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February 16, 1996

Two Bidders Quit Auction for Phone Permits

By EDMUND L. ANDREWS

WASHINGTON -- Two of the leading bidders in the federal government's auction of new wireless communication licenses have dropped out, either unable or unwilling to keep up as bidding reached $6.2 billion Thursday.

One of them, U.S. Airwaves Holdings Inc. of Bellevue, Wash., which has financial backing from MCI Communications, Sony Corp. and Hyundai Corp., formally dropped out Thursday. It had started out with ambitions to buy up licenses covering much of the country.

The other bidder, Craig McCaw, the billionaire who founded and later sold McCaw Cellular Communications, dropped out Monday after having bid more than $300 million to capture licenses for several medium-sized cities.

Taken together, the two retreats offered the latest demonstration of how the bidding has become too rich for even the best-financed competitors. The Federal Communications Commission is selling the rough equivalent of a new cellular telephone license for each of 493 markets nationwide, and these licenses have been reserved in a special "entrepreneur's block" that is only open to companies that qualify as small.

But most bidders had strong financial backing, and bidding has been far more aggressive than most people expected, fueled in part by investments from big financial institutions and companies, many of them from Japan and South Korea.

When the auction started on Dec. 18, U.S. Airwaves appeared to be the most ambitious company out of 254 companies that were qualified to bid. It made the biggest up-front payment of any company, $81 million, which qualified it under the auction rules to bid on licenses covering 180 million people.

The company's management and its backers were similarly formidable. Its founder is John Defeo, formerly president of US West's cellular and paging subsidiary, New Vector.

MCI Communications, the nation's second-largest long-distance carrier, invested $25 million with a view toward reselling Defeo's wireless services under its own brand name.

Hyundai, the Korean conglomerate that makes steel, ships, automobiles and electronic equipment, had an interest in marketing its wireless telephone equipment. Sony, the other investor, had similar interests.

Defeo refused to talk about his decision to withdraw from the auction Thursday; a spokeswoman said the company would make no comments while the auction was still in progress. McCaw did not return phone calls Thursday.

The most active remaining bidders are Nextwave Personal Communications, which has bid $1.38 billion for licenses in 19 markets; DCR PCS, a start-up company in Washington backed by Westinghouse Corp. and a partnership of investors from Japan, Korea and Hong Kong, which has bid $972 million for licenses in 13 markets, and North Coast Mobile Communications Inc. of Huntington, N.Y., which has bid $737 million, most of it for a license to serve the New York City area.

North Coast was founded by John Dolan, a nephew of the Charles Dolan, chairman of Cablevision Systems Inc., the big cable television operator based in Woodbury, N.Y.

Even those who are still in the auction have scaled back their plans as a result of the soaring prices, which have already outstripped the prices paid for similar licenses last year in auctions dominated by the likes of AT&T, Sprint and the regional Bell companies.

"Everybody has been caught by surprise by the amount of money that went into this auction," said Daniel Riker, founder of DRC PCS. "For us to avoid paying too much, we have to squeeze down our expectations."


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