Research Trends and Conclusions: Regulatory Communications 2009

• December 2009

• Regulatory Communications

Richard Woolley - Who's Who Legal

A closer look at recent issues facing regulatory communications lawyers finds the sector to be bearing up remarkably well, despite recent turmoil in the financial markets.

The communications industry learned some hard lessons after the dot-com bubble burst in the early years of this decade and made bankruptcies, liquidations and mass-layoffs commonplace. Companies were forced to become more efficient in their outgoings and streamlined in their staffing, and continuing demand for products and services - both in developed countries and emerging markets - meant that most balance sheets were in good order when the credit crunch hit. The lawyers we consulted attested to the resilience of the TMT sector in 2009: transactional work is generally strong, new markets are opening up and developments in technology and legislation are seeing many law practices broaden the scope of their services and increase their bench numbers. Yet the rapidly changing regulatory environment in many countries has thrown up numerous obstacles for clients and the need for regulatory advice and litigation is also on the increase.

MARKET DEVELOPMENTS IN 2009

Despite historic lows in transactional activity across many other sectors in the third and fourth quarters of 2009, the communications industry has seen a series of major deals and negotiations. In November, Deutsche Telekom and France Telecom signed an agreement to launch a joint venture between UK subsidiaries T-Mobile and Orange. The same month saw AT&T acquire Centennial Communications in the US and Liberty Global announce its purchase of Cologne-based Unitymedia. In September, France's Vivendi made a bid to purchase part of Brazilian mobile group GVT and in October, Spain's Telefónica put in a rival bid for the entirety of the Brazilian company. The subsequent bidding war between the prospective buyers has pushed the value of shares in GVT to an all time high. "There is as much, if not more, transactional work around now than there has been in recent years," according to Colin Long at Olswang in London, and law firms are responding by hiring more corporate TMT specialists.

Emerging markets such as Africa, India and Brazil are the fastest growing regions internationally in terms of mobile phone subscriptions. Many companies and law firms from Europe and the US are seeking to increase their presence in these regions - several lawyers in Europe noted that the majority of their deal work now takes place outside the EU. "There will be much greater growth in emerging markets going forward," says Long, who cites India as an example, where "they are adding around 10 million new telephone (mobile) customers a month, and the country still only has 43.5 per cent teledensity." The demand for regulatory expertise in developing countries is therefore increasing and local lawyers are earning more international recognition. Our listings for Brazil, India and Nigeria have all expanded considerably since the previous edition of this book was published in mid-2008.

According to The Economist, average monthly revenue generated per mobile phone user is less than US$15 in Brazil and less than US$7 in India and Africa (compared to US$36 in Europe and US$51 in the US), so domestic operators are using innovative measures to reduce operating costs and derive greater returns from their low-earning but fast-expanding customer base. Home-grown operators are outsourcing the development and running of their networks to big international players like Ericsson and Nokia at much lower costs than if they were handling these operations in-house. Further to this, operators agree to share infrastructure such as phone towers to reduce procurement and construction costs.

"There is huge growth that requires huge build-out," in the words of one source in New Delhi, and this has had a knock-on effect in the legal sector, where "law firms are building their telecoms practices and there are a lot more specialists than there were five years ago." As in numerous other jurisdictions, the expansion in the communications market in India has led to more stringent industry regulation and more severe penalties for related crimes, as such investors are heavily reliant on local expertise.

In other jurisdictions, stricter regulation has provided a disincentive to potentially lucrative foreign investments. China has added around 60 million new mobile phone users each year since the turn of the century; however, foreign investors attempting to enter the market have been limited by the in-built protectionist measures of the country's telecoms regulations. As Robert Lewis and Michael Aldrich of Lovells LLP in Beijing point out in their article, China introduced new telecoms regulations in 2000 that only permit foreign investment in the sector through a joint venture with a Chinese company in which the state has a majority share. Similarly, at the end of September 2009, a US$24 billion merger between India's Bharti and South Africa's MTN - that, according to the Wall Street Journal, would have created the third-largest wireless carrier in the world with around 200 million subscribers - was derailed by the South African government's resistance to the deal's structure, claiming it would not preserve MTN's national character. Many of the lawyers we spoke to noted an increase in the volume of litigation cases being brought to court in opposition to the restrictive resolutions of national regulators.

In the UK and elsewhere in Europe several lawyers noted an increase in the amount of regulatory work being done by in-house lawyers at telecoms companies, thus draining work from private practice. While the London marketplace has remained optimistic in 2009 with several firms expanding their teams, Mark Moncreiffe at Charles Russell, one of such firms, points out that "the market is very fee sensitive and there is now a large niche in the market for medium-sized firms, such as ours." Charles Russell has been involved in developing new telecoms legislation in the Bahamas, highlighting the increasing internationalisation of regulatory work among UK firms.

In the US, the regulatory landscape has changed both as a result of the new Democratic administration and the implementation of the fiscal stimulus package, and a lot of firms are developing their regulatory teams. Having come under new leadership at the beginning of 2009, President Obama's Federal Communications Commission is still finding its feet. Under the stimulus package, the new FCC has been given the dual obligations of developing ubiquitous broadband availability in the US and implementing the countrywide shift from analogue to digital broadcasting. As such, lawyers are doubtful as to how many other regulatory issues the FCC will tackle until the National Broadband Plan is presented in February 2010.

One notable exception is Comcast's proposed purchase of a controlling stake in NBC Universal from General Electric. Anti-trust regulators and the FCC will review the deal, which is also expected to attract the attention of congressional committees. If the deal is successful, however, Comcast will widen its remit from cable television, internet and phone services to include a film studio and broadcast network. As companies expand, many lawyers in the US are finding that representation of large telecoms clients increasingly calls for a broader skills base. As Jonathan Blake of Covington & Burling LLP in Washington, DC, says "communications law practices are broadening out - privacy and sports law are now closely related to TMT."

2010 IN PROSPECT

Many new regulatory measures will come into existence in 2010. The National Broadband Plan in the US is expected to draw capital investment into the broadband sector with the FCC being urged to impose investor-friendly regulation. US lawyers are expecting their work for broadband clients to increase in the course of the year.

This year will also see the implementation of the EU's new telecoms regulations package. Among the reforms to be introduced are firmer consumer protection measures to guard against personal data breaches and spam, greater independence among national regulators to eliminate political interference, and the installation of the EU-wide Body of European Regulators of Electronic Communications (BEREC), which will ensure fair competition and greater consistency in the European regulatory environment. As these reforms are implemented, lawyers are predicting an increase in demand for compliance advice as well as liability protection.

According to The Economist, household spending on mobile phones in the developing world now outstrips energy and water, and as mobile penetration in markets such as India and Brazil continues its upward curve, their communications bars are becoming larger and more sophisticated. In rare cases - such as Brazilian telecoms regulator Anatel's decision to allow Vivendi's GVT bid to proceed without regulatory restrictions if successful - regulators have made gestures towards reducing regulation on investments, but for the most part lawyers' ability to offer advice on increasingly stringent investment regulations will remain a sought-after commodity.

Lawyers and their clients in this sector learned a lot from the recession in the early part of this century and have navigated the recent crisis with remarkable resilience. At a time when other sectors are contracting and seeing deals fall apart, telecoms boasts a healthy international deal flow and there is a strong trend among law firms towards expansion and strategic build-out in anticipation of the large workload to come.

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