20 May 2013
Over the past eight months, the Federal Communications Commission (FCC or Commission) has issued two decisions that modernize and streamline its foreign investment policies for certain radio licensees, including wireless telecommunications carriers. In addition, the Commission recently initiated a proceeding to consider providing similar relief to broadcast licensees. With these changes, the FCC aim to reduce regulatory costs on current and prospective wireless telecommunications licensees and broadcasters, facilitate investment from new sources of capital and enhance opportunities for technological innovation.
The FCC’s actions will have an effect on the forthcoming spectrum incentive auction, which will involve entities currently holding broadcast licenses and those seeking to win new wireless telecommunications licenses, as mandated by last year’s Spectrum Act. (For more information, please see our Legal Update “Key Players Weigh In On Historic FCC Incentive Auction Proceeding.”)
Section 310(b) of the Communications Act requires the Commission to review foreign investment in any “broadcast or common carrier or aeronautical en route or aeronautical fixed ‘radio station license.’” In practical terms, radio station licenses are spectrum-based licenses, including those used to provide wireless telecommunications and broadcast services. Specifically, section 310(b)(3) prohibits a corporation from holding these types of licenses if more than 20 percent of the corporation’s equity or voting interests is held by foreign governments or representative thereof, or by a foreign corporation.
Section 310(b)(4) prohibits a corporation from holding these types of licenses if it is directly or indirectly controlled by any other corporation of which more than 25 percent of the capital stock is owned or voted by aliens, foreign governments or foreign corporations. Unlike section 310(b)(3), however, section 310(b)(4) grants the Commission discretion to allow higher levels of foreign ownership in controlling US parent companies unless it finds such ownership would be inconsistent with the public interest.
On its face, this statutory language may seem straightforward. In reality, however, the FCC’s foreign ownership rules and policies are notoriously ambiguous and confusing. Because section 310(b) applies not only to an initial application for a license, but also to applications for assignment and transfer of control, as well as to spectrum leasing arrangements, entities subject to these rules often find compliance and reporting to be time-consuming and expensive. The Commission’s recent actions to streamline its foreign ownership approval procedures as they apply to wireless licenses carriers, and to consider a proposal to analyze foreign ownership in broadcast licenses in a more meaningful way, are therefore encouraging.
In August 2012, the Commission ruled that it would no longer apply the bright line 20 percent foreign ownership limit set forth in section 310(b)(3) of the Communications Act where foreign ownership in the licensee is held through US-organized entities that do not control the licensee. Instead, the Commission will draw upon the discretionary authority found in neighboring section 310(b)(4) of the Communications Act to determine on a case-by-case basis whether proposed foreign investment in a common carrier licensee is in the public interest. Because the Commission relied on forbearance authority granted by section 10(a) of the Communications Act, this ruling applies only to common carriers, including wireless telecommunications carriers. The prior approval requirement remains in place, however.
In April, the Commission took additional steps to streamline foreign ownership policies. The Commission will now:
- Eliminate the distinction between foreign investment from World Trade Organization (WTO) Member countries and non-WTO Member countries;
- Streamline review of foreign investment by:
- requiring identification of only those foreign investors that would hold equity and/or voting interests of greater than 5 percent, and, in certain situations, greater than 10 percent;
- considering requests for specific approval for any named foreign investor (even those holding interests below these amounts) to increase its equity and/or voting interest at some future time; and
- considering requests under section 310(b)(4) for specific approval for any named foreign investor to acquire a controlling interest up to 100 percent at some future time.
- Issue new declaratory rulings consenting to a 100 percent aggregate ownership interest for unnamed and future foreign investors, provided that the licensee obtains approval before any foreign investor acquires an interest greater than 5 percent (or 10 percent in certain situations);
- Allow the licensee’s “subsidiaries and affiliates” to rely on the licensee’s own foreign ownership ruling rather than request a separate declaratory ruling, as long as the foreign ownership of the licensee and the subsidiary or affiliate are in compliance with the terms of the licensee’s ruling and Commission’s rules;
- Permit licensees to introduce new foreign-organized entities into the approved vertical ownership chain in certain cases without prior approval, provided that the new foreign-organized entity is under 100 percent common ownership and control with a previously approved foreign investor;
- Eliminate the practice of issuing service- and geographic-specific rulings, meaning that a licensee with a prior foreign ownership ruling may roll-out new services or add new geographic service areas, or both, without obtaining a new ruling; and
- Preserve the opportunity for Executive Branch agencies and departments to undertake national security, law enforcement, foreign policy and trade policy reviews.
Finally, as noted earlier, the Commission is in the process of gathering and reviewing comments pursuant to a request that it update its foreign ownership policies applicable to broadcast licenses to include “a substantive, facts and circumstances evaluation.” On February 26, 2013, the Media Bureau at the FCC released a notice seeking comment on an August 2012 request from the Coalition for Broadcast Investment (CBI), which asked the Commission to clarify that it will “conduct a substantive, facts and circumstances evaluation of proposals for foreign investment in excess of 25 percent in the parent company of a broadcast licensee.” CBI asserts that the Commission presently “will not even consider” proposals for above-benchmark foreign investment in broadcast licensees, and argues that modernizing the rules would “place broadcasters on the same footing as every other industry participant and signal that the broadcast sector continues to be a vital and valued part of the 21st-century media and telecommunications ecosystem.”
On a macro level, action in the area of foreign ownership signals the Commission’s willingness to try to put regulated entities (e.g., wireless telecommunications carriers and broadcasters) on an even footing with unregulated content distribution platforms, which provide similar, if not identical, services. While the Communications Act mandates prior approval of foreign ownership, modernizing its longstanding processes exemplifies the Commission’s recognition that, in today’s converged world, wireless carriers and broadcasters directly compete with various entities that are not subject to any restrictions on foreign investment. Multichannel video distributors and Internet over-the-top providers, for instance, do not incur the economic burden associated with obtaining regulatory consent to foreign ownership as do their regulated competitors.
The ability to attract capital from a larger pool of investors is especially important to prospective bidders for wireless licenses in the forthcoming incentive auctions. The 2008 FCC auction of 700 MHz spectrum netted more than $19.5 billion in bids from 101 participants. Due to this recent history, and the similar characteristics of the spectrum at issue, expectations for revenues from the incentive auction are high. Thus, by streamlining the foreign ownership review process now, the Commission creates more certainty for potential auction participants and potential investors. The policy changes should dramatically reduce the time spent collecting and analyzing foreign ownership information and the expense associated with preparing and submitting multiple, often duplicative foreign ownership filings. Indeed, Commission staff estimate that the sheer volume of filings will decline by 40 to 70 percent.
In the broadcast license context, a new FCC policy for reviewing foreign investment in broadcast licensees would provide a more meaningful opportunity for incumbent broadcasters, prospective market entrants, and potential investors to more fully explore the possibilities surrounding the forthcoming incentive auction. The ruling is expected to issue prior to or in connection with the forthcoming rules for the incentive auction.
The effect that a favorable decision would have on the auction is unclear. First, while incumbent broadcasters may still decide to enter the auction, they may have in mind higher market exit prices due to a new ability to raise foreign capital. Second, a new favorable policy may stimulate activity from foreign investors seeking a quick return on investment in broadcast licensees intent on entering the auction. Third, incumbent broadcasters may determine that the ability to attract foreign investment provides a more reliable financial path to offer new, advanced digital services, thereby rendering auction participation less attractive. And, finally, prospective broadcasters may find the path to market entry easier with an ability to secure foreign investment and thus may seek to purchase stations with the intent of continuing in the broadcast sector.
For more information about the topics raised in this Legal Update, please contact