NSR Policy: What Did the Lutnick Hearing Tell Us About Spectrum?
What’s New: At yesterday’s confirmation hearing for Secretary of Commerce, Howard Lutnick addressed numerous of questions about BEAD, which we analyzed yesterday. (LINK). But he also addressed questions on spectrum, which increasingly is a concern for investors in wireless companies. The context for the questions is the desire of Republicans to use spectrum auction revenues to pay for tax cuts in the upcoming reconciliation bill (as well as a belief that the wireless companies will soon need more spectrum for 6G). But the prime spectrum target for such commercial uses is currently used by the Department of Defense (DoD).
In this note, we analyze the key moments in the hearing with the three most important Senators in the debate and provide the most important takeaways for investors as to what has and hasn’t changed, and who the key player will be in determining the outcome (probably not who you are thinking).
Key Spectrum Related Moments
Senator Cruz, who has introduced legislation favored by T, VZ and TMUS, reiterated his position on the need for more spectrum for exclusive commercial purpose.
- Lutnick agreed, saying that we need more spectrum and that “being the secretary of Commerce, I tend to lend toward Commerce.”
- In other words, Lutnick will be supportive of the Cruz/Thune spectrum bill.
Senator Cantwell, who in the last Congress introduced legislation favored by the Cable industry, reiterated her position that dynamic spectrum sharing “holds a lot of promise.”
- Lutnick did not challenge her, saying “I think the best way to say it would be working closely with the Department of Defense to make sure we protect our National Security. If we can find it, then we can use it to enhance the United States of America. Generational Spectrum is important. Let’s work together and unleash the spectrum if we can.
- In other words, he is supportive of the Cruz approach but there were several ifs, which we translate to giving the DoD significant leverage.
Senator Fischer, who has resisted Cruz’ efforts as problematic for the DoD, reiterated her position that DoD operations must be protected.
- Fischer started by saying “I want to make it clear to you that DoD airwaves are not lying dormant and to clear them would jeopardize our national security.”
- She then listed numerous DoD uses of spectrum.
- She did not ask a question but just closed with a statement that she hoped “we can work together.”
- Lutnick did not answer, nor did he take any other opportunity to explain how the Cruz approach and the Fischer concern can both be accommodated.
- In other words, while he favors the Cruz approach, he likely understands that reallocating spectrum from the DoD to exclusive commercial use will be a challenge.
Key Investor Takeaways. Here is what we think of as the key takeaways for investors.
No one is moving off their prior positions.
- None of the key Senators are backing off their previous positions, suggesting that the dynamics that created the stalemate that existed in the previous Congress are still present.
- We think Fischer is the key Senator to watch both because she is a Republican and because she will be the leading Senate indicator of the DoD position.
If Lutnick has an answer to the Fischer/Defense arguments, he is saving it for another day.
- Lutnick did a great job of accomplishing his main goal; saying nothing that would prevent confirmation.
- So, it is not surprising that he was not more definitive in addressing the conflict between the exclusive wireless advocates and the DoD advocates.
- Still, our read is that the Trump/Lutnick team has not yet developed a strategy to address that conflict.
We don’t think Lutnick is serious about taking back broadcast spectrum.
- During the campaign Lutnick tweeted that broadcasters should be forced to return their licenses and have the government sell the spectrum to reduce the government debt, and idea that got a thumbs up from Musk and AI and Crypto Czar David Sacks.
- No one asked about that, nor did Lutnick raise it on his own as a way to address the spectrum crunch.
- We suspect the idea is now dead, though perhaps his failure to mention it was simply a function, as noted above, of focusing on his main goal of confirmation.
The most important player in this debate was not present and is unlikely to ever be public. The most important player in this debate is the Congressional Budget Office (CBO).[1]
- The spectrum decision will be reflected in the upcoming reconciliation bill, as the Republicans are hoping to use auction revenues to pay for tax cuts.
- The CBO must score the potential auction proceeds to determine the amount of tax cuts.[2]
- While complicated, the scoring boils down to the equation of auction revenues minus relocation costs.
- The revenue calculation will depend on many assumptions, including whether there are other auctions prior to a lower 3MHz auction, such as the spectrum dividend from the Intelsat/SES merger or DISH selling its spectrum, and if so, how does that affect the revenues of the lower 3MHz auction.
- The costs calculation will also depend on many assumptions with the largest one being the accuracy of the Department of Defense estimate of the moving costs.
- In short, the CBO may score the auction in a way that makes it easy for Cruz to win but it also might score it in a way that makes it impossible for Cruz to win by having the results of the equation being so low, or even negative, that forcing the DoD to give up its spectrum is not worth the effort.
Bottom Line: This Congress is very different than the previous Congress but the dynamics that created the stalemate on spectrum in the last Congress are still present. The reconciliation bill might provide a carrot that, eventually, could cause a compromise that enables spectrum legislation to move forward. But there were no signs at the hearing that any compromise is close.
[1] If you were guessing that we were going to say “Elon Musk” you get points for understanding what is happening in DC these days. We don’t think Musk will play a role in this specific spectrum debate but if we are wrong and he does, he will prove highly influential. If you were guessing Brendan Carr, well, we will have to assign you to the remedial class in which we discuss both the different roles of the FCC and NTIA and the nature of the upcoming reconciliation bill. Carr will be an effective advocate for the Administration position but in this case, he will not be influential in determining the outcome.
[2] Of course, the level of tax cuts is not based solely on spectrum auction revenues but the greater the auction revenues, the greater the potential tax cuts.