February 26, 1996
In Auctions of Airwaves, the Sky Seems to Be the Limit
By EDMUND L. ANDREWS
ASHINGTON -- As assistant secretary of commerce under President Bush, Janice Obuchowski was a passionate evangelist for what was then a radical idea: selling licenses to the nation's airwaves through auctions, rather than giving them away free.
Today, such auctions are real, and Ms. Obuchowski is still a true believer. Only now, she is backing up her convictions with nearly $2 billion.
Nextwave Personal Communications, a company that Ms. Obuchowski co-founded six months ago, has emerged as the heaviest bidder at the Federal Communications Commission's latest auction of wireless-communication licenses.
With that auction still under way, Nextwave and a handful of other companies have sent prices soaring to levels that have shocked industry executives and are defying almost all predictions. By Friday, bidding had reached $6.97 billion, and the end was still nowhere in sight.
"Yes, the numbers are high," Ms. Obuchowski conceded last week, betraying no hint of anxiety as she worked from her office in Washington. "But if you have the staying power and are committed for the long term, this can be a very handsome investment."
The FCC, which has come to see airwave auctions as a major revenue source for the federal Treasury, can only hope the prices keep going up. But many industry executives are shaking their heads in disbelief, warning that the bidding may far outstrip the possibilities for profit.
"Nobody ever imagined that the prices would get this high," said Thomas Sullivan, president of a start-up called Telecorp.
Sullivan's company, despite being backed by Chemical Bank and founded by one of AT&T's top wireless strategists, dropped out last week. "We just couldn't make the numbers work," a discouraged Sullivan said. "It's about three years of work down the drain."
Who is behind all this radio-spectrum speculation, and what are they thinking? The FCC reserved this auction exclusively for small companies, which are bidding on the equivalent of a new cellular license for each of 493 markets nationwide -- except that these new cellular phones will also be able to easily transmit data messages.
This auction is a follow-up to a similar one last year, which was dominated by communications giants like AT&T and Sprint. But many of the current bids have surged well beyond what AT&T and Sprint paid for their licenses last year.
By taking advantage of FCC rules that were intended to help entrepreneurs raise money, a handful of start-up companies have tapped corporate conglomerates from around the world and flooded the auction with money.
Many of these companies did not exist 12 months ago, yet they have emerged as the newest, brashest and some say rashest speculators in the wireless communications market. How brash? Craig McCaw, who became a billionaire through the first generation of cellular telephones, dropped out of the auction almost two weeks ago. So have several other well-financed companies.
Most of these companies were started by former executives at big telephone and cellular companies, who then raised money from investors around the world. Under the FCC rules, big corporations can own as much as 75 percent of the equity in a company without that company losing its defined status as a "small business."
A lot of money, not surprisingly, is coming from big companies already in the communications industry.
But capital is also pouring in from financial houses like Fidelity Investments, Chemical Bank and the Silicon Valley venture capital firm of Kleiner Perkins Caufield & Byers. And a significant amount of financing is being put up by Asian corporate and individual investors.
One bidder whose source of financing remains a mystery is John Dolan, founder of a Huntington, N.Y., company called North Coast Mobile Communications.
Dolan bid $700 million last week for a license to serve the metropolitan New York market, although Ms. Obuchowski's Nextwave at least temporarily topped him on Friday by offering $738 million. And his bid of $106 million for Cleveland is currently the highest for that city.
Dolan disclosed no investors or corporate affiliations in his application to the FCC, and reported that his corporate assets were less than $10,000. But Dolan is the nephew of Charles Dolan, chairman of Cablevision Systems Inc. of Woodbury, N.Y., which owns cable franchises covering much of New York City and Long Island, as well as smaller cable systems elsewhere.
In an interview last week, Dolan refused to discuss company finances or to comment on any links to Cablevision Systems -- except to say he had secured a bank loan.
The financial roots of the other big bidders are easier to trace. To form Nextwave, for example, Ms. Obuchowski teamed up with Allen Salmasi, a former executive at the Qualcomm Corporation of San Diego. Qualcomm makes wireless communications gear and has retained about 12 percent of Ms. Obuchowski and Salmasi's company.
Yet most of Nextwave's money is coming from Japan and South Korea. If Nextwave wins licenses, Sony will acquire 6.5 percent of the company; Pohang Iron and Steel of South Korea, one of the world's biggest steel companies, will acquire 13.3 percent; Lucky Goldstar, the huge Korean electronics conglomerate that is part of the LG Group, will own 10.7 percent.
Two big bidders were founded by people who previously ran wireless programs for MCI Communications. MCI itself had been an investor in U.S. Airwaves, a bidder that dropped out of the auction on Feb. 15.
Daniel Riker, who left MCI three years ago, started DCR Communications in Columbia, Md., and then lined up backing from Westinghouse Electric and a partnership of wealthy Asian investors led by two Japanese brothers -- Ikuo and Hitoshi Tajima -- who own and distribute industrial sewing equipment.
Through Friday, DCR was the second-highest bidder in the auction overall, and was leader in 15 markets, with a total of $1.19 billion bid.
Based just a few miles away from Riker, Steven Zecola is bidding aggressively with a company called Go Telecommunications. Zecola, who was once Riker's boss at MCI, was high bidder in 11 markets, with offers totaling $987 million, through Friday.
Zecola's biggest backer is Fidelity Investments, the giant mutual fund company owned by FMR Corp., but he also attracted money from Mitsubishi of Japan and two operators of small local U.S. telephone companies.
At least part of the high-roller allure has been the easy credit terms the FCC is extending. In last year's PCS auction, winners had to put up the full bid amount within a few months. But to make it easier for small companies, the winners in this auction can pay for their licenses on a 10-year installment plan at low interest rates. Experts estimate that this cuts the effective price of the bids by one-third to one-half.
And some experts assume that some companies are simply betting they can default on their license payments if their businesses fail, and so are really risking only the 10 percent down payments they must make upon winning licenses.
Whatever the reason, this auction is setting new records. Measured by the prices being paid "per pop" -- the price being offered for each person in the population area covered by a license -- the bidders in this auction are paying about $25, while companies like AT&T paid about $15 in last year's auction.
And these outlays will be the entry fees into a game that promises to be brutally competitive. Besides the two existing cellular phone carriers in every market, the winners of last year's auctions will add two new rivals in each city. That means each license winner in the current round will be the fifth player in most markets.
But the big bidders are hardly neophytes. Daniel Riker, head of DCR Communications, said he would build his systems almost entirely with financing from big equipment suppliers, including LM Ericsson of Sweden and Nortel, a unit of Northern Telecom.
Combined with the deferred payment for new licenses, Riker said, his cash needs will be far less than they might appear at first blush.
Salmasi and Ms. Obuchowski, at Nextwave, say they have little intention of marketing wireless phone services under their own brand. Rather, they plan to become a wholesale supplier of service to big national carriers.
They key to Nextwave's strategy is to plug regional gaps in the national networks being built by Sprint and a consortium owned by Bell Atlantic, Nynex, US West and AirTouch Communications.
Billions of dollars are being bid, and billions may well be lost. But even skeptics recall that McCaw was considered a borderline lunatic when he borrowed billions during the 1980s to build McCaw Cellular Systems -- only to seem crazy like a fox when AT&T bought his company for $10 billion in 1994.
Copyright 1996 The New York Times Company