February 3, 1998

SEPARATE STATEMENT OF CHAIRMAN WILLIAM E. KENNARD

Re: Local Multipoint Distribution Service. Third Order on Reconsideration

Today, the Commission takes another important step toward the auctioning and licensing of LMDS. I strongly support this effort. LMDS will offer more capacity than is currently available from existing wireless providers and has the potential to provide facilities-based competition in the provision of multi-channel video programming and local exchange service,⁽¹⁾ two service sectors that currently are characterized by a dearth of competition,⁽²⁾ and whose incumbent providers, by in large, exercise market power.⁽³⁾

Because of my concern about the state of competition in the service sectors that are likely to be affected by our licensing of LMDS, and my concern that incumbent providers in those sectors have the ability to act anticompetitively, I write separately to indicate my support for the Commission's stated commitment to enforce strictly our real-party-in-interest rules and our rules barring unauthorized transfers of control. Strict enforcement of these rules is especially important during the period we restrict incumbent LECs and cable operators from owning in-region LMDS licenses. I also write to emphasize my support for the commitment we make in this Order to conduct a general review of our attribution rules later this year.

The Commission indicated in the Second Report & Order that "open eligibility [would] impede substantially the pro-competitive benefits of licensing LMDS."⁽⁴⁾ The Commission found "on balance that a policy favoring restricted eligibility for a limited time would result in the greatest likelihood of increased competition in the local telephony and [multichannel video programming distribution] markets."⁽⁵⁾ I support this approach and am committed to ensuring that the eligibility restriction is a meaningful one which promotes competition. And although a reluctance to change rules concerning important financing arrangements in the middle of the game is a significant factor weighing against modifying the attribution rules applicable to the eligibility restriction at this time, I am concerned that the Commission's decision not to make attributable certain interests, such as debt and warrants, convertible debentures, options, and other instruments with rights of conversion, exposes us to the danger that the effectiveness of the eligibility restrictions we have imposed could be undercut by financing arrangements involving those instruments. Although I am willing to leave our attribution rules in place for now, I think it important for us to consider whether the financial instruments discussed above afford their holders influence sufficient to be captured by our rules in the future.

A key basis for the Commission's decision to impose eligibility restrictions in the case of incumbent LECs and incumbent cable companies was its conclusion that "both incumbent LECs and cable television firms currently possess substantial market power."⁽⁶⁾ The Commission determined that "a dominant firm has the incentive to expend resources to perpetuate the status quo,"⁽⁷⁾ that this incentive is "particularly compelling here because of the unusually large size of the LMDS spectrum allocation,"⁽⁸⁾ and that the monopolist has a greater incentive to preempt than an entrant has to enter.⁽⁹⁾

Because of their desire to preserve their dominant market positions, I believe in-region LECs and cable companies have a strong incentive to acquire interests with rights of conversion to voting interests in LMDS licensees operating in their regions, with the objective of influencing the operations of those licensees so as to forestall rigorous competition. New businesses and start-up companies, such as those participating in our LMDS auction, often offer the financial instruments at issue in exchange for financing and loans on terms more favorable than are otherwise available from institutional lenders. As a holder of such instruments, an incumbent would typically have the authority to review, and perhaps approve or veto major changes in, business plans that include payment schedules and pricing plans, among other things. If such interests are not treated as attributable prior to their conversion, we run the risk of allowing the incumbents with market power to exert far more influence over the business decisions and operations of LMDS licensees than they could by merely holding voting equity in the licensee in an amount consistent with our twenty percent threshold for attribution.⁽¹⁰⁾

Because our rules allow in-region cable operators and LECs to hold up to twenty percent of the voting equity in LMDS licensees without triggering attribution, our decision not to make instruments with rights of conversion attributable gives incumbents a considerable amount of flexibility to influence the operations of LMDS licensees. If, for example, an incumbent holds a twenty percent ownership interest and, in exchange for financing an LMDS venture, also holds options to acquire additional equity of up to eighty percent more, the investor's ability to affect the competitive nature of the venture would not be significantly different than if it had direct control.

Finally, the fact that the eligibility restriction is subject to a three-year sunset⁽¹¹⁾ heightens my concerns. The operation of this sunset in conjunction with the nonattribution of these financial instruments could increase the possibility that incumbents will acquire and use them to frustrate our competitive goals.

My concerns about the operation of the attribution rules that apply to the eligibility restrictions we have crafted for LMDS reflect a more general concern about the inconsistencies that exist with respect to our attribution rules across services. Therefore, I am pleased that this Order commits us to opening up a general rulemaking on attribution later this year. The Commission has already opened up a rulemaking on various attribution issues relating to licenses regulated by the Mass Media Bureau, raising questions regarding the treatment of debt and convertible instruments.⁽¹²⁾ I look forward to the more comprehensive review discussed in this Order.

2. See id. at 12618, ¶¶ 163-164.

3. See id. at 12617, ¶ 163.

4. Id. at 12616, ¶ 161.

5. Id. at 12616-17, ¶ 162.

6. Id. at 12617-18, ¶ 163 (footnote omitted).

7. Id. at 12622, ¶ 173.

8. Id.

9. Id. at 12623, ¶ 175 (footnote omitted).

10. See 47 C.F.R. § 101.1112(h)(5) (1997) ("Stock options, convertible debentures, and agreements to merge (including agreements in principle) are generally considered to have a present effect on the power to control the concern.").

11. Second Report & Order, 12 FCC Rcd at 12633, ¶ 198.

12. See Review of the Commission's Regulations Governing Attribution of Broadcast and Cable/MDS Interests, Further Notice of Proposed Rule Making, 11 FCC Rcd 19895, 19899-908, ¶¶ 8-25 (1996).