Posted 04/01/2001
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UNDER
A BLACK CLOUD
Nation's Largest Airwaves Auction Faces Controversy
By Kim Sunderland
Maybe it's lousy feng shui. Or perhaps it's being haunted by auctions past. Whatever the case may be, the FCC's (www.fcc.gov) C and F block broadband PCS spectrum auction--the nation's largest to date--is rife with controversy.
The auctions are intended to sell off radio spectrum that companies would use to transmit cellular phone calls, wireless Internet traffic, or two-way messaging on mobile phones. While the possibilities for this spectrum's uses appear endless, there's currently a snag in the FCC's plans to increase wireless competition.
Problems originally surfaced with NextWave Telecom Inc. (www.nextwavetel.com), which in 1996 bought up this same spectrum in an FCC auction restricted to smaller companies. Unable to pay on its $4.7 billion auction bid, NextWave filed for bankruptcy and the FCC took back the spectrum, deciding to hold another auction that would be open to all carriers, big and small.
This second auction started last December and ended in late January. In each market, the FCC opened up two-thirds of the spectrum to any bidder, and one-third was reserved for entrepreneurs, which are companies with less than $125 million in gross revenue and less than $500 million in assets.
The rules were supposed to prevent smaller companies from being used "as a sham," the FCC said. But the rules also weren't designed to keep the larger companies from investing in the smaller players, according to sources who say that the market can't move forward without such investment.
The auction's outcome was closely and quickly followed by cries of foul play from the smaller telecom players who lost out in the bidding. In a nutshell, they feel beat up and betrayed.
They allege that some of the other "small" companies that won valuable spectrum were actually facades for several large mobile phone corporations.
In this, an airwaves auction worth almost $17 billion, FCC documents show that the majority of the companies grabbing the most radio spectrum actually are unknowns backed by such industry powerhouses as Sprint PCS (www.sprintpcs.com), AT&T Wireless (www.attws.com), Cingular Wireless (www.cingular.com), and VoiceStream Wireless Corp. (www.voicestream.com).
"There were a number of entrepreneurs qualified to bid in the [auction's] closed session, but they weren't really entrepreneurs," says John Rogovin, a Washington lawyer with O'Melveny & Myers LLP (www.omm.com), who's representing auction bidder and dropout Allegheny Communications Inc.
The question isn't whether the law was broken, Rogovin says, but whether the small companies that won licenses are designated entities for such bidding under FCC rules.
Allegheny, a small Texas mobile paging company, had a viable business plan and sufficient capital to make a go of it with a license in San Antonio, Rogovin told xchange. The city was the single market where the company planned to own an airwaves license, compete against incumbent Southwestern Bell (a subsidiary of SBC Communications Inc., (www.sbc.com), and launch a flat-rate mobile phone service.
Allegheny was prepared to spend up to $20 million. But when the bids kept rising during the auction, reaching a final tally of $37 million, Allegheny pulled out.
Leap Wireless International Inc. (www.leapwireless.com) and DCC PCS Inc. won the San Antonio licenses. DCC is controlled by cellular carrier Dobson Communications Corp. (www.dobson.net), which is partly owned by AT&T Wireless, according to the FCC.
A Dobson spokesman has said that the company is formally committed to placing some of the licenses it won in the airwaves auction into a joint venture with AT&T Wireless. In turn, AT&T will invest up to $200 million in Dobson, the spokesman said. AT&T does not, however, control Dobson, the spokesman said.
In April 1999, Dobson entered into a strategic relationship with AT&T Wireless. As part of this relationship, AT&T purchased roughly $20 million of Series D convertible preferred stock and Class A common stock in Dobson. The AT&T subsidiary also gained a seat on Dobson's board of directors, along with ownership of approximately 3.2 percent of DCC.
The new relationship immediately resulted in the two companies acquiring American Cellular Corp. for some $2.3 billion as part of a joint venture. Upon completion, this acquisition increased Dobson's managed PoPs from 5.9 million to 10.8 million, increased its wireless operations from 11 states to 17 states, and vaulted the company to eighth place on the list of wireless carriers in the United States.
Some of the smaller companies involved in the FCC's airwaves auction, then, want to know: Does this company still qualify as an "entrepreneur?"
Under Review
The larger companies contend that they've followed the rules. The FCC, according to a spokesman, is finalizing its review of the matter now.
As part of the commission's normal operating procedures following the close of an auction, the spokesman explains that for several weeks the FCC reviewed the long forms filed by all the companies bidding in the airwaves auction.
These long forms are required and contain substantial information, including details about the bidding alliances between companies, he says.
Following this review, the FCC issued a public notice revealing the names of the companies to whom the agency intended to assign licenses. This triggered a 10-day "petition to deny" period, in which other bidders filed comments. Many of those comments were from smaller bidders seeking to stop the FCC's license assignments.
Many smaller auction dropouts allege that the winning bidders, backed by the larger carriers, violated the FCC's controlling interest attribution rule, and any entrepreneurs that are actively controlled by a larger company are disqualified from bidding, the spokesman explains.
But the larger carriers don't exercise any control over the business decisions of some of these winning bidders, company executives say.
Winning bidder Salmon PCS LLC, for instance, is a limited liability company formed by Crowley Digital Wireless LLC and Cingular Wireless LLC, a joint venture of SBC and BellSouth Corp. (www.bellsouth.com). Salmon nabbed $2.4 billion worth of licenses.
Salmon was established to participate in the FCC's spectrum auction, and to build out and operate systems in areas where it won properties in the auction.
Salmon is controlled by Crowley LLC, which in turn is controlled by George D. Crowley Jr. of Chevy Chase, Md. Crowley, a wireless veteran, is the chairman and CEO of Crowley LLC, as well as chairman and CEO of Salmon, where he also controls the Salmon management committee. Both Crowley LLC and Cingular are making substantial capital contributions to Salmon.
Crowley LLC holds 15 percent of the equity of Salmon. Cingular holds the remaining 85 percent, although Crowley LLC holds a majority of the voting control of Salmon.
Despite the allegations of the smaller dropout bidders, Salmon executives say that the Crowley/Cingular strategic partnership is within the confines of the law and that it will withstand FCC review.
In fact, they say, without the backing of a big company, an entrepreneur just doesn't stand a chance of succeeding in a competitive market.
Capital Intensive
The smaller losing bidders "appear to have been led down the garden path," says Ovum Ltd. (www.ovum.com) senior wireless consultant Robin Hearn.
It's unfortunate, he says. But if the nation's wireless industry is to reach global proportions, then the big-money big players have to be let in on the game.
"I feel sorry for the smaller players who lost out, and this isn't the best scenario for them," Hearn says. "But it's the best for the country."
To compete with Europe and Asia, Hearn says that the United States must stop stumbling around, pull itself together now, and quit such internal auction squabbling. The FCC must concentrate on the endgame: having viable carriers that can compete in the international wireless market.
"It's an unfortunate situation that never should have happened," Hearn says. "The FCC might just as well have let in the larger carriers [to bid] without getting the smaller companies' hopes up."
Small businesses that lost the spectrum bidding war to the subsidiaries of large corporations have little grounds to repeal the FCC's decision to award the licenses, other sources say. Although the FCC set aside licenses for entrepreneurs, its rules also say that these entrepreneurs can "transfer control of C Block licenses to a non-entrepreneur.
FCC (www.fcc.gov)
