Inter@ctive Week
April 20, 1998
LMDS: Not Coming Soon To A Market Near You
Low auction participation and cautious winners make for less competition than expected
By Fred Dawson, Contributing Editor
The LMDS auction ended a tepid five-week run at the Federal Communications Commission on March 25, netting only $578.7 million after entrepreneurial discounts for the largest block of spectrum ever allocated and leaving even the winners stunned at how it all came out.
The technology underlying what the FCC (www.fcc.gov) calls Local Multipoint Distribution Service (LMDS) was originally perceived by the commission to be a means of driving competition in the local telecommunications and cable markets. But the outcome of the auction left in doubt the pace and scale of deployment and thus the impact this segment of the wireless broadband sector might have on competition in the U.S.
"It's no longer a question of who owns the spectrum but of who the service providers will be," says Ed Cantwell, president and chief executive of Bosch Telecom Inc. (www.boschtelecominc.com), a provider of LMDS network gear.
With much of the LMDS spectrum, which is located at the 28-gigahertz and 31-GHz tiers, now in the hands of venture capital firms and entrepreneurs rather than established operating concerns, it will take some time to sort out the answer to this question, Cantwell says.
"If I had to predict who would participate in use of the spectrum, I wouldn't discount the interexchange carriers, the Bell companies, cable companies, CLECs [competitive local exchange carriers], personal communications services (PCS) providers -- in other words, the people already in the business," Cantwell says.
Executives masterminding the strategy at the leading auction winner, WNP Communications Inc., made clear they were going to take their time figuring out where to go from here, especially since they never expected to win as much spectrum as they ended up with.
"We were hoping to win something good, but we never thought we would do this well," says Thomas Jones, president of WNP, based near Charlottesville, Va.
After 128 rounds of bidding that began on Feb. 18, WNP was top bidder for 39 A-block licenses (1.15 GHz) and one B-block (150 megahertz), representing more than 91 percent of the population (Pops) in the top 12 basic trading areas, two-thirds of the Pops in the top 75 markets and 41 percent of all U.S. Pops. The company won 11 of the top 12 markets, excluding only Los Angeles.
Dodging Obsolescence
Under the FCC's liberal licensing rules, LMDS providers have up to 10 years from the point of getting their licenses to offer "substantial" amounts of service in their markets. While WNP believes first-to-market advantage is important, Jones says, the firm will not be in a rush to build infrastructure, preferring instead to make sure it chooses a technical platform that will not be outdated soon after it's built.
WNP must also raise money to build the infrastructure and put together a full management and operations team, which Jones expects to do through direct hiring rather than partnering with outside entities. While the firm is likely to seek vendor financing, it also will rely on other sources to avoid being too much under the sway of manufacturers, says Kevin Maroni, an investor in WNP and general partner in venture capital firm Spectrum Equity Investors LP (www. spectrumequity.com).
Because there is so much spectrum, licensees will have the opportunity to divide the larger piece up among multiple providers for various applications within geographic subsections of each of the 493 basic trading areas covered by the licenses, Cantwell says.
Yet, for all the flexibility to deliver voice, data and video services at such scales, the auction failed to come close to the level of participation anticipated last year as the final preparations were being made at the commission. Overall, 181 Basic Trading Areas -- out of a nationwide total of 493 -- representing 77.4 million Pops, or 32 percent of the total, were won with a single bid. Another 109 markets representing 10 percent of the population received no bids at all. After discounts to designated entities, including WNP's 45 percent discount, the government's take in the LMDS auction netted out at just $1.85 per Pop in the A-block.
FCC officials termed the auction a success. "Today's results are very exciting," FCC Chairman William Kennard said in a prepared statement. "The marketplace now has 104 new LMDS players."
But A-block licenses covering two-thirds of the population were held by only three companies -- WNP with 41 percent share of A-block Pops, NextBand Communications LLC with 12 percent (including the Los Angeles basic trading areas) and WinStar LMDS LLC with 7 percent. No one else had more than 5 percent.
WinStar, in some respects, may have been the biggest winner, since it already holds considerable spectrum nationwide at the 38-GHz tier and can use both spectrum tiers for provision of point-to-multipoint services in its markets, although the propagation characteristics are such that 38-GHz transmitter cell radiuses are somewhat shorter, meaning WinStar's buildout in a given market will be denser than would be the case in a pure LMDS play.
With its A-block wins covering Greensboro, N.C.; New Orleans; Norfolk, Va.; Oakland, San Francisco and San Jose; Orlando, Fla.; and Salt Lake City, WinStar's spectrum holdings now average more than 750 MHz in the top 30 markets and approximately 740 MHz in the top 50, officials say.
WinStar, like Teligent Inc., which holds smaller spectrum blocks averaging less than 400 MHz at the 24-GHz tier, has already begun using the new point-to-multipoint technology underlying LMDS in some of its commercial operations and thus has a big head start over the LMDS players in bringing the fixed wireless services to market.
Next Up
NextBand, the second biggest bidder in the LMDS auction, plans to use the spectrum to support the venture's two operating backers, mobile wireless operator Nextel Communications Inc. and competitive local exchange carrier NextLink Communications Inc., in which cellular pioneer Craig McCaw is the dominant shareholder.
NextBand won 13 A-block licenses, which will be useful in NextLink's operations for point-to-multipoint connectivity, and 29 B-block licenses, which will be used to provide backhaul links for Nextel and to support point-to-point connections to NextLink customers, says Bob Ratliffe, a spokesman for the companies.
"We're not prepared to talk about our plans in any detail," Ratliffe says, noting NextBand itself may not become an operating entity, choosing instead to license its spectrum to its controlling partners. NextLink operates in 26 markets in eight states -- many of them in the same localities where NextBand will have licenses -- while Nextel operates nationwide.
Where Did Everybody Go?
A number of factors contributed to the low level of competition in the LMDS auction. After the disastrously high bidding and subsequent financial collapses of many participants in the PCS auctions, investors were extremely wary of backing speculative bidding on airwaves. In part, WNP succeeded in raising funds because Jones' plan offered investors protection against the type of bidding that went on in the PCS auction.
"The government is better off getting close to $600 million in revenues from people who can pay the money and deploy the technology than it is getting billions in illusory sums that will never be spent," Maroni says.
Backers of WNP include The Centennial Funds, Chase Manhattan Venture Fund of New York, Columbia Capital Corp., Madison Dearborn Partners Inc., Norwest Capital and Providence Ventures of Rhode Island.
Maroni and Jones dismissed assertions by some players that failed to raise capital for the auction that FCC rules undermined their efforts and led to a pooling of venture capital money behind a single investor.
"There's a lot of money out there, so, if people couldn't raise funds, you can't say it's because of a scarcity," Maroni says. "The investors [WNP's Jones] attracted all talked to other people. [Jones] was the most compelling entrepreneur."
LMDS now has the support of the major telecommunications suppliers, including Alcatel Network Systems Inc., Ericsson Inc., Lucent Technologies Inc., Northern Telecom Inc. and others. But most of these companies only got into the game in the past few months as it became apparent that breakthroughs in the manufacture of low-cost gallium-arsenide processors had made possible solid-state broadband wireless communications at ultra-high frequency levels.
Bosch is showcasing the technology in Dallas, using two transmitter towers to serve 100 users in 18 business and apartment buildings. The showcase also includes six different simulated market environments with a wide range of service applications matched to specific needs.
Bosch anticipates that the showcase will go a long way toward stimulating the interest that was absent in the auction, Cantwell says.
"The biggest barrier to acceptance of this technology has been the lack of a viable demonstration of its capabilities that a large segment of the market can witness firsthand," he says. "We think this is going to turn a lot of heads." |
