When the Federal Communications Commission set aside a portion of the licenses up for bid in its 1996 personal communications services auction, the intent was to foster competition in the wireless industry by allowing minority-owned companies, known as designated entities, to purchase licenses without having to bid against well-established and well-funded competitors.
The plan was partially successful. While many licenses were indeed won by minority-owned companies, one DE, NextWave Telecom Inc., walked away with 90 licenses valued at $4.7 billion. But NextWave filed for bankruptcy soon after and has been fighting with the FCC ever since for control of those licenses.
The FCC opened up most of the licenses in its latest auction to the large, established players, and again set aside a portion for DEs. But, unlike the previous auction, the FCC is allowing DEs with financial backing from larger operators to bid on the DE-only licenses as long as the larger operator does not have a voting stake in the smaller entity.
Unfortunately for DEs without the financial backing from large companies, the bidding prices have quickly escalated out of their price range.
“We entered the wireless auctions with a sound business plan, and full intentions to use any licenses we won to build out a network and begin offering services,” said Paul Posner, owner of DE Allegheny Communications.
Posner charged that Allegheny did not have a chance to win a license because of the larger operators “corrupting” the intent of the auction. Posner noted that the average price for a license in the 1996 auction was around $2 million. So far, the average price for a license in this auction is close to $50 million.
Allegheny, which looked at the auction as a way to enter the wireless communications industry, said it informed the FCC before the auction that many of the registered DEs were merely fronts for the larger operators but was ignored.
“We are going to ride out the auction and see what happens,” said John Rogovin, an attorney with O’Melveny & Myers, representing Allegheny. “We hope to bring a challenge against the FCC and a petition to deny the licenses once the long forms the winners must submit are turned in. If the FCC denies our challenge, we will take it to the D.C. circuit court.”
Allegheny finally dropped out of the auction last Monday, realizing it could not afford the licenses it was hoping to purchase.
Of the remaining bidders in the auction, only five of the top 15 bidders appear to have no connection to a larger wireless operator, according to information released by the FCC prior to the auction. Those five include Leap Wireless International Inc., Black Crow Wireless L.P., Theta Communications, MCP PCS II Inc. and Summit Wireless L.L.C.
The remaining top 15 bidders are connected with current wireless operators, including Verizon Wireless, bidding through Cellco Partnership; AT&T Corp., bidding through DE Alaska Native Wireless L.L.C., DE Northcoast Communications L.L.C., DE DCC PCS Inc. through an agreement with Dobson Communications and DE Lafayette Communications Inc. through AT&T affiliate Triton PCS Holdings; Cingular Wireless, bidding exclusively through DE Salmon PCS L.L.C.; VoiceStream Wireless Services Inc., bidding through Voice-Stream PCS BTA I and DE Cook Inlet/VS GSM; and Sprint PCS, through DE SVC BidCo L.P.
Cingular Wireless’ deal with Salmon PCS was cited by Posner as proof to his claim that the large wireless operators are disregarding FCC rules in the auction. After the FCC rejected Cingular’s application to enter the auction, a spokesman for Cingular told RCR Wireless News the company was not worried and planned to bid through an agreement with Salmon PCS. Cingular is reported to hold a majority interest in Salmon PCS.
“This is not the way it was intended,” Andrew Barrett, a member of the FCC in the mid-1990s, told the Wall Street Journal. “The intent was not to have big wireless companies take over. But clearly, if you don’t write the rules correctly, you can’t blame [the companies] for doing that.”
The FCC has said it plans to handle any illegal actions after the auction when the long forms are turned in by the winners. If improprieties are found, the winner’s license could be confiscated and re-auctioned.
Dan Pegg, senior vice president of public affairs for Leap, explained that Leap felt it had to bid aggressively in the auctions if it wanted licenses for future expansion. Pegg noted that once a larger carrier gets a license, there would be little chance that piece of spectrum would ever come up for auction again.
Non-DE operators also have felt the pinch of high prices in the auction. Wireless operator Alltel Communications said it entered the auction hoping to add some capacity to its network at reasonable prices. The mid-size wireless operator already has numerous licenses in 25 states, but was willing to add capacity if the price was right.
“We went into the auction with open eyes,” said Andrew Moreau, a spokesman for Alltel. “We did not put too much pressure on ourselves to pick up licenses. We were just looking to add to what we had, with no intentions of investing in additional markets.”
Alltel’s plans quickly fell through as the asking price for the licenses it was interested in quickly escalated, driven by large telecommunications operators looking for spectrum to fill in their national footprints.
“Prices climbed very quickly on the markets we were looking at, so we made the decision to drop out,” Moreau explained. “It was more economically viable for us to use the money to invest in our current coverage areas than chase additional spectrum.”
Alltel’s decision to drop out of the auction mimicked other bidders both large and small that found the asking price for spectrum too much to handle. Nextel Communications Inc., which was seen before the auction as needing to be very aggressive if it wanted to build out a national footprint, dropped out within the auction’s first week. AirGate PCS, a Sprint PCS Network Partner, dropped out last Thursday, citing bidding prices that had increased “beyond a reasonable threshold” in its territory.
While the auction has left some smaller bidders with no hope of getting a single license, many analysts feel the FCC will end up letting the licenses stand after the auction in hopes of avoiding another NextWave situation where spectrum was tied up in the courts for years.
“The smaller entities do have a point in their arguments,” said Tom Stroup, currently president of GroupServe. Stroup was involved in negotiations to release PCS spectrum for the 1996 auction and is a former president of the Personal Communications Industry Association. “But they are being a little unrealistic. The capital involved to build out and operate a wireless market today is too cost-prohibitive for a small company. Unfortunately, only the well-funded operators can pull it off.”
Stroup noted that even if the FCC did not allow the smaller bidders to have financial backing from larger operators, there would have been agreements made before or after the auction that would have given access to the spectrum anyway.
