Despite the fact most private-radio attention is aimed at certain 800 MHz and 900 MHz operations and the industrial radio arena, 220 MHz to 222 MHz service is up and running, and its expansion channels soon will be up for auction.
And it is that auction, scheduled tentatively for first-quarter 1998, that is worrying the nascent industry in light of its relative youth, and the changes the Federal Communications Commission already has made in the auction rules-coupled with other possible changes under consideration-proposed last spring.
Up for grabs are 908 licenses in the Phase II 220 MHz service, consisting of three nationwide, 30 regional economic area groupings and 875 economic-area licenses. Things have changed, though, since the commission issued its third report and order on the auction along with a further notice of proposed rule making last March, in which it adopted rules aimed at regulating the service in a more flexible manner. The NPRM asked for comments on possible partitioning of Phase I nationwide licenses and disaggregation for both Phase I and Phase II licenses.
While it did not allow for an entrepreneur block of channels, as has been the practice with personal communications services auctions in the past, the FCC said it would allow incumbent and new entrants to use bidding credits and installment payments. However, a recent decision that disallows installment payments in some upcoming auctions is worrying current 220 MHz players.
Certainly, installment payments have caused nothing but headaches for the FCC, as exhibited by the recent actions of some C-block PCS players who bid excessively on their licenses because of the long payback time. The commission may have figured out that being a lending institution is not within its ken, and it wants to get out of that business as soon as possible. Because the U.S. Treasury has shown little interest in taking over collection duties from the commission for remaining C- and F-block PCS payments, which will resume next March, the FCC wants to minimize its future risk by dispensing with any more installment loans. Cash on the barrel head only.
“If the commission disallows installment payments, this will have an impact on who will be able to participate,” said Terry Romine, an attorney with Washington, D.C.’s Lukas, McGowan, Nace & Gutierrez. “A lot of people still are up in the air about the 220 MHz service anyway. They don’t know when new equipment will be available. They don’t know if they can make any money. If installment payments are not available, it will depress and suppress the number of people who will go into the auction. Few people have that kind of upfront money.”
Romine admitted that the next set of FCC commissioners, who could be sworn in this month, “probably won’t want the same problems that the former FCC commissioners had” when it comes to auction installments. “Bill Kennard (who has been proposed as the next FCC chairman) will have some good insight on this,” she added.
If installment payments are thrown out, Romine also thinks that the prices for the next round of 220 MHz licenses will be lower than expected; no numbers have been projected yet for the auction. The recent Wireless Communications Service auction brought in only a fraction of its projected revenues, in large part because the licenses had to be paid for within a few short months. This may not happen to the same extent in the 220 MHz auction because of the incumbents who will be playing, Romine said, but prices will be depressed somewhat because most operators are small and won’t have a lot of cash to commit.
Jimmy Evans, who heads the SMR Advisory Group in Florida in addition to his duties as chairman of the American Mobile Telecommunications Association’s 220 MHz Council, has been encouraging his constituency to get their auction plans together. At least seven operators have more than 100 channels in operation currently, and three of those have more than 400 channels each.
Evans’ company “plans to be a big player in the auction,” and he thinks that those who filed for nationwide, noncommercial markets and then were denied will re-enter the field as bidders.
Although he thinks the service clearly should be attractive to new entrants and investors because of its close kinship to traditional specialized mobile radio services, he doesn’t believe it will happen.
“We are an entrepreneurial group, with 175 channels per market in two megahertz of spectrum,” Evans said. “We have 60 percent of the traditional analog capacity SMR carriers have. There is a lot of potential here for people with money to come into the auction, but it’s not likely.”
Part of the problem is that most people who are new to the wireless industry do not understand the nuances of the 220 MHz private radio service, and the learning curve is fast and steep, Evans said. Despite the fact several carriers have been operating for a number of years, there continues to be a shortage of equipment and equipment manufacturers. Only SEA and Securicor have gear on the market, with a 75-percent and 25-percent market share, respectively. “With so few vendors, it would be hard for an operator to go to them for financing,” Evans said.
There will be new manufacturers in the future, though, because the service is so analogous to what 800 MHz analog operations were 10 years ago. Manufacturers have seen 220 MHz carriers blossom into entities serving the likes of the airport transport provider SuperShuttle, providing wide-area networking and two-way data services. All these did not exist in 1991. “Vendors will see the potential of 220 MHz services now that 450 MHz and 800 MHz systems are dominated by Nextel Communications [Inc.],” Evans said. “The only private option left with a good price is 220 MHz. With the potential of networking, someone in the vendor world will come up with (an) SEA-compatible protocol.” With the possibility of new licenses being awarded by next summer, Evans said new vendors could be ready to ramp up with new equipment. “It’s not rocket science,” he said. “Radios have been around for 27 years.”
In light of these factors, Evans sees two auction scenarios. He thinks such manufacturers as Glenayre Technologies Inc. and Motorola Inc.-which currently are not participating in the 220 MHz market as carriers or as equipment providers-may enter the fray because they do understand how things work and they certainly don’t have to depend on installment payments to play. He also thinks that deeper, yet-unknown pockets will align themselves with one of the seven existing major 220 MHz operators to back them in the auction. He does not see incumbent 800 MHz and 900 MHz carriers bidding on the spectrum, however.
“People in 800 and 900 already have a lot of spectrum or they have spent so much in past auctions that they don’t have the cash for this one,” he said. “There may be some who choose to step in, but I don’t think so. They have their hands full loading their systems now.”
Evans views the FCC as having a hand in the problems potential bidders may encounter next spring. “If the FCC insists on pushing forward with auctions as a budget tool, there will be a problem,” he said. “And while we are an established industry, we still don’t have solid rules.” Evans cited the FCC’s June 23 adoption of an order repealing the 40-mile rule, making it legal for 220 MHz carriers to operate two systems within 40 miles of each other as long as they “can demonstrate that the additional system is justified on the basis of its communications environment.” But because the rule won’t become effective until later this month, Evans said consolidation and financing will be difficult.
“Because of the time it will take to process this along with the slowing down of things around the holidays, venture capital and business plans for the auction will be slowed,” he said. “The down payment for the auction will be due before then, and it will be hard to come by.” If the 40-mile rule had been rescinded a year ago, “we would alre
ady have seen mergers,” Evans said, “and any reconsideration matters needed to be settled before the auction.”
The possible loss of installment payments is daunting enough, but Evans also hopes the commission does not adopt a minimum-bid strategy for the 220 MHz auction, as it did with the upcoming 800 MHz sale. “A minimum bid is a fairly significant amount for an entrepreneur to pay,” he said, adding that a model in which he plugged potential numbers round by round impressed him by showing how prices could jump. “This could backfire and cause people to drop out of the auction early,” he concluded.
