NextWave Telecom's Twisted Tale
By Joanna Glasner and Elisa Batista
wired.com
2:00 a.m. March 12, 2002 PST
Depending on whom you listen to, NextWave Telecom is:
A) A group of scheming entrepreneurs squatting on a multi-billion dollar government asset who are motivated by
little else than the desire to line their own pockets at the public's expense.
Or,
B) A forward-thinking telecommunications
company that has been woefully mistreated at
the hands of a government bureaucracy bent
on terminating its lawfully obtained right to use
the public airwaves.
On the "A" side is the Federal Communications
Commission, which has been arguing for years
that NextWave, a company best known for
bidding billions for wireless telecommunications
licenses and then declaring bankruptcy, should
give up its claims to the public airwaves.
On the "B" side is NextWave itself, which says the government violated bankruptcy laws when it
reclaimed a valuable block of spectrum licenses that the company won at an auction but failed
to pay for on time.
Last week, the U.S. Supreme Court indicated it will step into the debate -- albeit on more
narrowly defined terms -- when justices agreed to hear an FCC appeal seeking to reverse a
NextWave legal victory.
The decision, expected early next year barring a settlement, should determine what becomes of
billions of dollars in payments promised for wireless spectrum licenses that the FCC
re-auctioned in 2001. It may also offer a crucial interpretation of how bankruptcy laws apply to
sales of rights to publicly owned assets.
As the court hearing approaches, no single party has more riding on the outcome than
NextWave itself. After four years spent in bankruptcy reorganization, the embattled wireless
company now stands to lose its only substantial asset.
The court's intervention also comes at a time when NextWave, criticized for never actually
launching its much-talked-about wireless service, was taking steps to resuscitate its image. The
firm, once characterized in a letter by Sen. John McCain (R-Arizona) as "a company whose
only contribution to the American economy has been to manipulate, for private gain, the results
of an improperly designed auction," announced in February that it's testing a high-speed mobile
Internet service for rollout later this year. Now, the company will be devoting much of its energy
again to legal matters.
Things are looking up a bit for the FCC, however. The court's move gives the agency a better
chance of accomplishing what it tried to do a year ago, which is to resell NextWave's spectrum
to larger, financially solvent companies. Fourteen months ago, the FCC secured bids from
Verizon and subsidiaries of AT&T Wireless, Cingular and other big telcos who agreed to pay
more than $16 billion for NextWave's old licenses.
The prospect of billions from Verizon and its ilk, in fact, has the agency wondering why it ever
decided in the first place to hold an auction exclusively for small businesses -which is how the
whole mess began.
How It All Began
Seamus McAteer, an analyst for the research firm Zelos Group, calls the dispute between
NextWave and the FCC a "tawdry tale of greed."
NextWave Telecom was formed in 1995 by a group of telecommunications executives led by
Allen Salmasi, the former president of Qualcomm's wireless telecommunications division.
The company's plan at inception was to participate in a series of auctions organized by the FCC
to sell small businesses licenses for airwaves to be used in wireless telecommunications
services. NextWave's plan was to outbid as many rivals possible and win enough licenses for a
national network.
It was never NextWave's intention to sell wireless services directly to customers. The
company's publicly stated business plan was to become a "carrier's carrier," which would collect
fees from other wireless companies that used its network.
The upstart firm attracted a number of prominent backers, including Qualcomm and investment
group Cerberus Partners. It also got financing commitments from Lucent, Hughes and Nortel to
build its service.
NextWave's high-bidding ways proved successful at the spectrum auction. The company
submitted the winning bids for licenses covering 95 urban areas in the United States. It agreed
to pay the FCC $4.7 billion in installment payments for the licenses.
Shortly afterward, NextWave made the minimum 10 percent down payment of $500 million for
the spectrum. The company agreed to pay the remainder over 10 years.
Problems Arise
The installment payments never came. Instead, two years after making its down payment,
NextWave Telecom filed for Chapter 11 bankruptcy.
NextWave said it went into bankruptcy after failing to line up credit to cover the hefty installment
payments owed to the FCC. In bankruptcy court, the company claimed it was not at fault for the
missing payments.
"The problem was not the size of our bids but the collapse of the spectrum market," said
Michael Wack, NextWave's deputy general counsel.
NextWave claims the FCC flooded the market with spectrum following the auction in which it
participated. The oversupply depressed prices, making NextWave unable to find financing to
cover its bids.
NextWave wasn't alone in its plight. According to the FCC, the holders of 337 licenses went
bankrupt in the late 1990s. NextWave owns 216 licenses.
But telecommunications regulators had little sympathy for those who bid more than they could
afford and then failed to pay on time. The FCC said it automatically canceled NextWave's
licenses when the telco failed to make its first installment payment in October 1998.
Although companies in bankruptcy court are typically allowed a reprieve from creditors, the
FCC has consistently argued that the privilege should not apply to spectrum licenses. Because
spectrum is a public asset, it should not be left unused while a company that failed to make
payments meanders its way through the bankruptcy process. |
