The sixth largest PCS carrier (by pops) went bankrupt long before it ever got to market. Pocket Communications has $1.5 billion in liabilities, most of which is a large debt to the federal government.
When people buy a typical business franchise, they pay an up-front fee to buy the franchise, but the real money gained by the franchiser is the percentage of revenue obtained as long as the franchise is an operating entity. The franchise is guaranteed a pretty good chance of getting to market, and also gets a reasonable chance to compete.
Pocket’s bankruptcy may cause the government to try reauction the licenses won by the company. But even with a reauction, there is a good chance that bidders will only offer pennies on the dollar for those markets. The reality is that spectrum isn’t as valuable as it was perceived to be during the C-block auctions.
Pocket’s problems magnify a critical fault with the C-block auctions: the “franchise fees” are too steep, particularly for those companies without existing cash flow.
Pocket started its business plan with a billion-dollar-plus franchise fee. That was their decision. They made a bad one.
But the government, without realizing it, set these folks up for failure by requiring large interest payments from companies without any cash flow. That situation is being remedied now.
Still, Pocket Communications and some other PCS players aren’t going to make it to market and their investors will lose a lot of money. The government also isn’t going to be paid a lot of the money it is anticipating.
And what happens to the smaller PCS carriers if they do get to market? Sprint PCS just launched in Denver and is charging $11.50 per month for 30 minutes of airtime. I’m sure this loss-leader pricing works out well on the computing models for a company with the size and bundling capabilities of Sprint. But the little guys can’t match this price point and make money.
In Denver, the wireless competition shapes up like this: AT&T Wireless Services Inc., AirTouch Communications Inc., Sprint PCS, Western Wireless Corp., NextWave Telecom Inc., (with MCI Communications Corp.’s marketing muscle), U S West Inc., Nextel Communications Inc., Radiofone and myriad paging carriers.
Competition is good. Too much competition is unproductive.
Pocket may be the first of the PCS bankruptcy stories RCR covers, but it probably won’t be the last.
