January 2, 2025

By Matt Wiederrecht, Head of Capstone’s Special Situations Team

Capstone believes a Republican-led Federal Communications Commission (FCC) will aggressively pursue business-friendly regulatory reforms and adopt an accommodative stance towards mergers and acquisitions. This is expected to result in major policy changes for the telecommunications industry, creating underappreciated opportunities for broadband providers, wireless companies, and Elon Musk’s Starlink.

Outlook at a Glance: 

• Trump to Delay Bead Funding, Creating Opening for Starlink and Others
• Reforming Universal Service Fund a High Trump Priority Posing Costs For Big Tech
• FCC To Be Friendlier to Mergers, License Transfers, Waivers, and Other Approvals
• FCC to Eliminate or Relax Rules and Introduce More National Security Rulemaking

Trump to Delay Rather Than Cancel Bead Funding, Creating Opening for Starlink, Others

The Trump administration will delay but not block $42.45 billion in broadband funding to states appropriated in the 2021 infrastructure funding package. Trump will likely authorize waivers allowing Starlink to bid for and access some portion of this funding, but most will still go to companies, like Verizon Communications Inc. (VZ), AT&T Inc. (T), and Brightspeed, to deploy fiber in unserved communities.

Capstone believes that concerns about President-elect Trump canceling the BEAD program are overblown; however, a delay in the release of funding is likely. The delay, which could last months, could result from a change in leadership at federal agencies. We also expect a liberal grant of technology waivers under Trump, allowing LEO providers like Starlink to capitalize on high-cost and unserved areas using alternative technologies like fixed wireless and LEO satellites.

National Telecommunications and Information Administration (NTIA) oversees roughly $48 billion in funding in various broadband-related programs authorized in the Infrastructure Investment and Jobs Act (IIJA), with $42.45 billion distributed to states through the BEAD program to support broadband network deployments in unserved and underserved communities. However, in the three years since Congress established BEAD, not one home or business has been connected to the internet with BEAD funding. This has caused a significant level of dissatisfaction particularly with Republicans who want this funding released as soon as possible.

There has also been much criticism over the fact that the BEAD program prioritizes fiber deployments over other technologies like LEO satellites or fixed wireless, which would be far more cost-effective than fiber deployments that can cost $60,000 to $80,000 per mile to deploy.  A LEO constellation like Starlink can start providing service to an isolated rural location for as little as the $600 it costs to manufacture a terminal, while a fixed wireless provider can provide service across an area of more than a couple hundred square miles in area by simply attaching network equipment to a building or tower and connecting that equipment to backhaul fiber.

While some investors we have spoken with express concern over Trump potentially canceling the BEAD program, we believe investors should expect a delay in the release of funding. Were the Trump administration to scrap the BEAD program, it would be highly unlikely Congress would reappropriate the funding given the fact that in 2025, it must also deal with how to handle extending the 2017 tax cuts, an expiring debt ceiling suspension, and large structural deficits Trump has promised to eliminate through tariffs and spending cuts. We also do not believe the BEAD program will be sacrificed as a potential pay-for because the program is highly popular with governors and members of Congress with constituents with little to no broadband service, and many of these elected officials come from Republican-leaning states that supported Trump in the election.

Further reinforcing our belief that BEAD is too far along for Trump to derail is the fact that Louisiana has released its final proposal for public comment. It will be submitted to NTIA once the comment period ends on December 10, 2024, and will almost certainly approved well before Trump is sworn into office. Once this final application is approved, it will effectively release funds to the state for all the projects included in its final application. Louisiana received a $1.355 billion allocation from the BEAD program and will be using a substantial portion of this funding to provide fiber connections to more than 140,000 unserved locations with most being deployed underground so it is hardened against extreme weather events like hurricanes. The state also intends to invest $500 million in telehealth services, workforce training, education, and supporting small businesses. Once Biden approves Louisiana’s final application, it will be very difficult for the Trump White House to block BEAD funding for the other 49 states, the District of Columbia, and US territories.

The path of least resistance is for Trump to allow NTIA to continue to move forward with BEAD, albeit with some changes. We believe the most likely changes under Trump include changes in NTIA guidance to states as to how to allocate BEAD funds or NTIA, liberally granting technology waivers allowing internet service providers (ISPs) to bid “alternative technologies.” These alternative technologies are defined as any technology that does not qualify under NTIA’s definition of reliable broadband service, which generally means fixed wireless operating on unlicensed spectrum and low-earth orbit satellites like those used by Starlink. Under a more accommodative NTIA, we could see more than 10% of the 8.3 million unserved broadband addressable locations identified in the FCC’s broadband maps to become eligible for BEAD funding using alternative technologies like fixed wireless and LEO satellites.

Reforming Universal Service Fund a High Trump FCC Priority Posing Costs For Big Tech

Winners	Verizon Communications Inc. (VZ), AT&T Inc. (T), Comcast Corp. (CMSCA), Charter (CHTR), Brightspeed, and Windstream
Losers	Alphabet Inc.’s Google (GOOGL), Netflix Inc. (NFLX), and Meta Platforms Inc. (META)

Capstone believes the FCC under Trump will prioritize reforming the Universal Service Fund (USF), and is likely to expand the fund’s contribution base to include not just voice revenues but also broadband services and potentially edge providers like Google and Netflix. A reform of the USF may include the return of the Affordable Connectivity Program (ACP), but after revisiting the eligibility criteria.

The USF spends roughly $8 billion a year to support various FCC-managed subsidy programs and is backed by a levy on voice revenues assessed by the FCC each year for telecommunications services providers. Because the USF is backed by voice revenues and these have collapsed as voice revenues continue to decline, the USF is at risk of collapse in the next few years. Further compounding the issue are a series of federal court cases calling into question the legality of the FCC levying voice revenues to fund the USF and whether this is an improper delegation of Congress’ taxing authority to a federal agency. The US Supreme Court (SCOTUS) agreed to review the Fifth Circuit’s decision holding the Universal Service Fund’s contribution mechanism unconstitutional because this decision is in conflict with Sixth Circuit and Eleventh Circuit rulings upholding the constitutionality of the USF.

FCC commissioner Brendan Carr, who President-elect Trump has already named as his incoming FCC chair, is a big proponent of overhauling the USF. Carr explicitly called for taxing “Big Tech” in a 2021 press release and has consistently reaffirmed his support for such a tax since then. Such a tax would almost certainly require legislation. In fact, our base case is Congress would likely be required to pass legislation involving reforming how the USF is funded be it taxing content companies like Google and Netflix or expanding the USF’s contribution base from just voice revenues to include revenue from wireline, wireless, and satellite broadband services.

As a part of any USF reform, Carr will also likely want to pursue another of his policy goals, which is a holistic restructuring of all existing operating and capital subsidy programs for broadband. A recent report from the Government Accountability Office (GAO) found that there were 133 funding programs administered by 15 agencies that could be used to either support investment in broadband or provide consumer subsidies, and many of these programs are duplicative. Carr believes these programs should be consolidated under the FCC’s authority, and we believe he will push for that in the context of USF reform, as the USF would be a logical source of funding for all of these programs.

USF reform could also allow for the return of the Affordable Connectivity Program (ACP), which was a consumer broadband subsidy program for low-income households. The ACP was funded with $14.2 billion in the Infrastructure Investment and Jobs Act (IIJA) and provided a $30/month broadband subsidy to eligible households (increased to $75/month for qualifying tribal lands). However, these funds were fully exhausted in May of 2024, causing the program to lapse.

Any renewal of ACP in the context of USF reform will almost certainly involve revisiting eligibility requirements, the level of subsidy provided, and whether households that already pay for broadband service out of pocket can sign up for service through the ACP. One of Carr’s biggest objections to how the ACP was managed was that most of the individuals participating in the program were already paying for their own broadband service before they signed up for an ACP-compliant plan that was fully funded by the government. It is Carr’s opinion that households that had broadband before the establishment of ACP should never have been allowed to get free broadband service through ACP because that needlessly drove up the cost of the program.

FCC To Be Friendlier to Mergers, License Transfers, Waivers, and Other Approvals

Winners	Verizon Communications Inc. (VZ), Frontier Communications Parent Inc. (FYBR), United States Cellular Corp. (USM), T-Mobile US Inc. (TMUS), Intelsat, and SES S.S. (SESG on the Euronext Paris)
Losers	None

The FCC will be more accommodating to mergers and license transfers. We expect the FCC to approve all the deals currently under consideration – including the Intelsat and SES S.S. (SESG on the Euronext Paris) merger and Verizon Communications Inc.’s (VZ) acquisition of Frontier Communications Parent Inc. (FYBR).

The FCC must affirmatively approve all transactions involving telecommunications companies and broadcasters as these firms hold FCC licenses and fall under their regulatory jurisdiction. An FCC license can only be transferred in the context of a merger or acquisition if it is deemed to be in the public interest – a standard that is not terribly well defined and can mean different things to different people.

Under Democrats, this public interest standard was used to help block transactions that really did not seem to be anticompetitive, as evidenced by the FCC’s refusal to approve the acquisition of television station operator Tegna (TGNA) by Standard General because there was a view that transaction could potentially lead to higher cable subscription prices for consumers and a loss of jobs in newsrooms. This potential for harm were the transaction to be approved was seen as not being in the public interest even though there was no real evidence of actual harm. The companies tried to assure the FCC there was no risk of higher prices for consumers or a loss of jobs and even made commitments to keep pricing stable and protect jobs, but the Democrat-led FCC ignored those commitments.

We believe a Carr-led FCC will far more strictly define what is deemed as not being in the public interest and will routinely allow transactions to get approved that cannot be clearly shown to be as not in the public interest.  We believe all the transactions currently before the FCC for its review should be approved. These transactions include the merger between Intelsat and SES, Verizon’s acquisition of Frontier Communications, and the sale of UScellular’s wireless business to T-Mobile and spectrum holdings to multiple suitors. Should Dish/DirecTV come before the commission for review, we believe that the transaction will also be approved. The Dish/DirecTV transaction is in jeopardy because Dish bondholders and DirecTV have not agreed on how much of a haircut bondholders should receive in connection with a debt exchange that is part of the proposed transaction.

FCC to Eliminate or Relax Rules and Introduce More National Security Rulemaking

Winners	ISPs of all sizes, like Verizon Communications Inc. (VZ), AT&T Inc. (T), and Charter, as well as broadcast radio and television station groups like Nexstar Media Group Inc. (NXST) and Tegna Inc. (TGNA)
Losers	China Telecom, China Unicom, Huawei, ZTE

A Republican-led FCC will focus on reversing course on the perceived anti-business bias of rules approved by Democrats. We expect the FCC, under incoming chair Brendan Carr, to repeal the net neutrality rule, digital discrimination rule, and similar rules the telecommunications industry has opposed, creating tailwinds for internet service providers (ISPs) like AT&T Inc. (T) and television station groups like Nexstar Media Group Inc. (NXST).

With FCC Commissioner Brendan Carr already selected by President-elect Donald Trump to be elevated to the role of FCC chairperson, Capstone believes the FCC is likely to undertake significant regulatory reforms and work toward fulfilling Trump’s goal of eliminating ten old regulations for every new one. While it is unlikely that a ten-to-one ratio can be achieved, that does not mean a Carr-led FCC cannot find a significant number of rules to eliminate or ease rather quickly. Carr has disagreed with the Democratic majority currently on the FCC on more than a few occasions, usually with respect to making decisions Carr believes far exceed the commission’s authority and are detrimental to the telecommunications industry.

Some regulations we believe the Carr-led FCC may eliminate or relax include:

• The net neutrality rule approved on April 25, 2024, that reclassifies broadband as a common carrier under the Telecommunications Act and bans the throttling, blocking, and paid prioritization of traffic. This rule is currently the subject of litigation and could get overturned in the courts, eliminating Carr’s need to repeal it through a rulemaking process.
• The digital discrimination rulemaking, approved on November 15, 2023, gives the FCC the authority to address discriminatory conduct and practices by broadband providers. The big problem the industry has with respect to this regulation is its focus on disparate impact and the fact that it gives the FCC authority to investigate all aspects of how ISPs run their businesses. We would expect any rulemaking by Carr to substantially water down the existing rule and change the standard for measuring discriminatory treatment from disparate impact to overt discrimination.
• The media ownership rules that were reauthorized in the most recent quadrennial media ownership rule review were released on December 26, 2023. These media ownership rules restrict the ability of broadcast station groups to acquire additional stations and are generally seen as obsolete, with most consumers getting content through the internet.

However, Carr will also undertake new rulemakings.  Some will be designed to authorize the repurposing of spectrum from one set of authorized users to another and allow for spectrum auctions or spectrum sharing between satellite and terrestrial users.

Other rulemakings will be centered around national security concerns like enhancing the level of scrutiny foreign telecommunications providers interconnecting with US networks face or adding additional categories of equipment from China from the list of equipment prohibited from being sold domestically on the grounds it poses a risk to national security. The FCC has already ordered the US units of Chinese telecommunications companies from offering broadband service in the US, primarily used to connect to US data centers. The next step could be further restrictions on companies operating in the US interconnecting with companies in China and limits on the types of services that could be offered to customers in China – services like high-speed connections to US data centers.

We expect a Carr-led FCC to undertake an aggressive pace of rulemaking over the course of the next few years. Most of the rulemakings Carr will put forward would likely be voted on at FCC open meetings, which happen monthly and can have anywhere from three to as many as eight items on the agenda and up for a vote. We expect Carr to spend a few months pushing the staff to be able to ensure the commissioners have five or more items up for a vote each open meeting with at least one item being a substantial rulemaking. He will focus the first year on launching rulemaking processes by having the commission vote on issuing notices of proposed rulemakings (NPRM) with a goal of having final rules approved within a year or so of the NPRM being issued.

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