FCC Avoids Shutdown For Now, But Continued Threat Looms Over TMT Sector

by Hogan Lovells


The federal government is open.  But less than three weeks remain under the current reprieve and another shutdown seems possible.  Although the Federal Communications Commission tapped on-hand fees to support uninterrupted operations earlier this week, the FCC will start to run out of time – and money – if the stalemate over the budget continues and another shutdown occurs.

How would a protracted shutdown affect the technology, media and telecom industries and the billions of dollars of investment that depend on regulatory action by the FCC?  How soon before Samsung and Apple face launch delays for products that need FCC approval to enter the market?  When will GoPro, Nintendo, Tile, Roku and other consumer electronics makers start to see product delays?  Will wireless emergency alerts continue to be available?  And will a shutdown affect the nation’s bid in the global race for leadership in the deployment of advanced, fifth-generation wireless networks?  These are just some of the questions as the technology, media and telecom sectors confront the possibility of an extended period of time without a functioning regulator.

Consumer Electronics Makers May Be the First to See the Effects of a Prolonged Shutdown

Device manufacturers will be among the first to feel the effects of a protracted government shutdown.  In the United States, virtually all electronic devices must receive FCC equipment certification prior to sale.  Every cell phone.  Every television.  Every computer.  Each device emits a unique radio frequency signature, and the FCC reviews this signature to limit the potential for harmful interference to other devices.  All told, the FCC and its third-party contractors process an estimated 16,000 equipment certification applications annually.  But with further processing impossible during a shutdown, electronic devices not already approved by the FCC cannot lawfully be sold in the United States.

The FCC has already approved certain widely anticipated devices, such as the Samsung Galaxy S9 and many wireless charging pads; however, the longer the shutdown continues, the greater the risk that new devices will sit in warehouses and shipping containers unassembled or pending final design approval. Even upon the resumption of operations, moreover, the backlog of equipment certifications has the potential to delay important consumer product launches from manufacturers such as Google, Apple, Samsung, HTC, and LG, as well as from smaller manufacturers who seek to deploy innovative equipment for medical, industrial, and scientific use.

Spectrum Assignment Delays Could Postpone the Deployment of Next-Generation Wireless Services

According to the trade association CTIA, the wireless industry supports more than 4.6 million jobs and contributes roughly $400 billion annually to the US economy — more than the auto manufacturing, agriculture, and oil and gas industries.  But without new spectrum assignments to support additional wireless deployments, the trade association CTIA has said that America’s wireless leadership is at risk.  “We’re at a critical moment,” CTIA has said. “The EU, China, Japan, South Korea and others are doing everything they can to seize our wireless leadership.”

An extended shutdown could postpone a number of pending rulemaking proceedings intended to open vast expanses of radio frequency spectrum for wireless broadband use.  The FCC has identified additional spectrum available in the 24 GHz, 28 GHz, 37 GHz, 39 GHz, and 47 GHz bands.  But more work remains to be done before wireless operators and unlicensed device manufacturers can access these and other bands of spectrum.  In addition, numerous lower-frequency bands, including the 3.5 GHz citizen broadband radio service, remain at critical stages of development where deployment will suffer if FCC oversight remains on hold for an extended period of time.

Telecommunications and Media Companies May Face Merger and Licensing Delays

Sinclair Broadcast Group, the largest owner of local television stations in the country, could face delays in its $3.9 billion acquisition of Tribune Media, another large local TV broadcaster.  The informal 180 day “shot clock” is currently paused at day 167 as the FCC continues to review the transaction.  The public filed more than 3,500 comments with the FCC since August 7, 2017, and any delay could complicate implementation of Sinclair’s acquisition.  While a shutdown should not derail widely anticipated FCC approval of the transaction, a shutdown could delay Sinclair’s ability to fully execute its post-acquisition business strategy.

Delays are also likely to occur in licensing and spectrum assignments in the 600 MHz band. The FCC, for example, has yet to issue numerous 600 MHz licenses from its recent incentive auction, and several major secondary-market transactions in wireless spectrum, such as AT&T’s transfer of its 600 MHz licenses to LB License Company for nearly $1 billion, may face delays in the event of a continued impasse over the budget.

Wireless Emergency Alert System Will Function, But Face Delayed Improvement

The FCC’s Wireless Emergency Alert (WEA) system provides warnings of “imminent threats to safety or life,” including extreme weather, terror attacks, and natural disasters. WEA will continue to function during a shutdown because wireless carriers and public safety authorities – not the FCC – administer most of the day-to-functions of the WEA system.  Even during a shutdown, authorized national, state or local government authorities may send alerts regarding public safety emergencies – such as evacuation orders or shelter-in-place orders – using WEA.  But a shutdown would postpone long-sought improvements to the WEA system, such as improved support for multimedia, multilingual and geo-targeting alert capabilities.  The FCC has an open proceeding asking for public comment on a variety of reforms to the WEA system.  This effort, which has taken on far greater importance following the accidental ballistic missile alert that consumer cellphones, televisions, and radios in Hawaii received earlier this month, would likely stall during an extended government shutdown.

Subsidies for Rural and High-Cost Areas Will Remain Available – for Now

Disbursements would continue in the near term for Universal Service Fund programs, including the Connect America Fund and the Rural Health Care Program.  But a prolonged shutdown could place continued funding of these important programs into doubt.

The Connect America Fund, for example, provides subsidies to carriers to deliver voice and broadband service to high-cost areas and is authorized to provide more than $2 billion in funding support over the next ten years.  Similarly, the Rural Health Care Program has a budget of more than $400 million and provides support for broadband connectivity for healthcare providers serving rural areas, enabling telemedicine services to underserved populations.  Both programs are administered by the Universal Service Administrative Company (USAC).  USAC is an independent, not-for-profit organization that, unlike federal agencies, is not required to shut down once federal funding has been exhausted.  Nonetheless, disruptions could occur as soon as continued funding for USF requires FCC action.  For example, USAC submits quarterly projections of revenues of telecommunications carriers, which the FCC uses to establish a “contribution factor” for the upcoming quarter, requiring a certain set of proceeds to be set aside by the carriers for USF funding.  The longer a shutdown lasts, the more uncertain funding for USF programs will become.

In the same way, a prolonged shutdown could disrupt long-sought funding to improve availability of mobile broadband services.   The FCC, for example, has started to finalize planning for Mobility Fund Phase II and the Tribal Mobility Fund Phase II, which will be authorized to disburse up to $4.53 billion to promote wireless broadband deployment over the next decade.  But the administration of these funds is complex.

The FCC has said it intends to distribute funds using a market-based, multi-round reverse auction mechanism.  The FCC has also announced its intention to guard against abuse through a complex challenge process, the use of strict compliance milestones and extensive administrative oversight.   But finalizing this proceeding and the administrative safeguards will require support from scores of federal employees who face the prospect of financial furloughs in less than three weeks’ time.

Companies Should Identify Their Exposure and Devise Mechanisms to Maintain Business Operations Amidst Uncertain Government Funding

Companies operating in the TMT sector may not be able to solve the nation’s political gridlock.  But they can take steps now to guard against the most likely forms of delay at the primary regulatory authority for the sector.  Accelerating the filing of equipment authorizations and promoting the timely disposition of transfers of control and assignment applications can help mitigate disruption.  While companies that depend on spectrum assignments or universal service support may have fewer options, these businesses will benefit from conducting a candid assessment of their vulnerabilities and developing contingency plans if the nation’s legislators cannot settle on an annual budget by February 8 when the current temporary funding package expires.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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