June 15, 2012

FCC Sets December 12 Sunset Date for Viewability Rule

By a unanimous vote, the FCC adopted a Report and Order on Tuesday that permits the

agency’s “viewability rule” to sunset after a six-month transition period that ends on

December 12. Enacted in 2007, the viewability rule requires cable operators that offer

service in both analog and digital formats to convert digital must-carry programming to

analog format for their analog subscribers. In approving the rule change, the FCC cited

substantial declines in the number of subscribers that receive analog-only cable service

(i.e., 40 million households in 2007 as opposed to 12 million households today) as well as

a revised interpretation of statutory provisions that are “best read to give the operator of a

hybrid [cable] system greater flexibility in deciding how to comply with the viewability

mandate.” According to the FCC, that interpretation “hinges on a cable operator making

equipment available at no cost or an affordable cost” to analog subscribers that will

enable them to view digital channels that will no longer be converted to analog after the

sunset date. Emphasizing that the underlying statutory provisions on viewability remain

in effect, the FCC said it would reserve the right to reinstate dual analog/digital carriage

requirements “if we receive a significant number of well founded consumer complaints

that an operator is not effectively making affordable set-top boxes available to customers

in lieu of analog carriage of a channel.” In a related move applauded by small cable

system operators, the FCC also extended for three more years its rule waiver that exempts

small cable operators from the requirement to carry in high-definition (HD) format any

broadcast signal that is offered in HD. While noting that he is himself an analog cable

subscriber, FCC Commissioner Robert McDowell endorsed the “more flexible approach

that allows cable operators to decide whether to maintain both the analog and digital

streams or make available affordable set-top boxes,” as he recognized the importance of

the FCC modernizing its rules “to reflect the current media marketplace.” While voting

in favor of the rule change, Commissioner Mignon Clyburn sounded a cautionary note,

warning: “if set-top box fees become higher than I have been led to expect and viewers

experience ‘box shock,’ I . . . will seek appropriate and stiff remedies.” Although

National Cable & Telecommunications Association CEO Michael Powell lauded the

FCC’s decision as one “that will promote the deployment of faster broadband and the

expansion of new and exciting digital services,” National Association of Broadcasters

executive vice president Dennis Wharton voiced concern that the FCC’s ruling “has the

potential to impose negative financial consequences on small local TV stations that are a

source for minority, religious, and independent program diversity across America.”

Verizon to Launch Shared Wireless Data Plan

In a development hailed by one analyst as “the most profound change to pricing the

telecom industry has seen in 20 years,” Verizon Wireless announced on Tuesday that it

will soon replace its separate rate plans for voice and data services with a uniform rate

structure that emphasizes data usage and enables subscribers to operate multiple devices

FCC Sets December 12

Sunset Date for Viewability

Rule read more

Verizon to Launch Shared

Wireless Data Plan

read more

Lawmakers Question

Huawei, ZTE on Ties to

Chinese Government

read more

Vodafone, Telefonica Sign

Network Sharing Pact

read more

Brazilian 4G Wireless

Auction Nets $1.3

Billion read more

Telefonica Divests Half of its

Stake in China Unicom read more

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP 2

under a single contract. Marketed as “Share Everything,” the new rate plan had been long anticipated as the rising tide in data usage

has eaten away at voice minutes that now form a shrinking proportion of subscribers’ monthly bills. Statistics indicate that, last year,

data services accounted for 37% of U.S. wireless carriers’ wireless revenues, representing a three-fold increase over the 12% level

reported in 2006. Because wireless subscribers now use their handsets less frequently for voice calls, the Share Everything plan will

charge a flat monthly access fee for each device on a subscriber’s contract, ranging from $10 for tablet computers up to $40 per month

for fourth-generation smart phones. Unlimited voice minutes and text messages are included in the monthly access fee. Data,

meanwhile, will be covered in tiered increments that start at $50 per month for 1 GB of data and go up to $100 per month for 10 GB of

data and encompass all devices on a subscriber’s plan. Customers will be able to purchase additional data capacity in $10 increments

as they approach their monthly limits. Subscribers will also be able to use eligible devices as mobile hot spots at no extra charge. The

new pricing structure will be applied to new Verizon subscribers effective on June 28. Although current Verizon customers will be

able to continue with their existing rate plans, such subscribers will be permitted to shift over to the Share Everything rate structure

without extending their current contracts or incurring additional fees. As a Verizon spokeswoman predicted that Share Everything’s

debut “will fuel an ecosystem of devices,” analysts indicated that AT&T and other rivals are likely to follow suit with similar plans in

the near future.

Lawmakers Question Huawei, ZTE on Ties to Chinese Government

Writing to officials of Huawei Technologies and ZTE Corp. on Tuesday, two top lawmakers on the House Intelligence Committee

voiced concern about the telecommunications equipment makers’ ties to the Chinese government, as they requested details on the

companies’ funding arrangements, the role of a “party committee” at Huawei, the companies’ contracts in Iran, and Huawei’s

relationship with five U.S. consulting firms. Huawei, one of the world’s fastest growing suppliers of telecom network gear, has sold

equipment to more than a dozen small U.S. rural carriers but has been rebuffed thus far by U.S. national security officials in its quest to

expand its U.S. presence. ZTE, another key Chinese equipment maker, derives half of its revenue from foreign contracts and, like

Huawei, is also seeking to establish a footprint in the U.S. market. Following up on a series of recent meetings that took place in China

and in Hong Kong among U.S. lawmakers, committee staffers, and representatives of both companies, House Intelligence Committee

Chairman Mike Rogers (R-MI) and ranking committee member C.A. Dutch Ruppersberger (D-MD) asked the companies to produce

additional documents to assist the committee’s ongoing investigation into “the threat posed to our critical infrastructure and the United

States’ counterintelligence posture by companies with ties to the Chinese government.” In a statement to the press, Rogers outlined his

concerns “about the risk posed to our critical telecommunications infrastructure were these companies to have further access to the U.S.

market.” Commenting on the lawmakers’ letter, an official of Huawei said “we look forward to. . . . addressing the true threats to

critical infrastructure” as a ZTE spokesman affirmed that his company “is committed to remaining transparent, candid and cooperative

throughout this inquiry.”

Vodafone, Telefonica Sign Network Sharing Pact

With the goal of reducing the significant cost of fourth-generation (4G) network upgrades in the United Kingdom (UK) while boosting

their competitive stance against British wireless market leader Everything Everywhere, Vodafone and Telefonica announced plans to

share their respective wireless network grids in the United Kingdom. The 50-50 joint venture, announced last Thursday, combines the

networks of Vodafone U.K., the third-ranked wireless carrier in the U.K., and O2, the nation’s second-largest mobile phone operator

that is controlled by Telefonica. O2 was displaced as the U.K.’s largest wireless carrier in 2010 upon the creation of Everything

Everywhere from the merger of the British wireless assets of Deutsche Telekom (DT) and France Telecom. The pact between

Vodafone and Telefonica builds upon a previous equipment sharing partnership between the companies (known as “Cornerstone”) that

began in 2009. Officials of both companies also indicated that the deal will create a single grid of 18,500 cell sites—representing a

boost of 40% for each operator—that will cover 98% of the U.K. population with second- and third-generation wireless services by

2015 and 98% of the population with 4G services by 2017. Telefonica will operate the combined grid in the eastern portion of the

U.K., while Vodafone will handle the western portion, which includes Wales. Each company, however, will maintain control of its

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP 3

own respective customers and spectrum assets and will continue to pay each other termination fees as prescribed by law. As Vodafone

UK CEO Guy Laurence explained that “our motivation is the fact we have 4G coming round the corner,” an executive of Telefonica

observed that “one physical grid running independent networks will mean greater efficiency, fewer site builds, broader coverage, and,

crucially, investment in innovation and better competition for the customer.”

Brazilian 4G Wireless Auction Nets $1.3 Billion

Aiming to modernize it national wireless networks in preparation for soccer’s 2014 World Cup and the 2016 Summer Olympic Games

in Rio de Janeiro, Brazil’s government completed an auction of fourth-generation (4G) wireless broadband licenses this week in which

four carriers paid the lion’s share of the final tally of US$1.3 billion. Brazil, one of the world’s fastest growing wireless sectors with

253 million mobile lines in service, has emerged as a hot market for wireless broadband owing to its large number of youthful

subscribers who tend to be heavy users of social media. In the words of national telecom regulator Anatel, the auction “aims to meet

the growing demand for telecommunications services and to provide the appropriate infrastructure for the major international events

that the country will host in the coming years.” Licenses in the 2.5 GHz and 450 MHz bands were won primarily by (1) Vivo, a unit of

Telefonica of Spain, which emerged as the auction’s top spender with total bids of US$506 million, (2) Mexico’s America Movil, the

second-place winner with total bids of $403 million, (3) Tim Participacoes, a unit of Telecom Italia, which posted $180 million in bids,

and (4) Oi, a local Brazilian carrier which committed total bids of $166 million. In accordance with licensing conditions set by Anatel,

the winners of Tuesday’s auction will be required to construct 4G networks in host cities of soccer’s Confederations Cup by April 2013

and in host cities of the 2014 World Cup by the end of 2013. All cities and towns with populations that exceed 100,000 persons must

be integrated into the 4G networks by 2016.

Telefonica Divests Half of its Stake in China Unicom

As part of its ongoing quest to pare down its €57 billion debt load, Telefonica disclosed plans on Sunday to sell nearly half of its 9.6%

stake in China Unicom (CU) to CU’s parent company, China United Network, for €1.1 billion (US$1.37 billion). The sale of the 4.6%

stake at a price of HK$10.21 (US$1.31) per share will leave Telefonica with a 5.01% holding in CU, the second-largest wireless

operator in China. Telefonica’s announcement comes on the heels of similar recent moves that are also intended to reduce the

company’s substantial debt burden, such as a partial IPO of its German business and the sale of its 2% stake in Portugal Telecom.

Citing CU’s strong position in China’s fast-growing wireless market, some analysts voiced surprise at Telefonica’s plan to dispose a

portion of its CU stake. Stressing, however, that it remains committed to its strategic alliance with CU and that it will explore further

opportunities for collaboration with CU, a spokesman for the Spanish telecommunications firm maintained that the planned sale of

more than 1.07 billion shares to CU is intended to promote “financial flexibility.”

* * * For information about any of these matters, please contact Patrick S. Campbell (e-mail: pcampbell@paulweiss.com) in the Paul, Weiss

Washington office. To request e-mail delivery of this newsletter, please send your name and e-mail address to

telecom@paulweiss.com.

(No. 2012-24)