The auction of 422 wireless licenses conducted by the Federal Communications Commission over the last two months was intended to be largely for small, entrepreneurial companies. A significant percentage of the licenses were reserved solely for these bidders, and all of the companies qualifying as entrepreneurial were allowed to have their bids discounted as much as 20 percent.
Yet many of the top bidders in the auction, operating under the entrepreneurial rules, were in fact partnered with major carriers and in some cases almost wholly owned by them. That has made truly independent small carriers furious; they argue that the money from the large carriers quickly made the auction too rich for their blood. At least one small carrier has threatened court action to stop the licenses from being transferred.
"There's a serious threat that the licenses could be tied up for a significant period of time in the courts" even if there isn't much merit in the cases, said Elliott Hamilton, an executive vice president at The Strategis Group, a global telecom research firm.
Paul Posner, president of Pittsburgh-based Allegheny Communications, said he plans to file suit. Posner petitioned the FCC to stop the auction late last year, predicting that small carriers not aligned with major carriers would not be able to compete. The FCC denied his motion, stating that the proper time to challenge the auction was after it was complete.
He also asked the U.S. District Court in D.C. to halt the auction last month for the same reason and was denied.
"The auction is now a contaminated process," Posner said.
The U.S. Appeals Court in D.C. already is considering a case brought by NextWave Telecom, the original owner of most of the 422 licenses auctioned, which it was forced to forfeit in bankruptcy. NextWave maintains that the FCC wrongfully took back its licenses, but the company has lost several court battles to date on the matter. If it prevails, the licenses won in the auction would be returned to the FCC for distribution to NextWave, and the auction winners would be reimbursed by the Treasury.
Another company that may file suit for the same reasons is Leap Wireless of San Diego. Ironically, Leap was one of the winning bidders for the two San Antonio licenses Allegheny sought. The other winner was DCC PCS, a subsidiary of Dobson Communications. That company is partially owned by AT&T Wireless.
Some of the top bidders in the auction were qualified as entrepreneurs under the FCC's rules but have significant affiliations with major carriers. For example, the second-highest bidder was Alaska Native Wireless at $2.89 billion. 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.
FCC rules state that a major carrier may own a stake in an entrepreneurial carrier and even form separate ventures with the carrier. The entrepreneurial carrier maintains privileged status under FCC rules as long as the large carrier does not have direct control over the small carrier's bidding.
The auction's leading bidder did not use a proxy. Verizon Wireless led all bidders with $8.7 billion, $5.6 billion of that on two licenses in New York City alone.
"I was surprised how much New York went for--more than $5 billion for 30MHz of spectrum," Strategis' Hamilton said. He speculated that the New York market could be driven higher by the need to have spectrum to accommodate international roamers.
The nearly $17 billion was higher than some analysts had predicted, but Hamilton said the prices were in line with the auctions held recently in Europe. A key difference, he said, is that there is much more potential for customer growth in the United States.
"In the U.S. it's still a pretty low penetration," he said, about 104 million users at the end of 2000. However, he predicted that would rise to 200 million by 2007.
Swaps, more data services seen
"There will be a lot of spectrum swapping once the FCC can hand over these licenses," Hamilton said.
Already, some wireless carriers have begun to swap bits of their airwaves. Hamilton said some auction winners may break off pieces of their blocks of spectrum won at auction and trade them for blocks of other spectrum held by erstwhile rival carriers in other markets.
Most of the companies that were most active in the bidding for PCS spectrum hold large amounts of cellular spectrum. Hamilton said this encouraged them to stay in the auction longer.
"They were maxed out," he said. "They needed more spectrum."
Hamilton found understandable Sprint PCS' decision to drop out of the auction, noting that they have an all-digital CDMA network that can accommodate much more traffic.
As for how the spectrum will be used, at first it will be applied to voice services, "but in the long term a lot of this spectrum will be shifted to wireless data," he said.
But first regulators and the courts must decide how to react to the smaller companies' complaints that the airwaves auction was unfair.
"I hope either the FCC or Congress puts this on a fast track" so the spectrum can be put to good use quickly, Hamilton said.