November 28, 1997
Teligent, Teledesic Agreements
With FCC Are Causing Static
By JOHN R. WILKE
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- The order from the Federal Communications Commission was so urgent that it cut through all the usual bureaucracy and public-notice procedures. It was needed, the FCC said, "to advance, support and accommodate the national defense."
But the ruling, drafted behind closed doors in the name of national security, also happened to accommodate billionaires Craig McCaw and Bill Gates, former AT&T Corp. president Alex Mandl, his wealthy backers, and a circle of former FCC and White House officials, lobbyists and lawyers.
The agency's move last March cleared a slice of the airwaves -- a band of the electromagnetic spectrum -- for top-secret spy satellites. Used by U.S. intelligence agencies to eavesdrop on everything from Russian cell-phone calls to Iraqi fighter-pilot conversations, the satellites needed protection from interference. But the FCC's order went far beyond that: it handed an estimated $1 billion of spectrum to tiny Teligent Corp., which is building local microwave communications networks. It also had just wooed Mr. Mandl from AT&T to a top post.
And a related order the same day cleared the way for a Gates-McCaw venture, Teledesic Corp., to loft its Internet-in-the-sky satellites.
'Military-Industrial Airwaves Heist'
"This was a military-industrial airwave heist," says Bennett Kobb, author of SpectrumGuide, a widely used wireless-industry reference book. Teligent got free spectrum at a time when rivals must bid millions for new licenses, while Teledesic had a potentially crippling obstacle to its business removed quickly and quietly, he said.
Government and company officials say they did nothing improper and that the FCC's effort was good public policy; both companies aim to provide the kind of low-cost, high-speed communications needed in today's data-driven economy. Teligent, of Vienna, Va., says the FCC's order was a costly inconvenience that delayed its business plans, not a windfall. "This was a national security issue, and that's the end of it," Mr. Mandl said. In Seattle, Teledesic's spokesman said that "we don't feel we got any kind of special deal -- we reached an agreement with the government, they helped us work out a big problem, and it's over."
But it's not. BellSouth Corp., Hughes Corp. and several smaller firms say the national-security claim became a pretext for helping two well-connected companies; they're demanding a public review of what happened behind the scenes. Presenting new FCC Chairman William Kennard with one of his first policy dilemmas, they've asked the commission to reconsider the order, which the FCC now says it will take up in January.
For Reed Hundt, then FCC chairman, the story began last year around the time Mr. Mandl abruptly left AT&T to join Teligent, which was then called Associated Communications. Mr. Hundt, vacationing in Aspen, Colo., was startled when he read in a newspaper the company's boast that it had assembled nationwide wireless licenses without paying the FCC a nickel. "Wherever they're getting licenses, I don't want any more given out," he told his staff, ordering a freeze in the band.
Auctions Avoided
For decades the FCC parceled out licenses to use the public airwaves via lotteries and "comparative hearings," but in 1993 Congress told the agency to start auctioning licenses to the highest bidder. Teligent avoided any auction because, unbeknownst to Mr. Hundt, it had quietly collected its licenses between 1993 and 1995, before any auctions had been held. The spectrum was available because it had been set aside for a now-defunct service once intended to link office computers. An FCC office in Gettysburg, Pa., routinely handed it over because the FCC in Washington hadn't yet made plans to auction it.
Mr. Hundt wasn't the only one blindsided by Teligent's plans. Teledesic operated on the very same spectrum; it could coexist with the spy satellite, but not with Teligent's transmissions, which caused interference with its signals. The company planned a $9 billion network of 288 low-orbit satellites, using pizza-sized dishes to beam data around the world. It wouldn't have to pay for spectrum because international services are exempt from the auction policy. With U.S. backing, Teledesic already had won global commitments to reserve that frequency -- yet here was the FCC itself handing out licenses that would interfere with it.
Teligent's plans also surprised U.S. intelligence officials. A year earlier they had asked the Commerce Department to help the FCC protect the spy satellites' earth stations from local radio interference. The bases, somewhere near Denver and Washington, operated in the same 18-gigahertz band that Teligent had claimed.
'Stealth Strategy'
Lawyers for Messrs. McCaw and Gates, in filings with the FCC, accused Teligent of using a "stealth strategy" to grab spectrum. They said that under the rules for that band, Teligent had improperly acquired the spectrum and hadn't actively used it, as required. Teligent insisted its licenses were legal, and that it planned to sell "wireless fiber" service, beaming data over short distances in competition with Bell telephone monopolies.
Teligent and Teledesic squared off last fall, employing a stellar circle of lawyers and lobbyists, most with close ties to Mr. Hundt and Vice President Al Gore. Teledesic retained Scott Harris, fresh out of the FCC's international bureau, where he was a Hundt protege responsible for regulating the satellite industry. The company also hired Clinton political operatives and Akin, Gump, a top Washington law firm with close ties to the Democratic party.
Teligent retained Antoinette Cook Bush, who in 1991 was President Clinton's first choice to run the FCC, though she dropped out of the running and joined Skadden Arps, Slate, Meagher & Flom, a New York law firm. It also hired Larry Harris, a prominent Capitol Hill lobbyist, formerly of MCI Communications Corp.; and later, it hired Mr. Gore's former domestic-policy adviser, Greg Simon, shortly after Mr. Simon left the White House.
In September, three days after its FCC filing attacked Teligent, Mr. McCaw gave $50,000 to the Democratic National Committee under the name Eagle River Investments Inc., one of his other companies. Separately, Teledesic contributed $25,000 to an FCC "memorial fund" intended to pay for foreign travel by FCC officials. A spokesman for Mr. McCaw said the gifts weren't related to Teledesic's FCC dealings; both companies deny exerting political pressure.
Through the fall, the companies' lawyers tried to agree on a way to share the disputed spectrum, without success. Mr. Hundt recalls personally telling Mr. Mandl that "either you are going to have to get a solution or you are going to ultimately go to auction."
FCC-Brokered Compromise
By December, an FCC-brokered compromise was at hand. Commerce would free up additional spectrum, and Teligent would move to another, higher band. Teligent insisted on getting additional spectrum because the higher band would reduce its data-carrying capacity.
The FCC also needed to accommodate the spy satellites. The military wanted to avoid interference only in two 40-kilometer rings, one each around Washington and Denver. But the FCC went much further, giving Teligent a nationwide presence as part of the solution.
On March 14, with no previous notice except to the companies that would benefit, the FCC announced it would relocate Teligent to another band, giving it a slot four times larger than it originally held. That move eliminated the interference with both Teledesic and the spy satellites. In a separate order, the FCC confirmed Teledesic's spectrum and operating authority. Teledesic dropped its claims against Teligent and the FCC never ruled on them.
The swap was a huge boost for Teligent. Besides sweeping away questions about the legality of its licenses, the larger band would enable the company to carry more traffic. Teligent's portfolio of free spectrum helped attract a $100 million investment from Japan's Nippon Telephone & Telegraph Ltd., and $780 million in vendor financing. After a strong initial public offering of stock last Friday, it now has a market value of $1.3 billion.
Teledesic, too, was a winner. The FCC's orders cleared the way for it to begin launching its satellites. The company remains closely held by its chairman, Mr. McCaw, with backing from Mr. Gates, Microsoft Corp.'s chairman, and aerospace giant Boeing Co., which says it will start shooting satellites into low-Earth orbit by 2001.
The move triggered howls of protest from other companies. "This was the government dealing with private, politically wired companies behind closed doors, under the cover of national security," said David Mallof, president of a would-be competitor, WebCel Communications Inc., of Washington, D.C. He said that giving free spectrum to Teligent also subverts future auctions; he plans to bid in the next one, scheduled for Feb. 18.
Mr. Hundt, who left office last month, says the spectrum swap was proper and the companies didn't get special treatment. At the Commerce Department, the inspector general looked into the deal and found that the agency's people also acted properly. The report did note, however, that an FCC licensing office issued licenses "without the knowledge of FCC headquarters" even though they interfered both with spy satellites and Teledesic's planned service.
Teligent and Teledesic both say they're confident the FCC's actions will stand.
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