It was the wild, wild West of wireless history.
After the breakup of AT&T, in which the company lost its cellular business, the Federal Communications Commission began allocating cellular licenses to the Baby Bells and others. One of those others was McCaw Cellular Communications Inc., a cable company owned by Craig McCaw. No one had heard of McCaw, and at the time his company was just a small player, but he and his team of young and ambitious managers soon became some of the most important people in the wireless industry. Over the span of a little more than a decade, McCaw Cellular grew from a mere bit character to a visionary taking center stage in the wireless frontier.
And then-in a symbolic and ironic twist of fate-Craig McCaw sold it all to AT&T.
Many say the sale validated everything wireless. Many say the sale, which at the time was the fifth-largest transaction in U.S. history-was the end of the beginnings of wireless and the beginning of the industry’s explosion.
For these reasons, RCR Wireless News chose the rise of McCaw Cellular-the nobody that became a wireless pioneer boasting operations in 114 markets nationwide with more than 2.5 million customers-as one of its 12 most important events in wireless history.
Wireless Wild West
In the early 1980s, the FCC began a comparative-hearing process to distribute spectrum for the new cellular technology that AT&T helped develop. At the time few companies made a try for the licenses, but McCaw Cellular entered the comparative hearings in full force, bidding for several large cities.
“It was like the wild and woolly West,” said Louis Gurman, now a partner at law firm Morrison & Foerster L.L.P. Gurman worked for the law firm that represented McCaw Cellular-then McCaw Communications Co.-from 1981 to 1989. “McCaw was one of the bigger of the not-so-big players.”
The comparative hearings required plenty of time and energy, with loads of paperwork involved, and eventually became too much work for the FCC to handle. Every company that wanted to get a hold of a cellular license had to fill out boxes and boxes of paperwork, covering every part of its plan to use the spectrum efficiently. Geographic and population coverage, forecast surveys, ability to meet demand and system expansion plans were all discussed, ad nauseam, during the hearings. It was quite a lot of work for a company to go through without owning even one cellular tower.
To alleviate the reams of paperwork, and the work behind it, the FCC decided to hold lotteries for the licenses. Most agree this wasn’t the most judicious way to allocate spectrum, but it was probably the most expeditious. (The FCC hadn’t yet hit on the idea of auctions, the most recent of which raised about $17 billion.)
The lotteries created a new and strange kind of business strategy. McCaw Cellular had to hunt down the winners and buy up their licenses in order to increase the company’s footprint.
“You had to get more coverage,” said Keith Grinstein, now vice chairman of Nextel International and founding partner of venture-capital firm Second Avenue Partners. Grinstein joined McCaw Cellular in 1988 as general counsel. He was 28 years old. “It was a pretty involved process.”
“Things got a lot more complicated as the lotteries went on because you had more and more people involved, and some of these settlements got a lot more massive,” Gurman said. “We were buying properties at a breakneck speed.”
One major stepping stone McCaw Cellular had to deal with was an FCC rule that required lottery winners to build cellular towers and equipment before they could sell their licenses. The company eventually used the rule to its advantage by partnering with the license holder.
“People wanted to just buy the license and turn around and sell it, and by forcing them to build, they needed McCaw to come in and help them build it and fund it. So they had to sell out part of it to us, and then ultimately we’d buy out the whole system,” Grinstein said. “It enabled McCaw to be able to cobble together these systems because people needed us. It isn’t intuitive how you go out and you build a cellular system.”
But McCaw Cellular also fought the ruling so it could more quickly acquire spectrum and avoid involved business deals. Gurman handled McCaw Cellular’s argument in the issue.
“At the end of the day, the business world demanded this process be rationalized,” Gurman said. “Banks didn’t necessarily want to deal with people who had absolutely no experience in the industry.”
The change came in the landmark Madison Cellular Telephone Co./McCaw Cellular FCC decision, which paved the way for license holders to sell their licenses without first building systems.
“Our biggest victories were usually regulatory in nature,” Grinstein said.
While McCaw Cellular’s legal team was untangling the regulatory issues around the lottery, other employees were striking deals with lottery winners who had no experience in the industry. Bob Ratliffe, now vice president of Eagle River Inc., started at McCaw Cellular in 1986, when the company was only about 90 employees strong. Ratliffe’s job at that time was to jet around the country and buy up lottery winners’ licenses.
“We were running around the countryside like crazy people,” he said. “We were running around, long and hard.”
Some of the more peculiar lottery winners included the owner of a beauty salon, a group of dentists and a man living in a mobile home deep in the Oregon woods who was interested in model trains. Former president Bill Clinton and his wife Hillary made close to $50,000 on the sale of their piece of a cellular partnership.
One group of lottery winners in the South presented special difficulties, Ratliffe said. The first man he met with expected to sell his license for only $100,000, but during a dinner meeting Ratliffe explained that he was prepared to pay seven times that.
“He says, `I’ll sign that deal right now, and I’ll buy drinks for the house,”‘ Ratliffe recounted. “I knew if I didn’t do the deal with him … I was going to get a lawsuit from this guy if I signed him up for the $100,000.”
Other lottery winners in the same group demanded almost double the agreed-upon $700,000, Ratliffe said-a number he was not prepared to pay.
“I said, `OK. Well, have a nice day. You’re going to be minority holders in this for the rest of your lives,”‘ he said. “And for all I know they’re still minority holders of those licenses.”
Growing pains
As McCaw Cellular continued to buy up licenses for its still far-away nationwide network, the cost of its growth skyrocketed and it garnered incredible amounts of debt. The prices of licenses rose from less than $5 per pop in the beginning days to $250 per pop in 1989. McCaw Cellular raised desperately needed funds from a variety of sources, including AT&T and the now-infamous financier Michael Milken. However, when McCaw Cellular made its initial public offering in 1987, it received a welcome cash injection. According to O. Casey Corr’s book, “Money from Thin Air: The Story of Craig McCaw, the Visionary who Invented the Cell Phone Industry, and His Next Billion-Dollar Idea,” published by Crown Business last year, the McCaw Cellular IPO raised $2.39 billion, the most ever by a northwest company. In comparison, the Microsoft Corp. IPO a year earlier brought in only $59 million.
At the time of its IPO, McCaw Cellular had licenses covering 37 million people in 94 markets, more than twice that of its nearest competitor.
The offering gave McCaw Cellular the cash it needed for its biggest move to date, the hostile takeover of Lin Broadcasting Corp. in 1989. Lin held licenses covering 25 million cellular pops that McCaw Cellular needed for a nationwide network.
“McCaw had a lot of territory, but it didn’t have Los Angeles, New York, Dallas,
Philadelphia,” Grinstein said. “We were empty in the biggest of the big cities.”
McCaw Cellular saw exactly what it needed in Lin.
“We had to get acquired, or acquire Lin,” Grinstein said.
But one of McCaw Cellular’s major competitors, BellSouth Corp., one of the Baby Bells the company had been fighting against tooth and nail, also set its sights on Lin. The ensuing battle was furious.
“We stared down BellSouth in that transaction and acquired some major metropolitan areas as a result,” said John Chapple, chairman and chief executive officer of Nextel Partners Inc. Chapple joined McCaw Cellular in 1988 as executive vice president of operations at age 34. “It was a multibillion-dollar transaction. I guess we felt God was on our side.”
“In hindsight, it was absolutely essential,” Grinstein said. “Once that deal was done, the company had a lot of debt, but we also had all the footprint we could possibly want.”
According to RCR Wireless News’ 1994 Top 20 Cellular Carriers list, McCaw and Lin combined boasted more than 3 million cellular subscribers, about 1 million more than its two nearest competitors, Southwestern Bell Mobile Systems and BellSouth Cellular.
The cost for all those customers was substantial. Before the $3.4 billion bid for Lin, McCaw labored under $1.8 billion worth of debt, with interest payments amounting to $200 million a year. After the Lin deal, the company’s long-term debt was about $5.2 billion, according to Corr’s book.
“There were definitely days when you were very, very concerned,” Grinstein said of the company’s financial situation.
However, Chapple said many at the company had faith in the future of wireless-such strong faith that they could look past the company’s ponderous debt to the bright and profitable horizon.
“We never felt that way (burdened with debt),” he said. “There was, I would say, this almost religious zealotry that we were heading in the right direction, that we would be successful. And, as it turned out, I think it’s fair to say that our expectations-in terms of how fast we would grow and the industry would grow-it turns out even our expectations were conservative.”
McCaw Cellular was full of the young and the ambitious, those who believed in wireless and its promising future.
“You don’t realize how young everybody is,” Grinstein said. “At that point, 40 (years old) seemed like people with a lot of experience.”
Grinstein said even Craig McCaw, the aloof owner of the company, was younger than most chief executives at the time.
“When I walked into the conference room to meet him, there were two or three people there,” Grinstein said of his job interview with McCaw Cellular. “I began to walk toward the oldest person in the room, having never meet Craig before, and he tapped me on the shoulder and said, `I’m Craig McCaw.’ And he was clearly amused by the fact that I was headed toward the wrong person.”
Craig McCaw, the leader and driving force behind McCaw Cellular, was only 37 years old at the time of his company’s IPO. His unique value system and philosophy, along with the generous freedom he gave his employees, were the driving forces behind the company’s nontraditional culture.
“The first day that the weather really kind of turns nice in the spring, Craig would almost always close the office at headquarters,” Ratliffe said, remembering McCaw would say, `”It’s just too nice a day to be in here. Get out. Get outside and enjoy the day.’
“We just didn’t have a Microsoft kind of culture, where it was 24-seven,” Ratliffe said. “We never had a really big-company feel.”
Chapple compared the company’s culture to the Seattle office building McCaw Cellular moved into shortly after its IPO. The building was open and spacious, allowing employees to see one another.
“What I think was important to Craig in actually designing that office was that it had an open, interactive quality, which is certainly analogous to his vision for cellular,” Chapple said. “It was very much an open, free-flowing office design.”
The company’s unique offices also matched its unique approach to business.
“If there were certainly words that you’d put a circle and a line through, hierarchy was one of them. Hierarchy and bureaucracy were certainly dirty words” at McCaw Cellular, Chapple said. “It’s fair to say that our orientation wasn’t to replicate the traditional telecom or telephone mentality. Craig used to joke and call us renegades.”
Many members of McCaw Cellular’s old management vividly remember the company’s guidelines, which included a note from Craig McCaw himself. In part they read, “Keep Our Promises: It builds precious credibility; Run Lean: But spend wisely to achieve our goals and values; and Be Humble: It helps keep an open mind, a caring attitude and respect for others.”
The last value made the strongest impression on McCaw’s employees.
“We were constantly reminding ourselves: Don’t get too full of ourselves with a little success,” Chapple said. “Stay hungry.”
“We had this culture that was very humble,” Ratliffe said.
And the message has stayed with many McCaw executives through today. Chapple said the phrase “work smart while remaining humble” is on all the literature at Nextel Partners.
“You don’t find too many companies that champion humility as one of their core values. And that’s Craig McCaw,” Chapple said.
But who exactly is Craig McCaw, the wireless visionary behind one of the most profitable companies in the industry? Even those who have worked with him for more than 20 years still wonder.
The man behind McCaw
“Craig is not a person who you would, at first glance, pick out as chief executive,” said Corr, a former business writer for the Seattle Times and author of “Money from Thin Air.” “He’s just a guy that would just sit off to the side and let others do the talking. … He’s easily overlooked until you engage him in a conversation about one of these key business interests and that’s when you start noticing the intensity in his eyes, the incredible focus in the way he directs his mind to a topic, and-this comes out on more time spent with him-the phenomenal competitiveness he has. He’s one of the most unique chief executives, I think, of the last hundred years.”
And while McCaw’s company rocketed into the forefront of the wireless industry, Corr said Craig McCaw preferred to stay out of the limelight.
“In terms of his style, he prefers to be the guy that’s not on the cover of the magazines,” he said. “And he doesn’t like to give interviews. In fact, he told me he doesn’t like to read stories about him. … He’s a challenging interview.”
According to Ratliffe, Craig McCaw is on vacation and was unavailable for interview for this story.
Corr said McCaw doesn’t even want to discuss the most trivial aspects of his personal life. When asked about his typical day, McCaw “kinda squirmed and said, `That’s a personal question.’ And he looked at Bob (Ratliffe), you know, for help, and Bob said, `Answer the question. I’d like to know that, too,’ ” Corr said.
Former McCaw Cellular employees, many of who still work for Craig McCaw in some capacity, see him as a wireless visionary.
“Craig was really involved in the 60,000-foot level,” Ratliffe said, while everyone else was at the 30,000-foot level.
“I remember walking into Craig’s office one day,” Ratliffe said. “He was sitting with his elbows on the table and his chin rested on his hands. I said, `What are you doing?’ He looked at me and he said, `I’m thinking. You should try it.’ He was a guy who was thinking about strategic direction, not chapter and verse.”
“He’s a visionary leader who sees things that us mere mortals don’t see,” Chapple said. “But he also understands how important it is to have a company where there is true mutual respect among the people in
it.”
While many don’t understand him personally, most who know Craig McCaw agree that, if anything, he’s smart.
“Craig prides himself on staying focused-that’s one of his favorite words-on absolutely the essentials of what he needs to know. So if you come in and just want to c
hit chat and talk about things like that, he’s not interested in what kind of couch he has in his office,” Corr said. “This is something he learned as a history student at Stanford. You want to know the history about individuals and companies so you can anticipate and strategize around what they know, how they customarily react and how they look at the future. It’s pretty smart.”
Craig McCaw’s intelligence, along with his values and his competitiveness, may explain the reasoning behind his most important and agonizing decision: to sell off the company he had built from “thin air” to Ma Bell itself.
The sale
“Craig, he anguished over it right until the last minute,” Ratliffe said. “He didn’t really want to sell it. And it was a terribly painful thing for him. He had built the business from nothing. … These people were the people he took care of, and he laid awake at night thinking about them. And it was devastating, quite honestly, for Craig.”
“I think it was very emotional, I think it was a very tough call,” Grinstein said. “I’m sure that for Craig it was like selling a child. I mean, these were his friends. … I think that selling it was a very emotional decision.”
But it was the right one to make, former McCaw Cellular employees agree.
“We really came into this not to surrender by any means, but to talk about, `How do you compete with the rural Bell companies, who were making $12 billion a year?”‘ Ratliffe said, adding that McCaw Cellular was about to turn its first profit just before the AT&T sale. “We had to have a broader alliance. We had to have a big name behind us.”
Ratliffe said many McCaw Cellular employees felt like “if you don’t do this, you’ll be in shareholder lawsuits for the rest of your life, and so you kinda have to do it.”
“I think that financially for him (Craig McCaw), financially for the shareholders, financially for the bondholders, financially for all the partners that were in there from day one, I think it was just a great deal,” Grinstein said.
But for the employees, it marked the end of being renegades, of standing up to the Baby Bells in the wild West.
“And so when we left it was sad,” Ratliffe said. “It was remorseful when we did the AT&T. You just kind of went, `Jeez, that can’t have happened.”‘
But beyond the feelings and the money involved, the sale represented a giant step for the wireless industry.
“There was tremendous symbolism in that sale because Ma Bell itself, which had given up cellular in the divestiture in 1984, implicitly acknowledged the mistake it had made 10 years earlier by paying what some thought was a very high price to get back into cellular,” Corr said. “So AT&T-which remained the big kahoona, the most prestigious telecom company in the world-validated cellular by making its purchase.
“If there was any doubt that cellular, or wireless as it’s more commonly called, was absolutely strategic to the future of telecom, that was dispelled by AT&T’s purchase,” Corr said. “It was really a moment where people thought, `Well, it’s clear now that a telecom has to have a wireless component.’ Once AT&T-the last-came in and said, `On second thought, we’d better have this,’ it showed that everybody needed to have it.”
Craig McCaw left the company soon after the sale, and many of his former employees left, too. Most say AT&T was a fine company, but it just wasn’t like McCaw Cellular. But the McCaw group hasn’t faded from the scene-in fact, most of the company’s executives have gone on to become stars in their own right.
“If you look at the McCaw alumni, it is amazing how significant they are today,” Corr said.
Various members of the McCaw team, including Craig McCaw, are heavily involved in a variety of wireless companies, including XO Communications Inc., Nextel Communications Inc., Nextel Partners, Eagle River, Teledesic, VoiceStream Wireless Corp. and Ignition Corp.
“Most of us aren’t in this anymore necessarily for the ordinary income, we wanted to do it because it was fun, and we like working together,” Ratliffe said.
“If you fast forward to where we are today and you look back, you say, `God, we were all so young, we really didn’t know what we were doing, but we were all working so hard-it’s very special,” Grinstein said.
