Does industrial policy–government efforts to shape economic outcomes–ever work? You’d probably have trouble finding anyone at GM (NYSE: GM) who’d argue it doesn’t.
Barely three years ago the US automotive icon was on the verge of extinction. That’s when then-President George W. Bush released a $700 million bailout fund to keep the company in business, a policy later fully embraced by his successor Barack Obama.
The rescue operation was one of the most aggressive interventions in US economic history. And it continues to provoke scorn in this election year, with actor Clint Eastwood roundly criticized by some for starring in an upbeat auto industry add during this year’s Super Bowl. There’s absolutely no disputing, however, that the bailout did save GM, which looks set to pay back everything it owes taxpayers and to report about $8 billion in 2011 earnings. And management has set its sights on $10 billion-plus for 2012.
On the other hand, there’s the example of bankrupt Solyndra, which couldn’t produce solar components economically despite low-cost loans from Uncle Sam. And it’s hardly the only alternative energy company in dire straits, despite strong support from the US Dept of Energy (DoE) for the past three years-plus.
Just as Solyndra’s failure has become a rallying point on the political right for why government should not intervene in the economy, so is DoE support of nuclear energy stirring up opposition on the political left. This week, the Nuclear Regulatory Commission (NRC) at least issued a Construction Permit for Southern Company’s (NYSE: SO) two new reactors to be constructed on the Vogtle site in Georgia.
The vote was 4-1, with Chairman Gregory Jaczko the lone dissenter, claiming the commission was acting “as if Fukushima never happened.” Representative Ed Markey (D-Mass) had even stronger language, charging “the NRC abdicated its duty to protect public health and safety just to make construction faster and cheaper for the nuclear industry. Rather than ushering in the so-called nuclear renaissance, today’s vote demonstrates that the NRC is still stuck in the nuclear safety Dark Ages.”
Others criticize the financial support given by the Obama administration to Southern’s effort, mainly an $8.3 billion loan guarantee for the Vogtle project. Jim Riccio of Greenpeace USA, for example, charges “the federal government is putting the American taxpayer on the hook for billions of dollars to build nuclear reactors that corporations would never risk building themselves.” And several groups are set to file a lawsuit against the NRC at the US Court of Appeals for the District of Columbia in coming days.
Unlike Solyndra or GM circa 2008, Southern is a very healthy company. The Vogtle plant is already well down the road to starting up in 2016, and costs have been largely locked in as well. Also, the new plant’s AP1000 design is a wholly different animal from the reactors at Fukushima Daiichi that succumbed to the earthquake-tsunami one-two punch last year. And its output will provide vital balance to natural gas-fired power plants, which are replacing coal-fired output throughout the Southeast.
All that seems to argue this bit of industrial policy will succeed. The same, however, doesn’t appear true of the Federal Communications Commission’s (FCC) effort in recent years to launch a rival high-speed wireless network to challenge the growing dominance of AT&T (NYSE: T) and Verizon Communications (NYSE: VZ).
In 2010 the FCC held an auction of spectrum but effectively barred AT&T and Verizon from competing for all but a tiny sliver of what was available. As a result a venture backed by billionaire Philip Falcone’s Harbinger Capital Partners LP–dubbed LightSquared–won a huge swath of spectrum on the cheap.
The FCC’s obvious goal was to give LightSquared a giant leap forward in the name of promoting industry “competition.” Unfortunately, it soon became apparent that the company’s plans and technology would interfere with rapidly proliferating GPS (global positioning systems).
Companies began complaining LightSquared’s proposed network would interfere with the integrity of their systems. Then came a study from nine US government agencies, including the Dept of Defense (DoD), that drew the same conclusion.
On paper at least, the FCC still has the final say on whether LightSquared can go ahead with its plans. The commission is officially now requesting comments on the company’s request for a declaration that GPS isn’t entitled to protection from any future interference caused by its proposed system. Meanwhile, LightSquared’s chief operating partner Sprint (NYSE: S)–a company with a knack for making horrific strategic moves–has supposedly given the company until March to resolve its regulatory issues.
For its part, LightSquared appears to be trying to turn its GPS woes into a government-versus-business progress issue, charging government agencies, including DoD, with conducting bogus testing. That’s ironic, since its ownership of spectrum was essentially the result of industrial policy by the FCC. Even Mr. Falcone seems to be acknowledging the gig is up, however.
In fact, Harbinger Capital lost 47 percent in its biggest investment fund in 2011, largely due to a 60 percent writedown of LightSquared’s value. And it certainly doesn’t help that Mr. Falcone is currently the target of a Securities and Exchange Commission (SEC) investigation on matters related to market manipulation.
The FCC’s conduct in the case has also attracted the ire of Congress. Representative Greg Walden (R-OR) of the House Subcommittee on Communications and Technology plans to hold a hearing on the FCC’s handling of LightSquared. Any attempt by the FCC to override DoD objections to GPS interference would almost surely trigger a political firestorm in an election year. That could make it very difficult for President Obama to keep FCC Chairman Julius Genachowski on.
The real irony here is even if LightSquared survives, it won’t stop AT&T and Verizon from becoming more dominant in the US wireless industry, anymore than the FCC’s decision last year to reject AT&T’s purchase of T-Mobile USA did. All that did was punish T-Mobile owner Deutsche Telekom (Germany: DTE, OTC: DTEGY) and, by extension, lessen the attraction for other foreign giants of building or buying a US wireless network.
In the Nov. 25, 2011, Utility & Income, The Rules of the Telecom Game: Spend Big, Win Big, I highlighted the key driver of AT&T’s and Verizon’s growing wireless dominance: cash flow and capital spending that no other carrier can come close to matching.
These trends remain very much in force today. AT&T had its best-ever quarter for adding smartphones, the key driver of its 19.4 percent bump in wireless data revenue. That was in large part thanks to $20 billion-plus in capital spending last year, which the company plans to at least match this year. Verizon, meanwhile, also saw record customer adds and data sales (up 19.2 percent), as it spent more than $16 billion–and it, too, has plans for similarly robust outlays in 2012.
By contrast, No. 3 US wireless company Sprint is rumored to be pursuing a network-sharing deal with T-Mobile. That’s just the latest admission the debt-heavy laggard is going to have trouble following through on all of its capital spending commitments, which include $20 billion worth of iPhone purchases over the next five years. The company has termed out most of its 2012 debt but still has some $22 billion on the books and is generating negative free cash flow. It may yet survive, but there’s no way it can keep up.
T-Mobile USA owner Deutsche Telekom has pledged to invest enough to maintain customers. But it’s no secret its real long-term interest and capital spending focus is in its European network. And LightSquared, despite Mr. Falcone’s Wall Street connections, is even further behind in what it can afford.
The bottom line is money power is what will drive telecom dominance going forward, just as it has since the communications industry deregulated in 1996. And no FCC industrial policy prescription–from restricting spectrum purchases to subsidizing new players–can change that.
In fact the more aggressively it moves, the more it risks facing new restrictions on its power from Congress. Even now a bill is moving ahead that would require the FCC to hold a spectrum auction with no restrictions on who bids. This would, of course, benefit the companies most that can bet biggest as well as device-makers and web companies that will see improved speed and quality at networks owned by AT&T and Verizon. And a bigger sale would also be a boon to US government deficits.
That’s bullish for everyone, except proponents of the FCC’s current industrial policy. As for LightSquared, it’s looking increasingly like the next Solyndra.
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