Observers Note Prepaid Market Concerns in FCC’s Delay on AT&T-Alltel Review

The delay speaks to the “unbounded discretion” the FCC has in routine transaction reviews, said Fred Campbell, director of the Communications Liberty & Innovation Project and former chief of the Wireless Bureau. “With unbounded discretion comes public uncertainty, inequity among similarly situated wireless providers, and unnecessary delay. Sadly, while the FCC dithers in Washington, it is consumers in rural areas who are forced to wait for improved wireless services. It may be time for Congress to expand its oversight of FCC transaction reviews and consider legislation that would place meaningful limits on FCC discretion."

Medley Global Advisors analyst Jeffrey Silva told us the move may in part reflect the scrutiny the FCC is giving all AT&T acquisitions given that carrier’s position at the top of the U.S. wireless marke. AT&T’s public response to the FCC’s decision shows there’s a “level of frustration” at the carrier, and the pause’s coming five days before the 180-day mark “stung a little bit,” Silva said. The FCC’s request for additional information on how AT&T plans to make the transition for Alltel’s prepaid customers is itself “pretty straightforward,” he said. “They want more information to complete the review, and they don’t feel they have it right now. You can look at it at face value and take it for what it is.”

The request is evidence the FCC is looking at all AT&T transactions -- including the carrier’s proposed purchase of Leap Wireless and its deal to buy 39 of Verizon Wireless’s 700 MHz B-block licenses -- “in a broader context,” Silva said. “In this environment and given AT&T’s current share of the wireless market, they're going to get a lot more scrutiny, especially while AT&T has other deals pending. I don’t think this puts the Alltel deal in jeopardy, I think the FCC just feels a responsibility to cover all bases in their review.”

Both the Alltel and Leap deals involve prepaid business, so the FCC’s scrutiny of the transition of prepaid customers in the smaller Alltel deal could be an interesting indicator of a possible FCC focus in its Leap review, Silva said. The FCC accepted AT&T’s filing on the Leap deal Wednesday, officially starting its review process. “Leap is a substantial prepaid player, so this puts AT&T on notice that the FCC is going to be scrutinizing prepaid in the proposed Leap acquisition,” Silva said. “But I suspect AT&T knew that all along."

The FCC’s concerns about the prepaid market could be an “interesting precursor” for the review of AT&T-Leap, said Public Knowledge Senior Vice President Harold Feld. If AT&T is being genuine about using the Leap deal as a way to enter the prepaid market, rather than only wanting Leap’s spectrum, “you'd think they'd already have a plan for transitioning those customers into their network,” he said. Public Knowledge is going to have questions during the Leap review about AT&T’s commitment to making a big play in the prepaid market, Feld said. “Leap has been a primary provider to the prepaid segment, so if AT&T isn’t serious about getting into that market, that would leave T-Mobile the primary provider to that segment of the market,” he said.

The FCC may also see a “certain value in holding off until [FCC Chairman nominee Tom] Wheeler comes in,” Feld said. The Alltel deal represents a “third piece of the puzzle” for the FCC on competitive questions on low-band spectrum, along with the agency’s general spectrum proceeding and the incentive auction, he said. “This is as good an excuse as any to hold off until Wheeler can make a policy decision about how he wants to deal with these competitive concerns,” Feld said.

The FCC’s request is “self-explanatory,” and is unlikely to be a harbinger of its approach to other AT&T deal reviews, said Guggenheim analyst Paul Gallant. “Part of the concern may be that prepaid customers tend to be lower income, and that’s a group the FCC wants to make sure is treated fairly in the transition,” he said.

The FCC frequently pauses the 180-day clock, especially when officials feel they need more information. During the failed AT&T/T-Mobile merger in 2011, the Wireless Bureau paused the clock in late July and restarted it a little more than a month later after AT&T submitted new engineering and economic models in support of the deal (CD Aug 29/11 p1). In November 2012, the bureau halted the clock on the proposed deal by General Communication Inc. and Alaska Communications to share spectrum and form the Alaska Wireless Network. The FCC eventually approved the deal in July (http://bit.ly/16QEgtz) on day 279 of the review. Commissioner Ajit Pai said the delay offered further evidence why Congress needs to codify the 180-day shot clock (http://bit.ly/12KSiw1). While not listed among the major transactions tracked online by the FCC, a spectrum trade and sale announced in January by Verizon Wireless, AT&T and Grain would appear to be approaching the end of the shot clock, since the agency accepted an application by the companies March 5 (http://fcc.us/16QGHwd).

It’s “discouraging that the shot clock was stopped on day 175 of what is supposed to be, at most, a 180 day review,” said Free State Foundation President Randolph May. “For you have to wonder why it takes 180 days for the FCC to review a proposed transaction like this one which is relatively minor, all things considered. Based on the history of these reviews, you have to assume that a ‘work to the clock’ mentality often takes hold in the sense that the deadline, which is often extended anyway, becomes the earliest action date rather than the latest one. This is just one reason why there is a need to reform the transaction review process."

An FCC spokeswoman declined comment.,