Lukewarm reception seen for wireless auction

The Federal Communications Commission and its auction of wireless licenses is expected to garner a record of around $18 billion for the U.S. Treasury, according to a recent Merrill Lynch prediction. Still, industry watchers have seen a dramatic decline in interest in the auction among the larger wireless companies in recent weeks.

"I do not expect the auctions to raise tremendous amounts of money," said The Strategis Group senior vice president Elliott Hamilton.

For sale are no fewer than 422 wireless licenses in 195 markets, including New York and Los Angeles. Carriers want to launch next-generation technology such as high-speed Internet access using the newly opened airwaves.

The airspace is free of interference and ready to use for any wireless operator, allowing companies to meet growing customer demand and fill holes in national networks. Such free airspace is becoming increasingly rare.

But some carriers have found ways other than auctions to acquire that spectrum.

Hamilton said that providers such as AT&T Wireless and VoiceStream Wireless have filled holes in their networks by swapping spectrum, "so their need is much less than before."

VoiceStream and others also have purchased smaller companies or formed carriage partnerships to help grow their networks.

Based on Wall Street reports and an unsolicited bid for 95 of the licenses last year, the FCC earlier this year privately anticipated that this auction could reap tens of billions of dollars.

"I believe many carriers will participate to see if there are some real bargains to be had, or to selectively acquire spectrum in key geographic areas," Hamilton said.

New rules
The auction comprises licenses that were returned to the FCC when the original 1996 auction winners defaulted on their payments. For this auction, the agency has some new rules in place, including full payment upon winning a license.

The original auction was limited to small operators, but to increase bidding, the FCC has opened many of the licenses to larger carriers. It also broke licenses into smaller pieces to help a large operator purchase licenses without going over the spectrum cap, which limits the amount of airspace any one company can own in a market.

With few exceptions, these changes don't appear to have encouraged the big players to become major bidders.

FCC officials say down payments on wireless spectrum serve as an indicator of how much a company might bid, and the combined down payments total a paltry $1.8 billion. Down payments are required to enter the bidding, are based on the licenses to be bid on and limit the amount a company can spend.

The FCC reported less-than-stellar down payments made by the largest wireless providers, led by AT&T, Nextel Communications and VoiceStream, each at just over $150 million. AT&T and VoiceStream both are looking for licenses for so-called GSM transmissions. That is VoiceStream's primary technology, and Hamilton notes that AT&T plans to overlay its network based on TDMA technology with GSM--a system prevalent throughout Europe.

AT&T Wireless is expected to partner in its bidding with Alaska Native Wireless, which made an impressive down payment of more than $238 million. AT&T Wireless owns a stake in Alaska Native Wireless, which was formed to bid in this auction by Arctic Slope Regional, Doyon and Sealaska, all of Alaska.

Other down payments made included those by Verizon Wireless at just over $130 million and Sprint PCS at just under $70 million. Cingular Wireless affiliate Salmon PCS led the pack at just over $238 million. Verizon Wireless is a joint venture of Verizon Communications and Vodafone, and Cingular Wireless is a BellSouth-SBC Communications joint venture.

The NextWave factor
Ninety-five of the licenses up for auction once belonged to NextWave Telecom, a company that forfeited its licenses in 1998 when it defaulted on its payments to the FCC and entered bankruptcy.

NextWave thus far has exercised a futile campaign in federal court to win the licenses back, including two setbacks in the U.S. Supreme Court.

There is one federal case still pending that won't be resolved until after the auction. If NextWave prevails, whichever companies won NextWave's licenses will have to give them back to NextWave. The government will reimburse the purchase price, but the carriers will have to write off any work done with the spectrum.

Hamilton acknowledged there was uncertainty "over the legal status of NextWave's markets" but said he is "99 percent certain they won't prevail in the courts or Congress, so I don't think that will dampen the enthusiasm too much for the spectrum."

Last December, Nextel said it would pay $5.3 billion to the FCC for NextWave's 95 licenses, an increase over the $4.7 billion winning bid by NextWave in 1996. The FCC declined the offer, despite the interest of some members of Congress.

FCC Chairman William Kennard testified before the Senate Budget Committee in February and said that if Nextel was willing to pay $5.3 billion for the licenses--and Nextel CEO Timothy Donahue was at the same hearing saying just that--then U.S. taxpayers should be able to get even more for the licenses if they are put up for auction.