Spectrum: New Year, New Bidding

With bidding for PCS licenses topping $11 billion, many question whether rates will soar as well.

Carriers seeking spectrum have rung up more than $11 billion in bids in the most expensive government auction of airwaves to date—and its not over yet.

Of the original 87 bidders, 58 will continue the aggressive quest for spectrum licenses when the auction resumes this week. The auction, which began Dec. 12 and which industry experts expect to last at least a couple more weeks, offers licenses for so-called C- and F-Block PCS (Personal Communications Service) spectrum, which is slated to carry next-generation data communications.

At the end of 23 rounds of bidding, Verizon Wireless bidding group, Cellco Partnership, is leading the race, having committed more than $5.5 billion for 46 licenses. Alaska Native Wireless LLC, with financial support from AT&T Wireless Services, is in second place, having bid more than $2 billion for 106 licenses. Salmon PCS LLC, 85 percent of which is owned by Cingular Wireless—the combination of BellSouth Mobility and SBC Wireless—is ranked third, with bids totaling more than $1.5 billion for 62 licenses.

Industry insiders expect the bidding to continue to soar but are questioning how high spectrum costs can rise before they adversely affect user rates.

Some high-profile wireless players, including spectrum-strapped Nextel Communications Inc., have already decided the costs wont justify the benefits and dropped out of the auction.

But others are willing to accept the steep bids as a cost of doing business.

"Eleven billion dollars is kind of a drop in the bucket as far as the U.S. telecommunications market is concerned," said Ken Dulaney, an analyst at Gartner Group Inc., in San Jose, Calif. "Its hard to say whether that absolute amount is high or low [relative to the value of the spectrum]."

The C- and F-Block PCS licenses have a bitter, litigious history. After dedicating the spectrum to small entrepreneurial companies in 1996 to promote new competition in the wireless business, the Federal Communications Commission made a complete about-face four years later, opening the spectrum to the industrys giants.

Many of the 422 licenses now up for bid were originally assigned to the former NextWave Personal Communications Inc.—now called NextWave Telecom Inc.—which won them at auction in the spring of 1996.

When it became evident that several licensees were unable to meet their installment payment obligations, the FCC decided to change the licensing rules ex post facto and arranged new payment deals with companies willing to negotiate, officials said.

The FCC announced in January of last year that NextWaves licenses had actually "automatically canceled" in 1998 and that they would be re-auctioned. NextWave, of Hawthorne, N.Y., still maintains that its licenses were protected from cancellation by bankruptcy laws.

In the current PCS auction, the industry has considerably more bidding experience than it had in 1996. "Bidders have extensive computer models," Dulaney said. "That doesnt mean they cant do something stupid. But they do have a lot of data to guide them."