Spectrum Sale Leads to Controversy

FCC rules changes fail to help bidders with limited financial resources

Bidding for the largest radio spectrum auction in U.S. history ended last week with the final net revenues totaling more than $16.8 billion. But despite the windfall, many small companies felt shut out of the process because of a loose interpretation of new FCC rules.

The auction of the PCS (Personal Communications Service) C and F blocks of spectrum began on Dec. 12, offering a total of 422 licenses in 195 markets nationwide, including New York, Los Angeles, Chicago, Boston and Washington.

In the spirit of fair business, 170 licenses were supposed to be available only to entrepreneurs, that is, companies that had gross revenues of less than $125 million in each of the last two years. A bidder with average annual gross revenues of $40 million or less in the past three years got a 15 percent discount on a winning bid, while a bidder with average annual gross revenues of $15 million or less received a 25 percent discount.

The goal was to give smaller wireless companies a chance to participate in the larger markets, as the larger companies will certainly be able to turn on services around their spectrums due to deeper pockets.

"We had changed a bunch of rules for this auction," said Rosemary Cabral, an attorney with the Federal Communications Commission, in Washington.

However, despite these efforts, in the end several large companies indirectly swallowed the spectrum theoretically reserved for the smaller players.

The big winner was the Cellco partnership, which is backed by Verizon Wireless Inc. and Vodafone Group plc. It ended up with coveted permits in New York, Chicago and Los Angeles. Two smaller companies, Alaska Native Wireless LLC and Salmon PCS LLC, also did well, picking up spectrum in Los Angeles and the Southwest as well as in several other markets around the country.

Both of these companies fall into the "very small" category that qualified for the 25 percent discount. However, Alaska Native and Salmon PCS were each backed in the auction by big companies. AT&T Wireless Group, which owns a 39.9 percent stake in Alaska Native, plans to use some of the spectrum that Alaska Native won. Meanwhile, Cingular Wireless (a joint venture between the wireless units of SBC Communications Inc. and BellSouth Corp.) backed Salmon PCS.

Such backing troubled other "very small" companies, which were forced to drop out of the auction early because of limited financial backing. Pittsburgh-based Allegheny Communications Inc. wanted to buy spectrum in San Antonio and compete against Southwestern Bell but had to drop out after bidding for that market passed its budget of $20 million and eventually reached almost $40 million. Leap Wireless International Inc. and DCC PCS Inc. wound up with licenses in that market instead. Leap was backed by cell phone component giant Qualcomm Inc. DCC is a subsidiary of Dobson Communications Corp., which is owned by AT&T Wireless.

Allegheny Communications plans to file legal action in this matter.

FCC officials said that while the bidding may be over, the auction will not actually end until each bidder fills out a form explaining its bidding process. The FCC must then review all forms to make sure, on a case-by-case basis, that all the companies followed the rules.

Meanwhile, NextWave Telecom Inc. is continuing its legal battle with the FCC over the spectrum. NextWave won the spectrum in question in 1996 but defaulted on its payments and declared bankruptcy in June 1998. The FCC then revoked the license in 1999. NextWave claims it is still legally entitled to operate on the band.

Beyond this latest spectrum sale, smaller wireless players could be in even greater danger of extinction as the FCC ponders eliminating the spectrum cap. The current cap prevents any one company from owning more than 45MHz of spectrum in a single urban market or 55MHz in a single rural market. In late January, the FCC issued a Notice of Proposed Rulemaking asking the public at large to comment on the possibility of lifting the cap.

Analysts say that mergers of wireless companies and services are inevitable but that lifting the spectrum cap will certainly accelerate them.

Meanwhile, the FCC is wrestling with another upcoming auction, that of the 700MHz band, which is supposed to be an even bigger auction than the recent PCS auction as it will deal specifically with spectrum for third-generation, or 3G, wireless services.

The problem in this case is that a number of cable TV stations already sit on the 700MHz wave and have a right to be there until 2006 or until digital TV becomes widely available, whichever comes later.

In a ruling late last month, the FCC threw up its hands and said that "the private sector ... [will] determine the band-clearing mechanisms that will best suit broadcasters and potential new 700MHz licensees needs." In other words, the company that buys the spectrum has to figure out how to kick the current tenants out—most likely with a boot made out of money and with individual channel-swapping arrangements.