In a Nutshell........ NEW YORK -(Dow Jones)- One year ago, the Federal Communications Commission pulled off what looked like a dazzling two-fer. Aiming to help entrepreneurs compete with entrenched giants, the FCC auctioned off hundreds of new licenses to provide wireless telephone, paging and other services. The auction fetched a stunning $10.2 billion, and FCC Chairman Reed Hundt boasted about the "courage" of "these steadfast entrepreneurial winners."
But The Wall Street Journal Friday reported no one is bragging now. A slew ofbidders, blaming a deteriorating market for wireless stocks, say they can't pay for their licenses, and they are threatening to file for bankruptcy if the FCC doesn't bail them out. The government could collect billions of dollars less than was promised. And the licenses that were supposed to foster competition could instead languish in court for years.
"It's unfortunate that we've been put in this position, but here we are,"
says Hundt, the regulator who has been thrust into the unfamiliar role of banker. Having failed to persuade the Treasury Department to take over debt collection, Hundt has been forced to hire outside bankruptcy lawyers while the agency's own lawyers bone up on bankruptcy law. He and his fellow commissioners have spent the past month listening to pleas from troubled bidders who want the FCC to cut their debt or ease their payment terms.
Meantime, Wall Street is demanding a quick solution while other bidders and aggrieved rivals a re threatening to sue if the FCC capitulates. Congress is watching as it considers whether to limit future auctions of rights to use the electromagnetic spectrum. And a big embarrassment looms for the Clinton administration, which has touted auctions as a crowning achievement of its telecommunications policy.
Why the "C-block" auction has become a $10 billion fiasco is a tale of
seemingly good intentions gone awry. Seeking to help little players enter the telecommunications game, the FCC offered an installment-payment plan that would help them buy licenses. Instead, the attractive terms artificially inflated the bidding and scared off Wall Street, which decided some bidders had paid way too much to be the fifth or sixth wireless competitors in the market.
The C-block auction is a bit of an anomaly, albeit a potentially costly one. In 14 spectrum auctions in three years, the FCC has collected nearly $12 billion, including $1 billion so far from the C-block auction. The auctions have put 4,377 licenses in the hands of companies vying to offer phone, paging, radio and other services - and Hundt says fostering competition remains his priority as he determines what to do about the C-block bidders.
Last year, he shrugged off suggestions that some bidders had overpaid, saying he was "indifferent" to the prices and insisting deadbeats would have licenses taken away for reauction. He defends negotiating with bidders now as a logical reaction to the threat of bankruptcy litigation. "Bankruptcy is not swift, it's not smooth, it's not certain," he says. "It's a fundamental problem because I don't want the licenses on ice." But it is increasingly doubtful that big bidders are going to get much, if any, relief.
In 1993 Congress authorized the FCC to auction communications-spectrum licenses. The FCC made a splash by raising $7.7 billion with its auction of the so-called A- and B-blocks in 1995. Giant companies such as AT&T Corp. paid for winning bids with cash up front.
The C-block auction was designed, at Congress's behest, to distribute
licenses to small businesses, rural phone companies and businesses
owned by minorities and women. In addition, Congress urged the FCC to offer helpful financing such as installment payments.
A landmark 1995 Supreme Court decision scuttled special treatment of
women and minorities, so the FCC designed the C-block to help small companies with annual revenues of less than $40 million. Bidders were allowed to pay over 10 years at below-market rates, with interest-only payments for the first six years.
Experts now say the terms were a crucial flaw. "An initial six years of
interest-only payments increases the likelihood of speculation," says Peter Cramton, a University of Maryland economics professor who helped design the structure of an earlier auction. "If anything, you'd want a higher up-front payment from a new company, to reduce the risk of default."
The C-block auction began in December 1995 with 255 bidders and ended with a reauction of some properties in July 1996. Many of the "entrepreneurs" weren't small fry, though.
Top executives of NextWave Telecom Inc. of San Diego include former FCC adviser Janice Obuchowski and Allen Salmasi, once president of wireless operations at Qualcomm Inc., a big maker of digital-communications gear. Qualcomm, Sony Corp. and South Korea's Pohang Iron & Steel Co. all pledged bidding money to NextWave, which topped all bidders by offering $4.2 billion
for 63 licenses. Pocket Communications Inc., of Washington, D.C., which bid $1.4 billion, was started by Daniel Riker, a former senior executive of MCI Communications Corp., and had backing from Westinghouse Electric Corp. and a consortium of Asian investors.
Though well-connected, many companies started with nothing like the money needed to pay for their spectrum in full. Typically, there was enough for a modest down payment, and a plan to use the spectrum to raise more money. Pocket entered the auction with "something like $80 million" in capital and eventually raised about $180 million, Riker says.
Many bidders targeted certain cities, putting further upward pressure on bidding in those areas. The result was "a brawl," says Riker. For many, bidding rapidly escalated beyond the levels of the A- and B-block auctions. Those bidders had paid an average of $15.54 per "pop," an industry term for a potential customer. C-block participants wound up bidding an average of $39.88 per "pop." But most of the problem was with the top 10 bidders, who offered about $8 billion. Most of the other bidders actually bid close to or less than comparable A- and B-block levels, FCC officials say.
Some big players with plenty of industry experience pulled out as the
bidding got too high. Among these was Craig McCaw, the wireless-industry pioneer who sold his company to AT&T for $11.5 billion in 1994 and who was trying to set up a new venture. McCaw says the bidding spelled doom for many.
At a convention last year in Dallas, Kevin Compton, a partner at the
venture-capital firm of Kleiner Perkins Caufield & Byers, says he warned Hundt: "Within one year, you'll have to change your . . . rules and payment schedules. If you don't, all the lawyers who have been trying to understand your crazy FCC bidding rules will be trying to understand bankruptcy laws." No way, Hundt replied. He was equally emphatic in warning that the FCC wouldn't accept defaults. "Forget about it," he said in a speech. "We have long had plans to reauction defaulted licenses right away."
Watching gleefully from the sidelines were the big companies that the FCC had hoped to threaten with a horde of new rivals. "We were passing around internal memos that showed how much more they paid for their properties than we did," says Wayne Perry, formerly vice chairman of AT&T's wireless division, and now president of McCaw's OneComm Corp.
Meantime, challenges from disgruntled bidders delayed FCC issuance of licenses. By September, some were hinting they might have trouble paying. By the time NextWave and others started getting their licenses, Wall Street was souring on wireless start-ups. Beset by technical glitches, problems putting up antenna towers and fears of excessive competition, the sector was trashed.
NextWave has filed for both an initial public offering and public debt, but has withheld both for fears they would fail. Investors don't accept
projections about the size of the market, and in a cautious turn, have
demanded to see real earnings, rather than cash-flow projections.
FCC lawyers say that while a 1934 communications law says licenses aren't considered part of a bankruptcy estate, some courts, relying on the Bankruptcy Code, have ruled otherwise. Without a clearer legal picture, FCC officials fear licenses in bankruptcy could be tied up in court for several years, an eternity in the telecommunications business.
The FCC has been asking Congress to clear up the uncertainty, and Hundt says he hopes to persuade lawmakers to act by the end of September. Now the FCC finds itself in a multibillion-dollar game of chicken with bidders. An FCC task force headed by staffer Jon Garcia, a former McKinsey & Co. consultant, is working to devise a solution that will win the support of at least three While Hundt has hinted he especially wants to help small, rural competitors, other commissioners have argued that any changes would encourage bidders in
future auctions to bid irresponsibly in the belief that the FCC will ease
their obligations. Some say any significant step also would be unfair to
bidders that withdrew from the C-block auction, competing bidders and
companies that won licenses in other auctions.
The primary goal, Hundt says, is to get licenses to companies that will build
phone systems and start competing. "This is not a bad policy, but people in Washington have to realize if you're going to follow this policy, you're going to have to act like people on Wall Street," he says. "It would be easy to do nothing, but that's not commercially reasonable, that's not what lenders do, and that's not good communications policy."
Copyright (c) 1997 Dow Jones & Company, Inc.
All Rights Reserved.
Copyright (c) 1997 Dow Jones & Company, Inc.
All Rights Reserved.
Transmitted: 8/1/97 9:53 AM EDT (L100XebK) |
