February 14, 1996

$6 Billion Bid So Far in FCC Wireless Auction


WASHINGTON -- "Small," it turns out, can be very big.

Two months after the Federal Communications Commission started an auction of wireless telephone licenses reserved for entrepreneurs, start-up companies backed by giant corporations pushed bidding past $6 billion Tuesday and showed no signs of stopping there.

Among those leading the charge are Craig O. McCaw, the billionaire who founded McCaw Cellular Communications before selling it to AT&T Corp.; U.S. Airwaves, a company backed by Sony and MCI Communications Corp.; Nextwave Personal Communications, backed by another investment by Sony; and about a dozen other start-ups with links to companies like Westinghouse Electric, BellSouth, Chemical Banking and FMR Corp.'s Fidelity Investments.

Up for grabs is a special group of radio licenses for "personal communication services," a term that covers wireless pocket telephones, portable computers, facsimile machines and paging devices that communicate over the airwaves.

The FCC reserved this particular group of licenses in what officials called an "entrepreneur's block," in which bidding is supposed to be restricted to small companies. Winners of these licenses can pay the government for them on 10-year installment plans.

By several measures, though, the prices offered in this auction have already outstripped those of a much bigger auction last year that was dominated by giant communication companies like AT&T, Sprint and many regional Bell companies.

The frenzy over this set of licenses has surprised many analysts and could raise questions about whether the agency's program is indeed benefiting small companies at all.

"I think a lot of people are in for a nasty surprise," said Jonathan D. Foxman, director of strategic and business planning at BIA Consulting, an industry consulting firm that tracks the wireless market. Foxman estimated that the current auction was overvaluing the wireless market by about 20 percent.

"There is this mentality that you just have to get in there and get a license, and you're secure," he said. "But that is flawed thinking."

The top bid so far is $631 million for a license to serve the New York metropolitan area, submitted Tuesday by a company called North Coast Mobile Communications.

Just a year ago, a partnership led by Sprint Corp. paid only $442 million for a license that covers a much bigger geographic area in the same territory. The license bid on Tuesday covers about 18 million people, while the one sold last year covers about 26 million people.

The FCC's first auction for personal communication services last year brought bids totalling $7.7 billion. But that auction involved two licenses for each of 51 markets in the United States. The $6 billion being wagered in this auction involves only one license for each of 493 markets that make up the same geographic area as the last auction.

On a "per pop" basis -- that is, the amount of money being offered for every person in a given license's service area -- companies in this auction are bidding an average of $23.48. Last year, the average bid by big companies worked out to only $15.57.

Nobody knows how high the bidding will go, but all signs indicate that the auction is far from over. FCC officials say the activity level is still so high that they have not moved from what they call phase one of the auction to phases two and three. These later stages force companies to bid more aggressively to stay in the running, and are started when activity in the first stage begins to bog down.

The bidding is the latest twist in what was originally conceived as a program to offer special preferences to bidding companies owned by women or members of minorities; other, lesser preferences are being offered to companies that were merely "small."

The FCC eliminated the special preferences for minorities and women last year, following a Supreme Court ruling that sharply limited the government's ability to operate affirmative-action programs.

Under the current rules, a company is considered small enough to qualify for bidding as long as it had revenue of less than $125 million for each of the last two years and less than $500 million in assets.

But agency officials were keenly aware that companies would need enormous amounts of money to bid for licenses and then construct the new wireless systems. So they made it relatively easy for small companies to form partnerships with big corporations and huge investors.

Under the rules, big corporations and other investors can own as much as 49.9 percent of the equity and the voting stock of a small company without disqualifying it from bidding in the entrepreneurs' block.

Under an alternative formula, the principals of a small company can own as little as 25 percent of the equity, provided they control more than 50 percent of the votes and there are three other partners who each own a quarter of the stock.

Big companies and big investors have been prominent. One of the biggest bidders thus far has been Nextwave, a start-up in California founded by Allen Salmasi, a former executive at Qualcomm Inc. Qualcomm, based in San Diego, is a leading maker of wireless telephone equipment and is a big investor in Nextwave, along with Sony and Pohang Steel America -- a subsidiary of Pohang Iron and Steel, a huge South Korean steel company.

McCaw of McCaw Cellular has entered the bidding with a company called Personal Connect. BellSouth Corp., the Atlanta-based regional Bell company, is backing a partnership with Cook Inlet Communications, a company partly owned by Aleuts, Eskimos and other native Alaskans, that owns radio and television stations around the country.

"The rules were designed to allow partnerships," said Kathleen Hamm, chief of the auction division in the FCC's wireless telecommunications bureau.

Michele C. Farquhar, chief of the wireless bureau, said the government's broad policy goal is to let the market decide how much the licenses are worth.

"This reflects what is happening in the marketplace," she said. "It also reflects the growing realization that there is more you can do with these licenses than just offer cellular telephone service."

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