Last year, T-Mobile USA announced its intent to acquire a smaller, regional U.S. carrier: MetroPCS. Given T-Mobile’s foreign ownership (Germany-based Deutsche Telekom), the transaction is subject to review and approval by the Committee on Foreign Investment in the United States (CFIUS). As previously blogged, CFIUS is a U.S. Government inter-agency committee – including 16 Departments and Agencies - that reviews the "national security" implications of foreign investments in U.S. companies or operations.
While the CFIUS process is an utter black box, many have been quite curious to divine whether or how the recent CFIUS approval of the transaction may have built in market-distorting barriers to block infrastructure equipment from China-based suppliers (like my employer Huawei) on purported (yet never-substantiated) “national security” grounds. This would hardly be a novel endeavor, given the various ham-handed initiatives elements of the Government have pursued over the last three years, but the approach (via CFIUS) would be unique.
We CFIUS-watchers got head-faked.
You see, there was a separate but parallel and seemingly much more mundane review of the transaction required by the Federal Communications Commission (FCC) in order for MetroPCS’s government-granted radio spectrum licenses to be transferred to T-Mobile.
And, on March 12, the FCC gave its approval to the merger and the transfer. The approval of the transaction incorporated previously existing security agreements with T-Mobile related to earlier transactions, e.g. Deutsche Telekom’s purchase of VoiceStream in 2001 (which created T-Mobile) and T-Mobile’s acquisition of SunCom Wireless in 2008 which lightly amended the original security agreement.
As a result of the FCC’s review of the current merger, a curious new provision was added to a previously-adopted Amendment. The provision requires T-Mobile to provide the Departments of Justice and Homeland Security (DOJ and DHS) a list of all of the “principal equipment” deployed in their network (principal equipment is defined in the provision as pretty much every meaningful hardware, software and service element of the network) and the names of the vendors or contractors providing such equipment. Further, T-Mobile is required to give DOJ and DHS advance notice before selecting any new vendor or contractor.
And then comes the kicker: The provision concludes: T-Mobile (DT)“shall negotiate in good faith to resolve any national security, law enforcement or public safety concerns DOJ or DHS may raise in response to any disclosure by DT pursuant to this section.”
Clever. Very clever.
Everyone was waiting to see what CFIUS might have done, perhaps a proposal of some sort of “ban” on “China-based companies” (notwithstanding that virtually every telecom vendor is to some extent in effect a China-based company and, in any event, share supply chain and other cyber-vulnerabilities with China-based companies). Some had even dared to hope that perhaps CFIUS had factored security assurance disciplines into an agreement that would apply across T-Mobile vendors and actually effectively contribute to more secure networks.
Head fake.
The FCC carried the market-distorting water this time. CFIUS didn’t have to risk – yet again - accusations of black-listing or trade barriers, they could just rely on the FCC provision.
Can FCC do this? Well, yes. It would seem that the FCC is exercising its authority under Secs. 214, 301 and 310 of the Communications Act and additional FCC rules adopted in 1995 related to “Market Entry and Regulation of Foreign Affiliated Entities” under which the FCC reviews and acts on “… public interest factors that we consider in determining whether to grant a foreign-affiliated carrier's application…include…national security, law enforcement issues, foreign policy and trade concerns brought to our attention by the Executive Branch.”
Is it really a trade barrier? Well, no, and yes. Technically, the provision is little more than a “notice and negotiate” clause. Hardly a ban. Does it mention China-based vendors? No. But c'mon, anyone who's been watching this space for the last three years knows exactly what's going on. In any event, practically speaking, the intent is clear and the chilling effect severe. And not just on T-Mobile. T-Mobile will certainly pass on the pressure to its smaller and regional roaming partners. Moreover, there are parallel FCC and CFIUS review processes related to Japan’s Softbank’s purchase of 70% of Sprint’s U.S. network. We can almost certainly expect similar chilling provisions.
Where does that leave us? Well, as many are aware, AT&T and Verizon have already had their very significant government revenues wielded against them to discourage them from working with competitive venders. So, in short, we end up with less competition, less innovation, more expensive and less efficient broadband, less investment, fewer American jobs, more international trade tensions, jeopardized market access for American firms overseas, etc.
And for what? National security? Hogwash. Utter bullshit. Whether Cisco, Alcatel-Lucent, Ericsson or Huawei, each and every telecom equipment vendor is relying on common, global supply chains and subject to common, universal vulnerabilities and threats. Anything short of raising the security assurance bar for everyone is a thinly-veiled political or protectionist ploy.
Time will tell if the FCC’s “notice and negotiate” provision is the trade barrier it would appear to be. But, while we’re waiting, we should shine a light on the provision and its seeming intent. If our national telecom regulator is being used as a political or protectionist tool, we should at the very least expose what is happening for exactly what it is.
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