Wireless Week on NextWave's past and future.
>> Time Up For NextWave?
Mark Rockwell
Wireless Week
February 19, 2003
Depending on whom you ask, renegade carrier NextWave Telecom either stands to be a front runner in this year's wireless business or is a hopelessly outdated company whose only assets are spectrum holdings of debatable value.
As 2003 progresses, events are converging in the wireless industry that could mold its future for the next five years. The FCC mandated in November 2001 that spectrum caps for carriers would end in January 2003. Additionally, the commission is pushing a new wireless agenda that would liberate spectrum in already-allocated bandwidths through efficiency and spectrum sharing. New technology is coming that will make that possible.
These factors could drive wireless'-and subsequently NextWave's-fortunes in the coming months, say wireless industry analysts and observers. In such an environment, the Jan. 27 U.S. Supreme Court ruling that gave NextWave a victory in its epic spectrum license battle with the FCC solidified the company's position for now, but questions remain about its future.
NextWave, which has been under Chapter 11 bankruptcy protection from creditors for the past five years, could be in line for a big payoff-or it might land on skid row.
Show Me The Money
NextWave in its early days was buoyed by billions in potential investment capital from San Diego, Calif., partners such as Qualcomm but plagued by questions about foreign investment from firms such as Pohang Steel and LG Information & Communications. Throughout, it maintained that it had no more than a 25 percent foreign ownership.
It also had grand pre-launch plans to sell airtime to the likes of MCI WorldCom, which agreed to buy 10 billion minutes. Qualcomm even stepped up with a plan to inject $300 million more into NextWave in August 2001-along with a deal to support its network buildout-when it looked as if the company was ready to settle its dispute with the FCC and emerge from bankruptcy reorganization. But the company exercised its right to terminate the deal three months later when NextWave's settlement deal fell through and it couldn't escape Chapter 11. Around the same time, LCC International, another big NextWave investor, sold off nearly 1.7 million NextWave shares after having had written off $40 million in debt due to NextWave.
While NextWave's initial plans as a wholesaler may have changed, its CEO and chairman has remained throughout. CEO Allen Salmasi is a former president of Qualcomm's Wireless Telecommunications Division and was instrumental in the launch of its CDMA and OmniTRACS satellite system technology.
It also had strong connections in Washington, D.C., to help guide it through the regulatory and legal processes. Its general counsel was Janice Obuchowski, an antitrust attorney who led the National Telecommunications & Information Administration in the late 1980s and worked at the FCC under then-chairman Charles Ferris in 1980. (President Bush recently appointed her the U.S. Ambassador to the 2003 World Radio Communication Conference.)
Now, as part of its still-pending Chapter 11 case, NextWave is looking for new investors. By some estimates, the company will need several billion dollars to build a viable network. But the new investors likely won't be the usual suspects. Microsoft, AOL Time Warner and Earthlink represent the most viable sources of new revenue, even in a tight economy, says Andrew Seybold, head of the Andrew Seybold Group. Seybold maintains that content providers, in need of instant distribution channels for their products, should be high on the list of prospective investors. "There's tight and there's tight," he says, indicating these kinds of companies have money to spend strategically.
NextWave's initial buildout-the actual extent of which remains murky-must be beefed up significantly if it is to go forward as a competitive option. Yet industry observers say there probably will be a tradeoff between being a service provider and selling off some spectrum to stay afloat. The company expects to file with the bankruptcy court a new business plan within the next four to six months.
NextWave holds licenses in some of the largest markets in the United States, including New York, Los Angeles, Chicago, San Diego, Philadelphia and Washington, D.C. It has licenses in 95 markets nationwide, some of which may be attractive to existing carriers. Yet carriers that were willing to put down big bucks a couple years ago may not be so inclined these days to make an expensive acquisition.
Of course, NextWave would need to sell them at a price whereby it would make up for the $4.7 billion it bid in the 1997 FCC auction. The company made a 5 percent down payment at the close of that auction and another 5 percent when the licenses were "granted" in 1997. The remaining 90 percent was to be paid in installments over 10 years. According to court filings, NextWave executed promissory notes for those installments and security agreements giving the FCC liens on the licenses.
That means NextWave has paid $500 million for the licenses so far. It still is liable for the remainder of payments to the FCC but the company is protected by Chapter 11, the course of which has been prolonged by intervening years of litigation. In fact, the company literally put its business on hold while it battled to maintain ownership of the licenses after the commission's attempted seizure following NextWave's 1998 bankruptcy.
In the meantime, the telecom sector has faced the roughest years in its history, as major companies have crashed and burned. Some of the conditions that existed at the time of NextWave's struggles either have re-emerged, such as a general capital drought in telecom, or have persisted to this day, such as intense competition for wireless subscribers.
Wireless has limped along, in better shape that the wireline side. Some analysts are predicting this year could mark the beginning of a recovery. "We may have hit bottom with the economic sector. Wireless is positioned to lead it out of its problems," says Phil Verveer, partner at Wilkie Farr & Gallagher's Washington, D.C., telecommunications practice. Verveer has represented such wireless companies as NextWave and Nextel Communications. "2002 was a period of stasis. 2003 will be more fruitful than 2002," particularly for NextWave, he says.
For instance, NextWave could be positioned to take advantage of new technologies that might use its spectrum. "NextWave may well be positioned for the developing network," Verveer says. "I can see early adopters becoming very enthusiastic" about NextWave, which could employ CDMA packet data technology-possibly a 1x EV-DV network- to allow high-speed wireless Internet access. Demands for similar capabilities will increase at other carriers, he says, and those carriers may be looking for a quick way to get the capacity.
Visions For Data
Other observers agree NextWave is in a good place, although not necessarily as an acquisition target. After the Supreme Court ruling backing the company's ownership of the spectrum, NextWave is optimistic it can make it as a data carrier. That's the primary game plan for it anyway, according to NextWave senior vice president and deputy general counsel Michael Wack.
The company said almost a year ago it had activated wireless networks in 60 of its 95 markets nationwide, at a cost of $100 million. NextWave is awaiting findings from the FCC on the effectiveness of those buildouts. The company was required to build networks serving 33 percent of the customers in areas where it owns C-block spectrum and 25 percent of customers in its D-, E- and F-block licensed markets. It filed demonstrations of that effectiveness a year ago, according to Wack, but the FCC has yet to respond. No doubt, the intervening Supreme Court case has been a drag on the FCC's response.
NextWave, dogged by would-be competitors demanding to know what it has done to fulfill the buildout requirements, has declined to specify exactly what it has activated in those markets. A primary opponent has been NY Telecom, a company with ties to Eldorado Communications, which bid against NextWave in the 1996 PCS auction.
Some executives close to the company continue to insist the spectrum heavy, yet service light, NextWave is a good acquisition target. Officials within the company intimate, although are never explicit about, their wishes that the company be acquired. Rumors have been circulating for months that Verizon Wireless was in talks with the company about a merger or acquisition, although spectrum acquisitions Verizon has made in the meantime-notably Northcoast Communications-have sated some of its spectrum appetite.
Some industry insiders believe the FCC's lifting of the spectrum cap probably will make 2003 a year of consolidation. And regulatory officials might be more willing to let mega-carriers such as Verizon Wireless or T-Mobile acquire smaller secondary carriers such as NextWave than they would be in allowing the big carriers to swallow each other, Verveer says. "There's an awful lot of antitrust room" in acquiring smaller carriers, instead of large ones, he adds.
Others believe rumblings that NextWave is a great acquisition target are wishful thinking on the company's part. "A NextWave win at the Supreme Court can't leverage the company into a service provider," says Rudy Baca, vice president and global strategist at The Precursor Group, a Washington, D.C.-based investment research company. "NextWave wants to be bought by Verizon ... Verizon won't pay what NextWave wants," he says.
Baca argues that NextWave is behind the curve of the FCC's analog maintenance rules, which had required large cellular carriers to keep analog spectrum to support cellular services. The FCC recognized that analog services were pretty much obsolete due to PCS and digital services and changed the analog rules last summer.
The simple rule change, according to Baca, essentially made NextWave's dream of being a carriers' carrier moot. Carriers no longer have to look elsewhere for digital capacity. They are converting their previously reserved analog cellular spectrum to digital.
NextWave's POV
Wack says acquisition and partnerships are "Plan B" for the carrier at this point. The main plan is "going out and finding the best opportunity for our creditors and investors. There are lots of opportunity to deploy data services," he says.
Salmasi holds more than 50 percent of NextWave voting shares; the remainder of stock is held by a broad collection of entities, including the Connecticut State Teachers Fund and California Teachers pension fund. Qualcomm also holds some stock. However, no one other than Salmasi owns more than 5 percent of the company, Wack says.
Even if you believe NextWave will get bought up by a larger carrier, or will become a viable service provider on its own, the end of its five-year struggle isn't in sight. It will take more time for a resolution to take shape. For NextWave, the only thing that can be relied upon is change. <<
- Eric - |
