Appeals Court Vibrations
Margo McCall
July 2, 2001
NextWave Decision Reverberates Through Industry
The ruling giving back Next-Wave Telecom Inc.'s spectrum licenses and leaving re-auction bidders, including carriers backed by AT&T Wireless, Cingular Wireless and Verizon Wireless, high and dry injects even more doubt into an industry already facing uncertainty over spectrum caps, third-generation rollouts and the 700 MHz auction.
But those in the industry better get used to it because it may be some time before the FCC untangles the complex web surrounding the U.S. Court of Appeals' decision in Washington, D.C., that the FCC had no right to seize NextWave's PCS licenses for nonpayment shortly after the company declared bankruptcy in 1999.
Now that NextWave is sitting pretty on nearly $17 billion worth of spectrum licenses, it says it plans to behave more like a carrier than a litigant and start deploying a 3G network. The company reportedly will use CDMA2000 technology and employ 'a carrier's carrier approach,' meaning it will seek to resell its services to other carriers. Some observers, however, doubt NextWave has the money–or ability–to expand its 45-employee company fast enough to meet FCC buildout requirements.
There is much speculation that NextWave will take advantage of its currently strong legal position and settle with the FCC or one of the re-auction's high bidders. Michael Wack, NextWave's senior vice president and deputy general counsel, wouldn't comment on whether the company will accept a settlement but says re-auction winners have made inquiries. He stresses, however: 'We are not for sale.'
Either way, NextWave stands to make $10 billion or so, barring a successful appeal by the FCC. The company bid $4.7 billion in 1996 for the licenses that fetched nearly $17 billion in the January re-auction. NextWave took out a loan and sold private stock to submit its required $470 million down payment back then. It still owes the FCC the remainder of the $4.7 billion, plus interest.
NextWave, which previously had 350 employees and 22 offices around the world, still is in bankruptcy proceedings and now will update its reorganization plan. It has $90 million in interim financing, but now that a ruling has been handed down, Wack says there's no shortage of investors.
The FCC, meanwhile, is taking time to review its options. The agency is likely to take the least costly option of appealing the decision to the U.S. Supreme Court within its 90-day window–a move bound to help its negotiating position. The fact that the D.C. District Court of Appeals and the Second Circuit Court differed on whether the FCC should have taken the licenses from a bankrupt company could increase the odds the Supreme Court will hear the case. But if the high court takes the case, the legal battle could drag on for two more years, keeping nearly 400 spectrum licenses out of the hands of carriers, and thereby affecting the customers they serve.
That, some bidders say, is the biggest tragedy. 'The bottom line is the consumer is the ultimate wounded party in all of this,' says Sarah Thailing, a spokeswoman for Leap Wireless International, the San Diego service provider that won 22 new licenses for $350 million in the re-auction.
Tim O'Neil, a wireless services analyst with Wit Sound View, says each carrier will be affected differently. Verizon Wireless and Cingular Wireless needed the spectrum to fill holes, he says, while AT&T Wireless could have used it for its network overlay. Adds Tom Friedberg, vice president of equity research with Tucker Anthony Cleary Gull: 'Let's not even talk about 3G–the carriers need capacity for voice in big markets.'
But on Wall Street, the NextWave decision registered barely a blip. Cynthia Motz, a Credit Suisse First Boston analyst, says investors might perceive carriers' temporary loss of the licenses as a positive, since some believe companies paid too much for them anyway. Through its Cellco Partnership, No. 1 carrier Verizon Wireless bid $8.8 billion, the most of all bidders, for 113 licenses, including one in the pricey New York market. It reportedly is one of the re-auction bidders that has been talking to NextWave.
In cooperation with Salmon PCS, Cingular Wireless, the second-largest carrier, bid $2.3 billion for 79 licenses. Through Alaska Native Wireless, in which it has a 40 percent stake, No. 3 carrier AT&T Wireless bid $2.9 billion for 44 licenses.
The NextWave decision has touched off criticism of the FCC for taking back the licenses in the first place. It also raised a new rallying cry for revamping FCC policies, especially those concerning small businesses. Currently, small businesses can submit just a down payment to compete for licenses up for auction. That opens the door for underfunded companies such as NextWave to participate. At the same time, large carriers can take advantage of those same rules by investing in small businesses such as Cellco, Alaska Native Wireless and Salmon PCS.
'The real tragedy isn't that NextWave will get to walk away with billions. The real tragedy is the favorable financing treatment of small and rural businesses,' says Jeff Giesea, a senior analyst with Fierce Wireless.
But talk like that might make Vincent McBride bristle. The former letter carrier plunked down his $46,000 life savings on a $600,000 license for Williston, N.D., in a 1995 auction. He lost it when the FCC changed its rules and wouldn't return the down payment. Now McBride has a bigger concern: the $306,000 down payment he made in the re-auction on a license for Evansville, N.D. 'If they want to take my license and give it to NextWave, fine; they have to give me my down payment back,' he says.
In a case of bidder beware, the FCC advised re-auction participants that there was a chance they might not be granted the licenses due to the ongoing litigation. The FCC will refund the billions in high bidder down payments, although not until a decision is made on what course of action to take next.
Blair Levin, a Legg Mason telecom regulation analyst who wrote a report on the ruling, believes an appeal faces an uphill battle and a settlement faces practical hurdles. Beyond creating a hullabaloo over the immediate question of who gets the licenses, the ruling is expected to increase pressure to lift the spectrum cap and free up more spectrum for 3G services.
'There are two things people don't want to happen–one is a continuation of the ongoing uncertainty and the other is nobody wants to turn back the clock on the re-auctions,' Fierce Wireless' Giesea says. 'The FCC has gotten itself into a mess and now has to get itself out of it.'
FCC Chairman Michael Powell agrees the commission has problems. In an appearance Thursday before a Senate Appropriations subcommittee, he said: 'It's a mess. This is a major blow to the legal and regulatory foundation of our auction policy.'
Furthermore, the uncertainty extends beyond the wireless industry. Proceeds from the January re-auction were built into this year's federal budget. A $12 billion budget hole might prompt an even bigger outcry than a hole in a carrier's coverage.
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FCC Zero For Two In Auction Cases
The FCC on Friday lost another fight stemming from the 1996 spectrum auction involving NextWave Telecom Inc. In this case, the U.S. Supreme Court let stand a ruling that allows MetroPCS Inc., formerly General Wireless Inc., to pay only a fraction of the $1.06 billion it bid for 14 licenses.
General Wireless planned to offer wireless services in Miami, Atlanta and San Francisco, but found itself unable to finance the buildout when capital markets went sour. It filed for bankruptcy in October 1997. A bankruptcy court subsequently reduced the value of the licenses to $166 million, saying the value of the spectrum had dropped dramatically after the 1996 auction.
The FCC appealed that decision, arguing that the bankruptcy court usurped the FCC's authority to issue and oversee spectrum licenses. An appeals court didn't address that issue but agreed with the bankruptcy court that the value of the licenses had dropped. It was that decision that the high court refused to review.
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