When Congress passed Section 309(j) of the Communications Act and the government developed rules to implement this law, the goal was to increase diversity in telecommunications by providing opportunities for small businesses, women and minorities.
Diversity in telecommunications is beneficial because it provides opportunities for new players in the industry to be creative and develop new products and offerings for under-served sections of the population.
To date, the Federal Communications Commission’s auction program has been a catalyst for this success by creating many new opportunities in technologies such as personal communications services, local multipoint distribution services, multichannel multipoint distribution services and others.
However, as we look forward to additional services through which we can promote diversity and consider additional methods of promoting diversity, we should also consider the lessons learned from the PCS C-block experience as a way to fine-tune and improve the wireless marketplace in the future. Let’s reflect on what we have learned.
Lesson 1
Policies cannot mandate financial structures.
While the intent of the C- and F-block ownership structure-to prevent shams in C- and F-block bidders-was admirable, the control-group structure left much to be desired. In some cases, operators found themselves with expertise but no capital because investors could not get comfortable with providing most of the initial capital, only to have a 25-percent interest accrue to the operators.
Typically, the economics of the returns may differ from the ownership and control proportions; however, investors still need and want the ability to mitigate a landslide loss with certain super-majority voting rights. The FCC’s movement to de jure and de facto control in future auctions such as LMDS was a step in the right direction. To ensure “true” small businesses actually receive the benefits of these incentives, the FCC should judiciously, but measurably, use its auditing powers. No one wants counterfeit small businesses, but the marketplace has to be free to be the marketplace.
Lesson 2
The value of spectrum may be in the eye of the beholder, but a sound strategy is the key.
A license is not just a license, just like a “pop” is not just a “pop.” The fact that an operator was the winning bidder in an auction does not mean the true value of the license has been determined, especially in cases where bidding advantages are provided. The true value of a license is a function of the market and competition, but also is significantly influenced by the potential application and strategy to be employed.
Spectrum that can be used for a specific niche play in a given market may have greater value than other spectrum for which a clear application does not exist. Without a well-thought-out business plan, the inherent value of a given license may be more difficult to determine. As we have all seen, the winning bidders with flawed business plans may turn out to be the biggest losers. In those situations, the only winners are the incumbents that watch competition get forestalled once again.
Lesson 3
Promoting growth by smaller companies is the best way to diversify large capital-intensive industries.
Can you imagine the challenge you would face if the first business you owned was a 50-store McDonald’s franchise? Instead of having the experience of growing your business from 1 to 3 to 5 to 10 to 25 stores, you would have to learn those lessons all at once while dealing with the complexity of a 50-store operation.
This analogy is close to the PCS situation. The successful operators in the PCS market have been either those operators that started at a smaller scale, leveraging the experience of larger strategic branding partners, or those that had other smaller telecom businesses where they could learn from those experiences and leverage those cash flows.
Maybe for services as large as PCS, the proper entry channel might be through other avenues, such as resale, where past experiences in marketing, sales and customer service can provide a base for entry into larger, more capital-intensive services. It well may be that the old adage, “crawling before walking, and walking before running,” is appropriate.
Lesson 4
Consolidation is inevitable.
While I remain a staunch advocate of increasing diversity in telecom, we must stop lamenting consolidation and view it as an opportunity. Without consolidation opportunities, financial investors would be less willing to invest because exit strategies for their investments would not be as clear. We want investors to exit situations after a five- to seven-year period so those funds can be redeployed in the marketplace to create new opportunities. Therefore, we should not lament consolidation, but look to it as one door closing and another door opening.
As media consolidate, opportunities arise in telecom such as Internet, wireless data and wireless local loop. As cable and telephony consolidate, someone else may develop a new last-mile solution.
Consolidation is a natural reaction when an industry, market, or opportunity shrinks or growth slows. The challenge is to make sure adequate incentives exist to excite entrepreneurs and encourage reinvestment.
Lesson 5
Government and the financial markets must communicate more. Despite the goals, none of it works if both parties do not communicate more often. While both parties have different time horizons, there must be some bridge between the two so that the capital markets can understand and react to the regulatory process while the government, in turn, can react to the capital markets. I would recommend a series of regular quarterly or semi-annual forums attended by representatives of the investment community to stay apprised of trends and changes in the capital markets. Working together, the government can promulgate rules sensitive to the capital markets and the markets will better understand the impact of the government on each proposed deal. The result will be better opportunities for well-positioned entrepreneurs and more diversity in telecommunications.
No one can question the success of auctions in promoting diversity, and as we consider tax certificates and other programs to further this goal in a competitive industry, we would be well served to remember the lessons of the past in planning for the future. We must communicate with the marketplace, understand the principals driving the marketplace, and let the marketplace be our guide to new products, new services, and new competition.
