Next for NextWave: Sink or Swim
By Elisa Batista 2:00 a.m. Jan. 31, 2002 PST
NextWave Telecom, the bankrupt wireless service provider that almost
walked away with $5 billion from the FCC for its airwaves licenses -- even
though it never served a single customer -- may end up with nothing more
than debts to pay.
The Hawthorne, New York, company will file a brief with the Supreme Court
Friday to deflect the Federal Communications Commission's attempt to retake
its spectrum licenses.
The disputed 216 licenses allow mobile phone carriers to offer cellular phone
and wireless Internet services in major markets such as Los Angeles and New
York. Telecommunications attorneys
say the country's highest court
is likely to listen to this case
because at stake are public
assets (the airwaves) and
public policy (how the FCC runs
its auctions).
And even if the court doesn't
take on the case to decide who
rightfully owns the licenses, it
may agree to hear it because
two federal appeals courts
handed out different verdicts on
whether the FCC violated
bankruptcy laws when it repossessed the licenses from
NextWave in 1996.
"If you want to look at the law broadly, you have a conflict
between two circuits (of appeal) -- each interpreting
bankruptcy law differently in the context of a telecom auction,"
Roger M. Golden of Washington law firm Fenwick & West said.
"You've got really complex issues here." Golden and other attorneys predict the Supreme Court will side
with the FCC if it agrees to hear the case, which would be a
devastating ruling against NextWave, analysts say.
"Do you reward a defunct company with billions of dollars for
bidding on licenses they couldn't afford and keeping them off
the market for years and never doing anything with them?"
asked Paul Dittner, an analyst with Gartner Dataquest. "If the
courts or Congress would let that go through ... you'd never
have licenses get to the market."
The Supreme Court would agree, said Harvey S. Jacobs, an
attorney at Jacobs & Associates in Washington.
"The bidding and rules and regulations were established," Jacobs
said. "The participants were aware of those rules and
regulations and to simply say that, 'I can bid on something and
win it and not pay for it, and get to keep it anyway,' seems to
fly into the face of fair dealing."
NextWave originally won the licenses in an auction intended for
small businesses with limited resources in 1996. NextWave,
which bid $4.7 billion for the licenses, made the minimum 10
percent down payment of $500 million for the spectrum.
But shortly thereafter NextWave filed for bankruptcy protection
and defaulted on its payments for the licenses. The FCC, in
turn, confiscated the licenses and re-sold them to Verizon
Wireless and the subsidiaries of AT&T Wireless and Cingular
Wireless, among others, for $17 billion in an auction that ended
in January 2001.
Generally, all proceeds from spectrum auctions are deposited
into the government's coffers.
After years of legal wrangling between the FCC and NextWave
-- with the licenses in limbo and of no use to consumers -- a
federal appeals court in D.C. ruled that the FCC violated
bankruptcy laws in repossessing the licenses in the first place.
The FCC filed a petition with the Supreme Court, asking it to
hear the case. The FCC, desperate to gain the funds from the
auction and put the spectrum to use, struck a deal with
NextWave. NextWave would get $5 billion to relinquish all rights
to the licenses. In return, the winners of the second auction
would pay $15.85 billion and the government would pocket $10
billion for the sale. That $10 billion was included as government
funds in President Bush's budget proposal.
But the deal, which required approval from Congress, didn't get
its rubber stamp -- a move that analysts say signaled
NextWave's slow and steady downfall.
"For NextWave, that's about as bad a scenario as they can
have, considering what was on the table at the end of the
year," Dittner said. "That's from one extreme to the other --
pocketing $6 billion at the end of the year to walking away with
bankruptcy notes."
"You'd think they would be happy with something more
reasonable than what was proposed at the end of the year,"
Dittner added. NextWave officials predict the Supreme Court probably
won't take on the case.
"We hope to file a new plan of reorganization and emerge
from bankruptcy shortly after the Supreme Court denies
(the FCC's petition to listen to the case)," said Michael
Wack, attorney for NextWave.
Even though other attorneys say no law keeps NextWave
from offering services, Wack said the company is waiting
on the Supreme Court's action before erasing its debts to
creditors and selling mobile Internet services to consumers.
But analysts aren't convinced. If the Supreme Court
chooses not to listen to the case, or NextWave triumphs in
an appeal that would follow the high court's decision to
hear the case, NextWave probably won't sell mobile
Internet services, they say.
"The spectrum itself is a valuable asset," said Joe Laszlo,
an analyst for Jupiter Media Metrix. "My take on the
bankruptcy court decision is that as a valuable asset,
NextWave should be able to liquidate it for creditors."
NextWave's other option is to build a business upon selling
spectrum to other carriers so they can build their own
cellular networks, Laszlo said.
But the industry, like the FCC, appears to be tired of
dealing with NextWave.
All the winning bidders of the second auction, including
Verizon, Alaska Native Wireless and Salmon PCS, are
demanding their $3.1 billion in deposits. The FCC says it
hasn't decided whether to return the money.
Verizon Wireless is buying smaller carriers to gain the
spectrum it needs, while competitors Cingular Wireless and
AT&T Wireless are sharing spectrum to build out their
high-speed mobile data networks.
Even investors who once pledged to bail out NextWave are
considering bailing out altogether.
In a filing with securities regulators last week, wireless
technology company Qualcomm (QCOM), which pledged
$300 million to NextWave, said it may not make the
investment because NextWave failed to reorganize under
bankruptcy protection by Oct. 31, 2001.
"We pointed out there's uncertainty and we're waiting to
see the outcome of the settlement with FCC and financing
plan," Qualcomm treasurer Dick Grannis said.
NextWave, naturally, is confident it will move on with
business as usual.
"We believe we will be able to find adequate funding,"
Wack said. "We hope Qualcomm will participate in any
reorganization plan we put forward. If they don't we will
find other investors."
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