TR Daily

Japan-based SoftBank Corp.s plan to buy a 70% stake in Sprint Nextel Corp. for $20.1 billion and Sprint Nextels related plan to acquire the rest of Clearwire Corp. that it doesnt already own for $2.2 billion are drawing opposition or at least requests for conditions – from the Communications Workers of America, EBS (educational broadband service) licensees, Clearwire shareholders, and others. Meanwhile, the Department of Justice has asked the FCC to defer action in the proceeding until law enforcement officials have completed their review.

For its part, Verizon Wireless said the FCC should consider all of Clearwires BRS (broadband radio service) and EBS spectrum holdings in its spectrum screen analysis.

In the government filing, DoJ, including the Federal Bureau of Investigation with the concurrence of the Department of Homeland Security, asked the FCC to defer action. DOJ, DHS, and FBI (the Agencies) are currently reviewing this matter for any national security, law enforcement, and public safety issues but have not yet completed that effort, DoJ said. We therefore request that the Commission defer action until such time as the Agencies notify the Commission of the completion of their review and, based on the results of such review, request appropriate action by the Commission. Such deferral requests by the agencies regarding transactions before the FCC are common.

The concerns expressed by entities with the deals cover the impact on competition in the wireless market, national security issues, and the treatment of spectrum leased by EBS entities.

In a petition to deny or impose conditions filed yesterday in IB docket 12-343, CWA complained that Sprint offers only vague, unverifiable promises that the transaction will result in network expansion. Sprints claim must be scrutinized against a regulatory backdrop in which the Commission has expressed concern about warehousing and has consistently sought stringent safeguards to ensure spectrum is rapidly put to use. Yet, Sprint, a company that owns more than a third of licensed spectrum, operates virtually free of any construction requirements.

The FCC should not approve the proposed transaction unless and until Sprint commits to concrete build-out requirements fleshing out its vague promises of network enhancement. Consistent with Commission precedent, the Commission should require Sprint within the next three years to cover 30 percent of the population in every EA where it holds BRS/EBS spectrum, incorporating in its network frequencies from each license it holds or leases. Sprint should also separately commit to cover, within that same three-year period, 30 percent of the population of each EA using its G Block license, CWA said. At the seven year benchmark, Sprint should be required to serve, on a license by license basis in each EA, 70 percent of the population using both its BRS/EBS and G Block spectrum.

The FCC also must ensure that the proposed transaction does not pose a security threat to our nation, CWA said. The national security concerns implicated by the Softbank/Sprint/Clearwire transaction relate to Softbanks and Clearwires close association with two Chinese equipment vendors, Huawei and ZTE. Huawei and ZTE are helping to build Softbanks next generation 4G wireless network in Japan. Huawei also helped build wireless networks for Clearwire and Clearwire recently announced that it has selected Huawei as a major vendor in the upgrade of its wireless network.

CWA cited a recent House report that suggested that Huawei and ZTE pose considerable security risk to the United States, and it said the Commission and the national security agencies that are reviewing this transaction must at a minimum, place restriction on the use of Huawei equipment in the Sprint/Clearwire networks.

CWA also said the FCC should recognize that this transaction will not lead to job creation at Sprint.

The Consortium for Public Education and the Roman Catholic Diocese of Erie, Pa., which are EBS licensees, filed a joint petition to deny, complaining about the way Clearwire has used the spectrum it has leased from EBS entities.

Grant of the Application would give a foreign company control of an impermissible amount of U.S. spectral resources that executives of one applicant have stated are not needed. Most disconcerting, grant of the Application would allow a foreign company to control the U.S. EBS spectrum that is reserved for the promotion of U.S. educational, nonprofit and religious institutions and their missions, thereby further minimizing the potential the EBS spectrum will be developed for the purposes and promises envisioned by the Commission and these stakeholders, the licensees warned.

Clearwire has failed to be an acceptable steward of the EBS spectrum, and has not ensured compliance with the Commissions educational reservation and usage rules and policies. Clearwire has abused the market power granted by the Commission as part of the 2008 approval of the Sprint-Clearwire 2.5 GHz merger transaction, and has used its market power to leverage EBS licensees into long term leases for their spectrum that minimize to the barest extent possible, any educational usage rights, while at the same time offending the Commissions EBS minimum educational reservation rules, the licensees added. The Commission should not allow Clearwire to now simply pass the buck onto a foreign controlled entity for its non-compliance. The Application should therefore be denied or conditioned on divestiture of the EBS spectrum as further discussed herein.

The consortium and the diocese said substantial service exhibits filed for 127 EBS licenses leased to Clearwire in the 20 markets where the carrier has commercial indicate there is some educational usageon only 31 of the licenses, with 24 of those indicating very limited educational usage of Clearwire devices.

Crest Financial Limited, which owns about 8.34% of Clearwires outstanding Class A common stock, also filed a petition to deny, saying Sprint Nextels acquisition of the rest of Clearwire is emphatically not in the public interest as it will prevent a full deployment of Clearwires spectrum and will set an artificially low benchmark price for spectrum that risks undermining the Commissions recent efforts to unlock spectrum through incentive auctions. Far from unleashing the potential of Clearwires spectrum, the Proposed Transaction would instead entrust the single largest portfolio of spectrum to a license holder that has shown itself willing to keep spectrum underdeveloped. Moreover, the Proposed Transaction will undermine the Commissions efforts to reclaim and repurpose spectrum for wireless broadband use and impede competitors ability to participate in a concentrated market.

The Commission should not accept Applicants asserted public interest benefits for two primary reasons, Crest argued. First, Applicants have demonstrated that they are irresponsible custodians of Clearwire spectrum, having used Sprints control of Clearwire to scuttle Clearwires publicly stated plans for full deployment of a next-generation 4G LTE network. In recent years, Clearwire began to raise the necessary capital to deploy its spectrum into a vibrant, nationwide 4G LTE network. Unfortunately, that financing for this plan was blocked when Sprint and Softbank began to discuss the Proposed Transaction. The reason for this is clear: Sprint, with Softbanks investment, seeks to warehouse Clearwires vast spectrum holdings away from other competitors, rather than making it available for consumer use.

Crest added that if the FCC nonetheless wishes to approve the Softbank-Sprint transaction, it should not do so unless it imposes conditions that will mitigate the anticompetitive harms posed by the transaction and enhance the ability of Clearwire to continue to compete in the spectrum market, to the benefit of consumers nationwide. The only condition that will achieve this objection is to require Sprint to relinquish its control of Clearwire.

Taran Asset Management, another minority shareholder in Clearwire, said it believes that Sprint and SoftBanks acquisition of de facto control of Clearwire is not in the public interest and the FCC should deny the Applicants request. As a result of Sprint obtaining de facto control of Clearwire, the U.S. wireless market will lose a significant stand-alone broadband provider and the only major platform for wireless business model innovation which were key public interest considerations in the 2008 Order approving the Sprint Nextel-Clearwire partnership.

At a minimum, the Commission should wait for the current corporate process to conclude and, if Sprint is successful, only then institute a full and public review of the Clearwire consolidation proposed by Sprint, Taran said. Ideally, review of the Clearwire consolidation should be separate from the review of the transfer of Sprints 800 MHz, 900 MHz, PCS and WCS licenses to SoftBank as this transaction represents a fundamental shift in the competitiveness of the US wireless-data landscape and a potential shift in the availability of the 2.5 GHz band in the US as a potential source of true innovation in wireless broadband.

Another petition to deny was filed by Line Systems, Inc., (LSI), which is a communications provider to business customers.

LSI believes that Sprint Nextels continuous, open, and brazen flouting of the Commissions rules and bad faith disputes are harmful to competition and demonstrate a disregard for its obligation to serve the public interest, the company said. Without conditions on the Proposed Transaction requiring Sprint Nextel to comply with the same rules as smaller competitors, Sprint Nextel will be emboldened to use its newly expanded size and investment capital to continue to ignore Commission rules in order to stifle competition.

LSI complained that Sprint Nextel has a long history of disregard for the law, including Commission tariffs, as well as negotiated contracts, and routine filings of bad faith disputes with competitor carriers. LSI said that Sprint Nextels One Sprint Policy has led subsidiaries of the carrier to take switched access services from smaller competitors without compensation. A federal judge determined that the One Sprint Policy led to Sprint subsidiaries purposely avoiding paying legitimate switched access charges in an effort to cut its costs. Critically, Sprint does not pay the portions of an invoice that are rightfully due, and dispute those portions that it contests. It simply refuses in bad faith all payments. Sprint has also been nonresponsive to requests for an explanation as to why LSI routinely receives Sprint traffic without a Calling Party Number. Sprints refusal to file good faith disputes or to explain why its traffic does not contain CPN is contrary to the public interest because it harms competition.

The Proposed Transaction should not be approved unless the Commission can be sure that Sprint will not use its significant capital infusion to further harm competition and continue to act in bad faith under the One Sprint cost control policy. In the event that the transaction is approved, the sole method to ensure that Sprint does not flout the laws and rules of the Commission is to attach legally enforceable conditions, LSI said.

The company said Sprint Nextel, among things, should be required to file a monthly report with the Commission, until further notice by the Commission, identifying all access charge disputes that exceed an outstanding balance of $10,000, and should have to retain records on access charge disputes. Sprint Nextel also should be required to make available to the Commission any arrangements, written or otherwise, whereby Sprint has terminated access traffic: (1) by disguising the true jurisdictional nature of any Sprint wireless access traffic; (2) on behalf of any non-wireless Sprint entity; or, (3) on behalf of any other third party entity, LSI said.

A group of competitive local exchange carriers (CLECs) asked the FCC to reject the SoftBank-Sprint Nextel deal or to require Sprint Nextel to make intercarrier compensation payments that it has refused to make.. In the filing, nWire LLC, Pac-West Telecomm, Inc., and Tex-Link Communications, Inc., complained that Sprint Nextel has engaged in self-help measures by unilaterally ceasing Intercarrier Compensation (ICC) payments owed to the CLEC Petitioners pursuant to federal law and federal and state intercarrier compensation rules. Sprint appears to have made a corporate-level (including all of its operating subsidiaries) decision to stop paying the CLECs ICC payments.

The CLECs said they have actively pursued Sprint to resolve Sprints non-payment and to address Sprints disputes of the CLEC Petitioners invoices without result. By refusing to make ICC payments to the CLECs totaling millions of dollars Sprint has effectively and illicitly financed their business operations on the back of CLECs. The Commission should require that Sprint must meet all of its Intercarrier Payment obligations to the CLECs, prior to approving any transfer of authority. As others have commented in this Docket, Sprint should not be allowed to skirt its financial obligations while benefiting from the sale of its business.

The Crow Creek Sioux Tribe Utility Authority asked the FCC to deny the SoftBank-Sprint Nextel deal or to impose conditions to address the tribes concerns. As explained below, Sprint has demonstrated a blatant disregard for the jurisdiction and sovereignty of the Crow Creek Sioux Tribe and its regulatory authority over Sprints operation on the Crow Creek reservation, it said. The authority said the FCC should require Sprint Nextel to pay access charges to a tribe-owned telephone company and to work with the tribe to make unused spectrum available to the tribe.

Verizon Wireless said it does not have a position on the merits of the applications filed with the Commission. But it said the Commission must consider Clearwires significant Broadband Radio Service (BRS) and Educational Broadband Service (EBS) spectrum holdings. The Applicants themselves tout the value of this spectrum as a primary benefit of the transaction; it would be arbitrary for the Commission to discount spectrum that is indisputably suitable and available for mobile services, and highly valued in the market.

Currently, the FCC includes in its screen 55 MHz of BRS spectrum and no EBS frequencies. Verizon Wireless said the Commission should include 188.125 MHz of those channels in the screen. Only by doing so can the Commission conduct a proper competitive review of the SoftBank-Sprint-Clearwire transaction that accurately reflects the full amount of spectrum that is suitable and available for wireless providers to compete, Verizon Wireless said.

Even entities that see positive things in the transactions are seeking conditions.

The New Jersey Division of Rate Counsel asked the FCC to approve the SoftBank-Sprint deal with conditions.

The proposed transaction has the potential to be in the public interest because it could: (1) increase the level of wireless competition in a market that a duopoly (consisting of AT&T and Verizon Wireless) now dominates; and (2) lead to new and substantial investment in the nations wireless network that might not otherwise occur, the rate counsel said. The combination of the new competitive pressure and additional wireless investment could lead to more affordable rates and a greater diversity of wireless services for consumers than would otherwise exist. Furthermore, because SoftBank does not have a presence in the United States nor is there any evidence that it would enter the market absent the acquisition of a U.S. company, the transaction would not eliminate either an actual or potential wireless competitor. Also, SoftBanks 2004 acquisition and operation of a major wireless provider in Japan suggests that it possesses the requisite financial, managerial, and technical expertise to own and operate the third largest U.S. wireless carriers network.

The rate counsel said it has some reservations, however, which the FCC could address with targeted measures. The Applicants describe new levels of investment – approximately $8 billion – that SoftBank would make in the network it proposes to acquire from Sprint. Rate Counsel welcomes this investment, but is concerned that the investment appears to be an intention rather than a commitment. Rate Counsel urges the FCC to seek an explicit, measurable commitment from the Applicants to the investment rather than rely solely on the Applicants promise.

The FCC could also seek a commitment by the Applicants to offer wireless broadband service to a specified quantity of Lifeline customers at affordable rates. Although Rate Counsel does not consider wireless broadband service presently to be a substitute for wireline broadband service, the availability of an affordable wireless broadband ramp to the Internet for consumers who might otherwise lack such an access is preferable to no access at all, the filing said. Furthermore, the FCC should condition its approval of the proposed transaction on the Applicants commitment to abide by the CTIA Consumer Code for Wireless Service. Rate Counsel also recommends that the FCC seek explicit commitments by the Applicants to roll out 4G LTE.

The Greenlining Institute said it believes that the proposed transaction could serve the public interest, saying that Sprint Nextel could emerge as a maverick company with the power to disrupt the wireless market, driving down prices and increasing quality of service. However, there are some concerns about the proposed transactions potential impacts on low-income communities and communities of color. Greenlining respectfully requests that the Commission further investigate those issues and take whatever steps are necessary to ensure that the proposed transactions benefits accrue to low-income communities and communities of color.

Greenlining suggested that the transaction could harm the public interest by eliminating competition in the market for low-cost phone services. There is a risk that, as a result of the proposed transaction, Sprint will stop offering low-cost services. Greenlining said it could find no evidence on SoftBanks web site that it has initiatives to help low-income consumers.

The FCC should also probe the deals impact on quality of service, the deployment of advanced services, jobs, net neutrality, diversity, Greenlining said. It urged the FCC to impose conditions to ensure low-income consumers and these other priorities are preserved.

Dish Network Corp. notified the FCC in a filing that it planned to file reply comments in the proceeding. Earlier this month, Dish asked the FCC to hold the SoftBank-Sprint Nextel-Clearwire proceeding in abeyance until the resolution of significant unresolved contingencies regarding Sprint Nextels bid to acquire the rest of Clearwire (TRDaily, Jan. 17). Dish has made a rival bid to acquire spectrum from Clearwire and stock from Clearwires minority shareholders (TRDaily, Jan. 9).

In its one-page filing, Dish said it didnt plan to file comments in the proceeding at this time due, among other things, to the uncertainty surrounding the ownership of Clearwire and DISHs continued negotiations with the Special Committee of Clearwires Board of Directors to acquire the company or certain assets of the company.

In a research note today, analysts at Stifel, Nicolaus & Company, Inc., said they expect that the law enforcement agencies will be particularly interested in resolving any potential concerns about SoftBanks relationship with Chinese equipment makers Huawei and ZTE. We believe they could impose equipment restrictions and/or review processes, though we don’t expect them to block SoftBanks purchase of 70% of Sprint outright. The DOJ/FBI/DHS request adds another wrinkle to the equation. However, while we wouldn’t expect the FCC to conclude it’s review prior to the other agencies resolving any concerns, were not sure it would put the proceeding on hold, unless theres some sort of indication that Clearwires board is at least seriously pursuing a deal with Dish, which would face difficulties related to Sprints majority ownership, influence, and contract rights with Clearwire.

As for the spectrum screen issues raised by Verizon Wireless, the Stifel analysts said that the FCC will probably agree eventually to include all the BRS and EBS spectrum in its screen, but our guess is its reluctant to resolve this issue outside of its separate rulemaking on spectrum aggregation. Still, the Verizon push could help prod FCC decision making. Even if Clearwire doesnt have to divest the spectrum, counting more of it in the screen would give Verizon and AT&T (T) more headroom to add spectrum.

Jeff Silva, an analyst at Medley Global Advisors LLC, said he isn’t surprised by the law enforcement agencies deferral request, adding that it isnt a red flag. The DoJ-FBI-DHS review is an expression of due diligence that will likely feed into the multi-agency national security review by the Committee on Foreign Investment in the United States (CFIUS), Mr. Silva said. Weve seen nothing to change our view that Softbank-Sprint will secure CFIUS approval and that FCC approval will be forthcoming later this year after the combined Softbank-Sprint-Clearwire (CLWR) regulatory review is completed.- Paul Kirby, paul.kirby@wolterskluwer.com