WASHINGTON-In the early to mid-1980s, the rush was on at the Federal Communications Commission to get cellular licenses in major metropolitan and rural areas issued as quickly as possible to get the new service operating. Because of the time element involved in using comparative hearings as a method of deciding which companies would be most capable of providing cellular service, the commission instead opted for the faster lottery procedure.
At the time, there was no congressional authority for the FCC to auction such licenses, so the massive millions that were made by application mills prior to the lottery and private sales the day after went into pockets other than the government’s. Currently, all urban and most rural cellular licenses have been built out, and any bankruptcies or other failures that happened to these licensees did not hinder the process much.
This is not proving to be the case with the personal communications services auctioning scheme, which was authorized some four years ago by Congress to help ease budgetary shortfalls. What the FCC first hailed as a way of getting licenses-including those for PCS, advanced paging, private radio, interactive television and other emerging technologies-into the hands of “those who would value them the most,” has turned into an off-the-record headache of massive proportion for the agency. Despite all official talk that auctions are not about money, Congress itself recently mandated the time and collection strategies of certain spectrum sales to fall within certain fiscal years. Such emphasis on cash has put pressure on the FCC to begin tailoring its auction rules to fit any disaster that might prevent funds from flowing into the U.S. Treasury.
At first, auctions went smoothly, mostly because the rules were strict and only big, monied players could participate, i.e., the sale of A- and B-block PCS licenses, and many of the narrowband licenses. Such major organizations as AT&T Corp., Sprint Corp., the regional Bell holding companies and others either had enough resources to self-finance bidding and buildout or they were trusted by Wall Street to make a go of any venture. Prices per market were in the reality range, although there was some overpayment to ensure winning a spot in the top 10 or 20 markets. There were few petitions to deny filed against these winners, and network buildout began on schedule.
Then the tinkering began. With the well-intentioned thought of getting a more diverse group of operators-minorities, women, small businesses and rural providers-into the wireless arena, first IVDS and then C-block PCS auction rules were tweaked to allow such incentives as bidding credits, tiered bidding, installment payments and whole blocks of set-aside licenses. However, the definition of “small business” was not tight enough to keep out some entrepreneurs who were backed by major money groups-both domestic and foreign-who were drawn mostly by the installment-payment and bidding-credit promises. The FCC also did not temper its bidder handbooks and its bidder seminars with enough admonitions regarding the risks involved in auction participation and the possibility of financial failure, a practice that changed drastically when it came time to talk about the Wireless Communications Services auction that began last week.
As a result of the commission’s liberal rule changes, many bidders paid wildly for licenses with the thought of a 10-year repayment period plus a discount. And when they defaulted on their first or second payments, the commission first hung tough with the rules, bending them for no one, and then loosened them to allow waivers for almost any excuse.
Recently, major C-block winners petitioned for and won from the commission a stay of interest payments for an undetermined period, which could probably end up being a year. This will buy some time for additional financial mining, and the FCC is at the point where-as the first creditor-it will do almost anything to make sure it eventually gets its full payments. Other winners-those that did not commit billions-made their payments and are either beginning to build or they are continuing the search for money to do so, a difficult task at best in this financial environment.
Despite FCC rule changes geared toward whatever it takes to keep a major licensee from defaulting and, thus, diminishing the amount of money promised to the treasury, there continues to be problems. NextWave Telecom Inc., the largest C-block winner, is in the third month of a six-month reorganization period aimed at lessening its foreign-ownership stake, a “fix-it” period allowed by the commission because the FCC could not afford to not license the winner. NextWave has admitted that it almost did not have the money to make its first payment last year, and it was only at the 11th hour that additional financing came through. If NextWave had been found to be unfit to be a licensee, its markets would have been reauctioned for probably significantly less than the more than $4 billion NextWave paid. Second, the company would have tied that decision up in court, and major C-block markets would remain unbuilt for years.
In light of what could be seen as a pre-emptive strike on NextWave’s part (just in case it cannot “fix” its foreign problem by July), the reseller’s reseller has petitioned the FCC for a waiver of the foreign-ownership cap, and the FCC may well grant it.
Another C-block overpayer, Pocket Communications Inc., already has declared Chapter 11 reorganization, and there is every possibility that its licenses could be reauctioned, depending on the decision of the creditors’ committee and the court. GWI PCS Inc. reportedly is looking at an initial public offering, but chances of its success may be slim.
Many bidders in the recent D-, E- and F-block PCS auctions took a lesson from the C block. Most D- and E-block bidders ratcheted down their bids significantly to match true market values. On the other hand, F-block bidders-those with the small-business incentives-overpaid for many markets due to the decade-long payoff period, and some may experience some of the same financial problems as their cash-strapped C-block counterparts.
The FCC has several more auctions planned during the next two years, with only a few in the rulemaking stage. The IVDS auction is on indefinite hold. Will the FCC now take a hard look at how it crafts its auction future? In one instance, it already has. The WCS auction in the 2.3 GHz range has been geared to allow service flexibility for anyone who wins; if you fail at one endeavor, you can try another. However, there are no deals-no installments, no set-asides and payment in full by September. The treasury gets its money. While such restrictions don’t help mend the commission’s C-block and IVDS problems (no one knows yet of any D-, E-and F-block woes because licenses have not been awarded), they could form the basis for a redefinition of how licenses are sold.
