Happy St. Patrick’s Day!!!

Connecting America

The FCC presented Connecting America:  the National Broadband Plan to Washington yesterday.   The report is the culmination of close to a year of work, mandated by Congress, of laying out a roadmap for government help in the development of broadband, both fixed and mobile, in the US over the next ten years.

remedial action

As almost any foreigner will cheerfully point out while visiting the US, the country is much closer to being the caboose of the broadband train than the locomotive.  As a result, a lot of what the FCC proposes is necessary for the US to catch up with the rest of the developed world–although, of course, that fact isn’t mentioned in the report.  On the other hand, some of the ideas proposed have already been tried elsewhere.  And the projections of economic benefits to be had from development of broadband, especially mobile broadband, are on surer ground than most economic forecasts, since they’ve already been realized elsewhere.

mobile broadband is the plan’s focus

The centerpiece of the plan is the goal of providing an additional 500 Megahertz of spectrum available for broadband over the next ten years.  A more immediate goal is to provide an extra 300 Mhz spectrum for mobile broadband over the next five years.

Of that latter figure, the FCC has 50 Mhz in inventory–meaning it has to find an additional 250 Mhz fairly quickly.  About half is envisioned to come from spectrum now licensed by over-the-air television.  More is supposed to come from getting government agencies (I think we’re supposed to understand that the FCC means the military) to free up unused, or very inefficiently used, spectrum for better social use.  Presidents have been asking Congress to allow this for the past ten years, though, without any success.

I’ll write more about the report’s findings in later posts.  For today, however, the main point I want to make is that the star of the FCC show is (and correctly so, I think) mobile broadband.

winners and losers

Assuming the FCC gets most, or all, of the legislative support it needs to carry out its plans, the question we all should have as investors is:  how do we make money from what the FCC is going to do?

My first thoughts:

1.  The spectrum that the FCC is talking about providing to mobile broadband operators is huge, and is intended to pave the way for a gigantic increase in the availability of mobile broadband services.  To the FCC’s way of thinking, and it’s doubtless correct, this is the cheapest and fastest way of achieving its wider goal of ubiquity in high-speed internet access throughout the US.

A second purpose is to foster innovation in services offered, by both large and small providers.

The obvious winners will be the leading providers of wireless internet access devices, be they smartphones, netbooks, or new devices yet to become popular.

Ideally, you’d look for a maker of a key component used in many, if not all, devices, much in the way TXN chips were used in most early cellphones, or as Japanese manufacturer Nidec’s motors ended up in every small form factor hard disk drive used in an iPod.  QCOM or British design firm ARM might be today’s equivalents, but I’m not sure.  The safest bet is probably INTC, although its exposure isn’t very big.

2.  It’s unclear how new spectrum will be allocated.  The FCC often refers to auctions, but it’s hard to believe that the government would allow the lion’s share to end up in the laps of T or VZN–even if they are willing to pay the highest prices.  Arguably, the FCC will seek to promote a third national wireless broadband power.

How it would act with regard to T vs. VZN is less clear.  T has inferior spectrum, but it has a monopoly on the iPhone.  That combination has been a recipe for market leadership so far.  Success of Android phones might restore a more equal playing field, freeing the FCC to favor T.

Yes, both VZN and T have dividend yields of 6%+.  But they also have ailing wireline divisions.  And a yield of 2x the ten-year Treasury bond is a potential red light in itself.  For me, it’s also very hard to handicap how their competitive positions will shift in the years ahead.  Both should benefit from the rapid expansion of mobile broadband but they make me uncomfortable.

3.  One might think that over-the-air TV stations would be losers in two ways.  Their audience has shrunk to a mere tenth of the population and continues to decline.  In addition, much of the new wireless spectrum will be taken from TV.

On the other hand, the FCC estimates that spectrum in the hands of a mobile network operator can be worth 10x what it is to the TV station.  In Connecting America, the FCC is asking for permission to conduct voluntary spectrum auctions, where TV stations would provide spectrum for resale in return for a(n as yet unspecified) share of the sale proceeds.

So TV is a mixed bag.  A value investor would try to figure a price where most of the secular downside of TV is already factored into the stock price–but the potential upside from a large spectrum sale is not.

4.  Other than for the companies directly involved in possible spectrum transfer, it seems to me that the key issue is the fact that the FCC is trying to accelerate the already rapid pace of development of both broadband and mobile internet.  The ultimate losers in this process, it seems to me, will be legacy media/entertainment companies that don’t have a viable internet strategy.

That’s their main problem.  But they have a second one, as well.  The FCC is likely going to compress the timeframe these firms have to get their act together.  Radio’s woes seem likely to continue.  The same with print media–newspapers, magazines, books.

The fact that these are legacy businesses is certainly well understood on Wall Street.  But is the potential speed of their demise fully discounted?