By Matt Wiederrecht, Head of Special Situations

US telecommunications policy has been stuck in a deep freeze, with little movement by the Federal Communications Commission (FCC) over the last two years due to the gridlock at the agency given the two-two tie between Republicans and Democrats on the commission.  At Capstone, we believe the glacial pace of policymaking is finally ready to melt, given the likely confirmation of Anna Gomez, a veteran telecom lawyer, to serve as the third Democrat at the FCC.

From forceful moves by the FCC, such as publishing nationwide maps identifying areas unserved and underserved by broadband service and a rulemaking in progress targeting digital discrimination, to progress on Broadband Equity, Access, and Deployment (BEAD) program funding, Capstone predicted that this year would see important developments in the telecommunications space (see: Capstone’s US Telecommunications 2023 Preview: Federal Agencies to Move Forward on Broadband Funding, Net Neutrality, and Universal Service Fund Reform in 2023).  We expect the pace of impactful policy to pick up in the second half of 2023, with material implications for companies and investors alike.

In a recent Q&A, Capstone lead Telecommunications analyst Matt Wiederrecht provides updates to his view on what the remainder of 2023 holds for telecom policy.

We believe the glacial pace of policymaking is finally ready to melt.

What expectations did you have for the year that have already played out?

The primary area where policy has evolved this year has been with respect to broadband funding. The National Telecommunications and Information Administration (NTIA) has released guidance and is taking steps to prepare for the release of $48 billion in broadband infrastructure funding across multiple programs—a massive, material, and still underappreciated development given that it is the single largest investment in broadband in the history of this country. NTIA is on track to get most of those funds allocated later this year with a goal of getting the funds in the hands of internet service providers to help construct projects in unserved and underserved communities by late 2024.

What do you think was overlooked in the first half of this year that clients should be paying attention to?

The Buy America provisions that recipients of Infrastructure Investment and Jobs Act (IIJA) broadband funding must adhere to will be difficult to meet, as there isn’t enough domestic manufacturing capacity across the entire supply chain—including many categories of telecommunications—to meet the demand created by IIJA-funded projects. The government will almost certainly need to grant waivers to the Buy America provisions while supply chains are shifted onshore. The firms best positioned to benefit from these Buy America requirements—such as Corning and CommScope— are already focused on expanding their domestic manufacturing capacity, particularly with respect to fiber optic cables, as this is the one category of products for which the Biden administration has already signaled waivers will not be granted. However, the devil will be in the details—something we think both companies and investors may not fully appreciate.

What underappreciated themes do you expect to play out this year in your sector?

The main theme I will be paying attention to is what policy priorities the FCC will push through during the last year or so of the Biden administration’s current term while the commission has a Democratic majority. With Anna Gomez nominated to fill the last vacant slot on the FCC and likely to be confirmed in the next few months, Democrats will, for the first time during Biden’s term, have voting control over the FCC. We expect net neutrality will be a high-priority item, but we could also see the FCC taking steps to address media ownership rules, reform the Universal Service Fund, and look into what more it can do to bridge the digital divide. This will have implications for internet services and content providers for years to come.

A major underappreciated focus will be on the $42.45 billion BEAD program which is being administered by NTIA.

What are the big questions you are paying attention to for the balance of 2023?

A major underappreciated focus will be on the $42.45 billion BEAD program which is being administered by NTIA. By June 30th, NTIA will announce BEAD allocations for each state, and it will then be up to the states to decide how to distribute their allocations on broadband infrastructure projects targeting unserved and underserved communities. This will be a complicated process. There could be a significant amount of diversity between the states with respect to how they structure their respective grant programs. Some states will prioritize supporting municipal broadband while others will focus on supporting well-capitalized investor-owned companies with a proven track record of managing large network infrastructure projects and managing a customer-facing internet service provider. So, the big questions for the year will be about how the money is distributed, how the state plans are structured, and who will benefit the most from these plans and who will lose out. Capstone has been playing close attention on behalf of our clients. It’s one of many issues that we expect to play out in a busy second half of the year.  

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