The broadband personal communications services auctions held during the past two years have spawned a plethora of novel policy and fiscal issues for policymakers.
The reason: $20 billion. Money changes everything, even in ways not altogether obvious. Federal regulators will insist licensing is still bound by the almighty public interest standard. Congress put it in writing in 1993 legislation. But make no mistake, money is the name of the game in PCS licensing. It cost millions-in some cases billions-of dollars to buy a single license.
That cost is in addition to paying thousands of dollars in phone bills for remote bidding; millions to relocate microwave users from the 2 GHz band to higher frequencies; hundreds of millions to build systems (factor in the legal and consulting costs of siting); and millions more in marketing and other overhead costs.
Then there is the business of signing up subscribers in a highly competitive market.
Auctions are a hallmark of Federal Communications Commission Chairman Reed Hundt. Under the grand auctioneer, the FCC raised $7 billion from the sale of A- and B-block PCS licenses to Sprint Spectrum L.P., AT&T Wireless Services Inc. and PrimeCo Personal Communications L.P. and a few others with good credit lines.
Another $10.2 billion came flowing in from Korea and elsewhere for C-block licenses. The beneficiaries were supposed to be small businesses, but turned out to be just more deep pockets that bank rolled applicants that were eligible for a 25 percent small-business bidding credit.
The D-, E- and F-block PCS auction is closing in on $2 billion. Folks remain bullish for PCS, save for one Minneapolis-St. Paul license fetching only $6,000 or so.
“We think the auctions are going quite well,” said Michele Farquhar, chief of the Wireless Telecommunications Bureau at the FCC. Farquhar is looking to spectrum disaggregation, geographic partitioning and other measures to open up opportunities for women and minorities whose bidding credits were erased by the Supreme Court’s Adarand ruling last year. The PCS licensees themselves should also benefit by having more commercial options.
In addition, Farquhar is attempting to fine-tune microwave relocation, interconnection, antenna siting, roaming and spectrum flexibility policies in the PCS arena. How those policies are decided could either save or cost PCS operators big bucks.
The enormity of the big money has stunned lawmakers and regulators.
Licenses used to be given away through lengthy comparative hearings and fraud-laden lotteries. The 1980s Republican push for auctions, summarily rejected as heresy by Democrats, was embraced by Bill Clinton.
The rest is history. Photo opportunities and press clippings galore were produced from the biggest auction ever. A page for the record books.
Fanfare aside, the question remains as to whether PCS auctions were successful. And successful on what basis? Scholars, policy wonks and lawmakers differ on the answer. The debate held up a vote on the telecom reform bill, before its eventual passage Feb. 8.
Measured in terms of dollars generated, PCS auctions have been a smashing success. But that gives auctions a political component that may be at odds with sound public policy.
For wireless titans like Sprint, AT&T, the Baby Bells and GTE Corp., auctions are a steal.
Big bidders boast they got a good deal and say they were prepared to have paid even more for licenses. The auction allowed them to dictate pricing and geographic strategies. Had the FCC issued PCS permits via lotteries, large firms would have had to depend on luck rather than big money.
And if they didn’t win, they likely would have had to spend much more in the private market to buy whatever PCS properties were available.
In the long run, the PCS auction could work largely in favor of big business and against the interests of fledgling entrepreneurs and ordinary taxpayers. Spectrum shares some characteristics of real estate, but the government is not cashing in. Under the present scheme, spectrum auctions represent a one-time payment to the government. The taxpayers will never see another dime from spectrum even though the airwaves will be used for profitable purpose for years to come. Why not spectrum leases? They don’t pull down billions of dollars in a four-year presidential budget cycle.
As for the rest of the pack, the C-block PCS licensees in particular, auctions may have been deadly. These firms are leveraged to the hilt and still have to compete against AT&T, Sprint and the Baby Bells. NextWave Personal Communications Inc., with all its Korean money, map-covering licenses and the marketing muscle of MCI Communications Corp., is one of a handful of newcomers that shows promise on paper.
But what happens if its public offering doesn’t fly on Wall Street and its Code Division Multiple Access technology continues to stall? “This is the most exciting day of my life,” said Allen Salmasi, chairman of NextWave upon winning 56 licenses in C-block bidding.
And what about all the other C-block licenses not going public? If they go belly up because of unbearable auction/capital costs and competitive pressures, can the PCS auction still be deemed successful? The FCC’s Hundt is fond of saying it’s not auction money that is important, it’s the billions of dollars spent on infrastructure and the thousands of jobs created by swift licensing of next-generation digital pocket telephone systems in a competitive market.
But if the financial strains of auctions set up firms for failure in the marketplace, infrastructure investment and job creation will not materialize and the U.S. Treasury will lose out on annual tax revenue from ongoing PCS concerns. Hundt’s wishful theory will be turned on its head.
Already such pressures are being felt. Eighteen C-block PCS licenses (17 won by BDPCS Inc. and one by National Telecom PCS Inc.) were invalidated when the applicants failed to meet a down payment deadline. Not to worry. The FCC re-auctioned the licenses and made $900 million, $30 million more than the first go-round.
In Congress, the issue is not whether auction policy is good or bad but rather one of jurisdiction. The House and Senate Commerce Committees are protective of their turf and growing increasingly resentful of intrusions by lawmakers and the administration, whether it be painless offset to pay for sharp spending cuts or a convenient way to underwrite college tax tuition credit, school renovation, linking schools and libraries to the Internet or any of a host of other election-year proposals from Clinton’s grab bag.
“Overall spectrum policy should be set after a considerable and deliberative effort to address the complex questions it presents, not on a piecemeal basis as political needs arise,” said House Commerce Committee Chairman Thomas Bliley (R-Va.) and John Dingell (D-Mich.), ranking minority member of the panel.
Senate Commerce Committee Chairman Larry Pressler (R-S.D.), who is in a tight election race, and Earnest Hollings (D-S.C.), ranking minority member of the committee, echoed that sentiment in a letter to Senate leadership recently.
Besides the spat over deciding who determines how much spectrum auction money goes for what program, congressional and administration budgeteers are injecting added confusion into the political process by earmarking anticipated revenue that may not materialize.
The mentality driving PCS speculation appears to be that PCS is the same gold mine as cellular. Never mind cellular operators didn’t pay for licenses and that they operate in a duopoly, or shared monopoly environment. Never mind cellular companies have been skimming cream since they were turned on a decade ago.
Never mind everything the cellular industry has in its favor works against PCS. Just pay the auctioneer and get to the other
side of the rainbow.
Ultimately, if small- and mid-sized PCS licensees go south, the pricey spectrum may come to be com
pared with real estate ignominously known as prime waterfront property.
