YOU ARE AT:Archived ArticlesDOES ANYONE BUT THE U.S. GOV'T PROFIT FROM SALE OF SPECTRUM?

DOES ANYONE BUT THE U.S. GOV’T PROFIT FROM SALE OF SPECTRUM?

In the nation’s capital, where I work, it’s not uncommon to be approached on the sidewalk by strangers handing out leaflets. Typically, these are advertisements for coupons for local restaurants, delis and shops. I know this because I never refuse to accept one of these little missives. Sometimes they’re coupons for a free meal or discounts at places where I would take my business anyway; and, after many years of living off Velveeta sandwiches while working my way through school, I’ve developed a lifelong appreciation for a “free lunch.”

Surprisingly, many people don’t share this outlook on the leaflets. For as many cheapskates as there are like me who are happy to grab anything handed to them on the streets, there are just as many who would prefer to cross the street against heavy traffic to avoid being accosted by coupon-givers. Presumably, this has something to do with the intuitive belief that it can’t be worth anything if they’re giving it away free.

Thoughts of leaflets, free lunches and PCS are on my mind as I think about this past summer in the land mobile and wireless industry. Throughout the long hot season, while some of us have been trying to save a few bucks, others have been doing their level best to spend them. As temperatures rose and patience evaporated in this town’s hot, humid air, many were heard complaining: “When will we be able to bid for PCS spectrum?”

That plea wasn’t limited to small businesses and the “designated entities,” minorities and women, who were waiting for litigation to be resolved so that they could participate in the PCS auctions. Remarkably, even the sitting Chairman of the Federal Communications Commission, a typically calm and cerebral sort of fellow, blew his cool and publicly scolded the U.S. Court of Appeals for delaying the start of the “C Block” PCS auctions.

Though the sight of a presidential appointee berating a federal panel of judges is somewhat unusual in the field of communications law, it’s not surprising that this particular FCC should be concerned about any additional auction delays. The agency has aggressively promoted PCS and other wireless services, such as interactive and wireless cable TV, as investment opportunities for small businesses, women and minorities. Agency officials would presumably argue that they have not guaranteed that anyone would necessarily profit from these wireless ventures; still, it is a certainty that the FCC has marshalled an enormous amount of time, personnel, money, and yes, lawyers, to promote broad participation in wireless services auctions. Having made that commitment, this agency now seems to be taking these auction delays rather personally.

Throughout the recent tumult of monthly personal communications services rule changes and attendant litigation, some people have stood away from the fray, and begun to question some of the basic assumptions about spectrum auctions. One economist recently released a study that attacked the entire concept of spectrum auctions, suggesting that spectrum fees needlessly diverted scarce capital away from more productive investments in plant and personnel.

My take on spectrum auctions is not nearly as sophisticated as the economist’s, or as personal as the FCC’s. I’m just an average Washington lawyer, who feels no shame in using coupons to save some money. Perhaps because I’m such a regular Joe, I really don’t understand all the excitement about these spectrum auctions. For the life of me, I can’t figure out why the FCC wasn’t nearly so enthusiastic about promoting entrepreneurial opportunities in the wireless industry when it was giving the spectrum away for free.

For decades, anyone could apply for a paging, microwave, or two-way radio license simply for the cost of the FCC filing fee, and perhaps an engineering study. A few hundred dollars and a few months later, you had yourself an official FCC license and the right to start a communications business. The capital required to build a land mobile station was not enormous if you were planning on covering a small city or town. Before the advent of cutthroat pricing, it was not unusual for small paging or two-way dealers to turn a profit in less than two years of operation.

Ever after, the land mobile licensee had a successful business, the community had a new source for quality jobs, and the public benefited from having additional communications services available at lower prices. Ultimately, the sale of the small wireless business would take care of the licensee’s retirement needs, and provide a successful business opportunity for the buyer. You might have thought that this was precisely what the FCC would have been advocating over the years, for “designated entities” or anyone else.

But it wasn’t. Until Congress gave it auction authority, the FCC paid scant attention to promoting common carrier and private radio investment opportunities for small businesses, women and minorities. Sure, it had a “Small Business Activities” offices, but those activities were mainly directed at broadcasting interests. Until the past two years, the bulk of the FCC’s efforts on behalf of minorities and small businesses were directed toward promoting ownership of high risk, high capital, labor intensive, radio and television broadcasting stations.

The FCC’s rules reflected this institutional bias toward broadcasting ownership. Women and minorities were granted decisional preferences in comparative proceedings for broadcast station licenses. Tax certificates and distress sale policies were all designed to encourage diversity of ownership in the broadcasting field. Still, the delays and expenses attendant to acquiring one of these rare radio or TV licenses were exponentially higher than the comparable costs involved in obtaining a common carrier license. And, many broadcast stations operated at no better than break-even levels, only returning the licensee’s investment following a sale of the station. Finally, following successful court challenges to the FCC’s broadcast “preference’ rules, these ownership opportunities, such as they were, all but dried up for many small businesses, women and minorities.

At the same time, what was the FCC doing to promote diversity of ownership in the land mobile and wireless industry? The answer is, not much. Long before anyone even considered challenging the constitutionality of “preferences,” the FCC’s common carrier and private radio rules were virtually bereft of any references to minorities or small business. On the few occasions where the FCC was asked to award minority preferences or grant tax certificates for common carrier licenses, the agency usually demurred.

And so, during a decade and more of enormous growth and opportunity in the land mobile industry, when licenses were being awarded by lottery or for the asking, the FCC all but ignored taking any active role in promoting these ownership opportunities for women, minorities and small business. Now, suddenly, when the cost of obtaining a wireless license has threatened to go through the roof, the agency is interested in promoting the wireless industry to new investors.

The FCC has detailed most of its most talented employees toward writing, re-writing and defending in court, its auction rules. It has hired countless accountants, economists, “futurists” (whatever they are), and outside specialists to conduct and police its auctions. It has ballyhooed to Congress and the media the billions of dollars that is has raised to date through auction spectrums. Recently, the FCC announced that it will be setting aside even more spectrum, reclaimed from the federal government, to be auctioned off to “entrepreneurs.” And the chairman has announced aggressive plans to finish auctioning off the remaining land mobile spectrum by the end of 1996.

If it were simply a matter of the FCC finally coming to realize the enormous opportunities that the land mobile industry has always held for any hard-working individuals, there would be no grounds for concern about its belated interest in the
field. Unfortunately, the stakes in this game have now changed dramatically. Though it wasn’t always the case, now there truly is no such thing as a “free lunch,” or even a discount coupon, in the land mobile industry.

Not only have spectrum auctions exponentially increased the costs of obtaining a radio license, it is by no means clear that the licenses being auctioned off are even remotely as valuable as those that were given away just a few months ago. For instance, anyone who thinks that one of the 4600 MHz “entrepreneurs” licenses that the FCC intends to auction off, is comparable to an 800 MHz or 900 MHz cellular or paging license, ought to seriously consider investing their money in a fast-food franchise.

The PCS field is fraught with many serious technical, engineering and financial issues that incumbent paging and cellular operators never faced; PCS is not for the faint of heart. Yet, rather than clearly articulating these potential problems to the public, the FCC seems inordinately concerned only with the delays that bidders might face in buying these experimental licenses. In light of its years of neglect of the land mobile industry, when the spectrum was free, the agency’s belated interest in promoting expensive and more problematic spectrum to industry newcomers seems, to put it mildly, tragically ironic.

There are already ominous signs that individuals who rashly bid millions of dollars for interactive TV licenses, without knowing, amazingly enough, whether marketable equipment was available, will probably lose everything they invested in these FCC licenses without ever signing up customer one. The FCC has only hinted at the problem by agreeing to waive first-year construction requirements for the IVDS licenses. I would not be the first or last person to predict that there will be many defaults on IVDS license payments. These will not be limited to frequency “speculators,” but, they will be hard-working individuals who believed the FCC when it said that IVDS was a great opportunity for them to get on the information superhighway.

This will also not be the first time that anyone questioned the wisdom of using auctions to “promote” diversity of ownership in the wireless industry; but, it may be close to the last. Like it or not, this particular agency seems hell bent on auctioning off whatever spectrum remains extant. Still, I couldn’t live with myself if I didn’t make one last effort to suggest an alternative means of accomplishing the FCC’s and the industry’s common goals for promoting the growth of this terrific industry.

If spectrum auctions are intended to deter speculators, surely we can devise speculator deterrents that do not handicap legitimate applicants with exorbitant licensing costs. One alternative is an application bond, posted to the government, equal to the first year’s estimated costs of constructing and operating a station. If the licensee fails to timely construct and operate a station, the feds collect the bond, and the license is available for a new applicant.

What about mutually exclusive situations? The FCC believes that, absent public auction, there exists in reality a “private auction” for limited spectrum, but that only a handful of investors, rather than the taxpayers who own the airwaves, profit from it. On its face, it seems like a fair argument; but the government’s alternative has never been tested in the marketplace. It’s a certainty that the feds have collected billions of dollars from PCS spectrum auctions (and probably already spent it); however, there is today not a single paying PCS customer in the entire United States.

In other words, if the PCS industry tanks, or merely fails to meet the industry’s expected potential, in part due to burdensome auction fees, the government would only have pocketed a one-time licensing fee, rather than recurring revenues from a steady stream of PCS customers. Worse still, in many cases the FCC might not even recover the auction fees from entities paying in installments if their businesses go bankrupt.

The FCC could certainly decide to run its wireless licensing more like a business, and less like a high stakes game of blackjack. The FCC could decide to grant land mobile licenses as quickly as possible, charging enough to recover its costs of licensing and regulating the industry, with the requirement that the licensee pay annual fees based on a percentage of revenue or number of customers in service (these are familiar concepts: the terms “taxes” and “regulatory fees” spring to mind). In the event of mutually exclusive applications between bond-posting, qualified applicants, the FCC could give them the option to share the spectrum or to be randomly selected. At least that way, the spectrum would be put into use, and not tied up in litigation, as soon as possible.

If a return to if not “free spectrum,” then at least something akin to “reasonably affordable” spectrum is too radical for this FCC to consider in these budget-minded days, it should at least contemplate some alternatives for the licensing of “entrepreneurs.” Assuming that entrepreneurs and designated entities even exist after the courts are done with them, it is unfair and disingenuous for this agency to continue to foster the idea that anyone but the federal government benefits from spectrum auctions. Even if there are no more free lunches in this industry, it should be the FCC’s job to ensure that there will at least be room at the table for anyone willing to buy a meal.

Frederick M. Joyce is a partner with the Washington, D.C., law firm of Joyce & Jacobs, where he specializes in communications, corporate and litigation matters.

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