes the following key points:

  • “Mobile spectrum bands below 6 GHz will be valuable to allow the smooth integration of 4 G and 5 G systems.
  • Spectrum bands in the range above 6 GHz will offer technical challenges; however, capabilities for mobile services are possible in the higher band ranges with new radio solutions.
  • A variety of bands are needed to address both coverage and capacity needs of evolved 4G and 5G systems.
    • Lower frequencies have better propagation characteristics for better coverage and thus can support both macro and small cell deployments.
    • Frequencies beyond those traditionally used for cellular systems, especially those above 6 GHz are important to consider.
    • Higher frequencies can support wider bandwidth carriers due to large spectrum availability at millimeter-wave bands for providing very high peak data rates in specific areas where traffic demands are very high.
  • Action is needed by regulators to ensure that new spectrum needs are addressed for the evolution of 4 G and additionally to address the timely introduction of 5 G by identifying new spectrum ranges to be studied in the ITU- Radiocommunication Sector (ITU-R).” (Source: Yahoo! Finance)

The telecommunications services sector was in the positive this morning along with other sectors in the economy so saying that Mr. Wheeler’s announcement moved mountains much less the telecom sector would be a reach.Acting as a monopoly licensor of spectrum, I suspect that wireless companies will be seeking licenses at a premium given the scarcity of the resource. Mr. Wheeler admits that the emerging technology should be driving demand for spectrum. Fortunately in this case he appears willing not to hinder deployment but issuing new rules.

Comments Off

Has net neutrality decision impacted trading in the telecom sector?

Today the United States Court of Appeals-District of Columbia gave the Federal Communications Commission a victory, holding that the agency has the statutory authority to reclassify broadband providers as telecommunications companies as opposed to the industry favored status of information service providers. Broadband providers and their supporters have vowed that the fight is not over, telegraphing the probability of obtaining a ruling from the full bench of the appellate court or, going all the way to the United States Supreme Court.

The telecommunications services sector seemed to have shrugged off the ruling. The Thomson Reuters G7 Telecoms Sector Index registered a .06% decline at the end of the trading day. The sectors biggest players, AT&T and Verizon, saw their stock values increase .47% and .80% respectively. The response is not surprising since broadband operators such as AT&T, Verizon, and Comcast have been providing their high-speed access services pursuant to an open internet philosophy for decades. Their primary argument has been that broadband regulation should be conducted with a light touch and that throttling access speeds or discriminating against certain content or websites would be bad for business given the level of competition that they face.

Wall Street, unlike the Commission, has not been afraid to declare how competitive the telecommunications sector is. Charles Schwab analyst Brad Sorensen had this to say in a recent report about the telecommunications services sector:

“The telecom sector is certainly not what it was a couple of decades ago, although some investors may not realize it yet. The days of near-monopolistic control of landlines are long gone. These days the sector is driven by fierce competition, with new ways of communicating continually entering the market, and consistent—and expensive—upgrade cycles. To us, this reduces the traditional defensive appeal of the telecom sector.”

The court avoided the question of market power and deferred to the Commission’s predictive judgment on telecommunications companies willingness to invest in broadband network deployment. Although the sector has long left the monopoly environment existing prior to the passage of the Telecommunications Act of 1996, should traders consider not only a throwback to the regulatory world of the 1990s that the court’s ruling has cemented but reorganization of the sector that resembles the Ma Bell days?

The 1990s were the pre-convergence days. Carriers followed a silo model separating, in the case of larger local exchange companies, their long distance operations from their local exchange operations. In order to avoid the disruption that may ensure from increased complaints regarding perceived throttling, suspected paid prioritization, and misunderstood network management techniques, what if larger carriers like AT&T and Verizon decided to spin off their newly created “utility” pieces and focused on providing backbone, mid-mile, advertising, content delivery, and special access services? State public utility commissions, long shut out of the broadband regulatory game, may now view the courts ruling as permission to re-enter the regulatory fray.

Spinning off the telecommunications component and leaving them subject to state and federal regulation may allow AT&T, Comcast, and Verizon to focus on the content and data business and go head to head with Google or Facebook, edge providers, who, though subject to the Federal Trade Commission’s privacy regulation, don’t have to suffer the FCC’s Title II regulation.

A spin off may be good for traders especially if the utility components are subject to rate-of-return regulation thus providing the certainty of fixed-income behavior while the unregulated portions, while subject to the volatility of competition, may generate higher rewards that come with the greater risk.

It’s still early and in the immediate term broadband providers will be focused on continued appellate court action. The long term potential restructure stemming from this action is something traders should keep in mind.

 

Comments Off

Let a private capital business model meet un-served, underserved broadband market

Federal Communications Commission member Ajit Pai yesterday sent a letter to the chief executive officer of the Universal Service Administrative Company, the not-for-profit entity designated by the Commission to administer the universal service program. In the letter, Mr. Pai questions apparent waste in the Lifeline program arising from certain households receiving more than one Lifeline subsidized service and the application of exceptions used to to allow additional members of household to qualify for a subsidy.

USAC administers four programs: high-cost and low-income; rural health care; Lifeline; and schools and libraries.  Universal service is premised on the principle that all Americans should have access to a baseline of telecommunications services. These principles were recently expanded by the Commission to include high-speed internet access.

To meet these goals, a federal universal service fund has been established where telecommunications providers and voice-over-the-internet service providers make contributions to the fund and telecommunications companies may apply to receive reimbursement of the expenses involved in meeting universal service goals. According to USAC, in 2014, $7.9 billion in funding were disbursed from the fund to telecommunications providers.

My bird’s eye view of the extension of Lifeline to mobile broadband here in Atlanta tells me that mobile carriers are focusing on lower income neighborhoods. Here in the West End sector of Atlanta there appears to be a table and tent pushing free phones on every other corner. Assurance Wireless, a subsidiary of Virgin Mobile  is pretty busy pushing its Lifeline wireless services here. Fraud and waste as discussed above has been a big issue with policymakers. Rather than a government program where a private company is being required to act as a social welfare agency determining whether a consumer is eligible for a government aid program and rather than telling households how many phones they should be limited to having, why not let entrepreneurs and private capital identify and sell to underserved markets for cell phones.

The technology is there where cell phones, capable of accessing the internet, can be provided to lower income consumers at prices a fraction of what it costs to get an iPhone. Technology continues to innovate where low cost phones can be provided. For example, Verizon offers smartphones at retail prices ranging from $94 to $120. Plop down the cash and for the monthly data plan fee a consumer can make calls or surf the internet.

If private capital sees returns from investing in a company that can provide handsets and data plans to low income households, private capital will make the investment. The problem is the premise that everyone should have access to the internet via mobile broadband. That premise is faulty because it assumes a value to the consumer and forces that value into Commission rule. Yes, commerce benefits from the deployment of a telecommunications infrastructure that facilitates the flow of data, knowledge, and information, but those providing and extracting this value should be ready to compensate the providers of services or invest in its deployment out of their own pockets or with funds raised in the capital or credit markets.

Yes, telecommunications networks may increase in value with an increase in end-users accessing it, but spreading the cost of facilitating access by one consumer who probably brings no value communications wise to other consumers is an externality that I view as negative. Not only will we see fraud in the current government-based universal service, but a taking of consumer property via the taxes paid by consumers to support universal service.

Comments Off

Why can’t agricultural interests and web companies fund rural broadband deployment

Sections 214(e), and 254 provides that certain telecommunications companies contribute to a universal service pot from where certain eligible telecommunications carriers can recover the costs for providing services, deemed by Congress and the Federal Communications Commission as “universal.” Section 214(e) requires that only carriers designated as eligible telecommunications carriers receive funding to help deliver universal services, an, according to section 254, “evolving level of telecommunications services that the Commission shall establish periodically …. taking into account advances in telecommunications and information technologies and services.” These evolving services include access by schools and libraries; access by rural healthcare facilities. access by low income subscribers, and access to advanced services such as broadband.

The individuals that foot the bill for funding these pots are the end-users, the consumers, who may not be recipients or beneficiaries of the universal services. Not only is the State determining what services should be provided in order for a carrier to receive funding, but the State, using the carriers as licensed fee collectors, is requiring that consumers foot the bill. Broadband providers have long made the valid economic argument that servicing rural customers is a more expensive proposition due mainly to population and density and topography. By law the Commission is required to bring about an efficient, nationwide wire and radio communication service and brings this about by “regulating interstate and foreign commerce in communication by wire and radio ….” Since telecommunications carriers literally provide the channels through which commerce in communications flows, they are naturally the low hanging fruit that gets picked by the Commission.

But interstate and foreign commerce in communication by wire and radio has evolved since 1934. Commerce by wire and radio is no longer about charging a consumer for the privilege of sending and receiving voice calls no matter the content of the message. The commerce now takes the form of video, voice, texts, and graphics sent via wire and the use of various bands of spectrum. The commerce now takes the form of various content delivery entities storing data and information either for future distribution or data analysis by data mining companies or marketers. The commerce by interstate and foreign communication via wire or radio has morphed into an internet protocol eco-system that is home to internet service providers, broadband providers, content providers, and app providers. However, after eighty-two years, investors in telecommunications companies are the ones still holding the regulatory bag and shouldering the expense for getting broadband services to the underserved.

When we think of rural consumers, I wonder if we focus too much on the stereotypical family of eight living on a couple acres with a tractor riding mower in the yard. The chemicals-agricultural sector has operations in rural areas and with a $19.7 billion market cap has incentive to invest in getting broadband into its surrounding market areas. And Google and Facebook have not been shy about wanting to connect the underserved, particularly in India and on the African continent. Get the chemical-agricultural sector to pitch in and the United States could lessen the temptation to spread the costs over the entire population and allow those with the most skin in the game to bear the burden of funding access.