The U.S. Court of Appeals for the District of Columbia Circuit ruling that the Federal Communications Commissions illegally repossessed NextWave Telecom’s personal communications services licenses has turned a once $17 billion windfall for the federal government, and much needed capacity for wireless carriers, into a three-ring circus. And like the shows under the big top, each ring is filled with a different act.
In the center ring is NextWave, now holding the reigns over a slew of wireless spectrum that it won during the FCC’s personal communications services auction in 1996 for a now bargain price of $4.7 billion. Entertaining in the peripheral rings are the FCC on the right, no pun towards the commission’s current leader, and the wireless industry on the left.
“This is one of the toughest issues the industry has ever faced,” said Elliot Hamilton, senior vice president and director of global wireless for the Strategis Group. “This will affect the whole industry’s strategy since there is no additional spectrum for the foreseeable future, which limits the growth opportunity.”
For NextWave the ruling reinforced its claim to the 90 PCS licenses it won in 1996. After winning the licenses, and paying a $470 million down payment, NextWave filed a Chapter 11 petition for reorganization in bankruptcy and defaulted on its first installment due to the FCC.
Following the circuit court announcement, NextWave Chairman Allen Salmasi noted the company was pleased with the decision and was ready to pay its debt to the FCC. Salmasi also noted the company had $90 million in debtor-in-possession financing to begin deployment of its wireless network.
But, even with its current ownership of the licenses and millions of dollars in hand, some see little chance for NextWave to build out its network. Frank Marsala, vice president of wireless research for Robertson Stephens, noted current economic conditions would work against a new wireless operator attempting to infiltrate the market.
“They’re not going to build out markets at this time, I don’t care what your business plan is,” Marsala said.
NextWave’s business plan calls for the company to build out its licenses covering more than 168 million potential customers, including licenses in 12 of the top 15 U.S. markets, and resell service to wireless carriers in need of additional capacity in those markets.
Even with its $90 million to re-start its buildout, many analysts claim NextWave will need between $3 billion and $6 billion to completely build out its network.
For now, the side acts in the show, the FCC and the wireless industry, have few options to consider. The two most talked about solutions involve the FCC appealing the court decision to the Supreme Court, or for all three parties involved to work out a settlement.
The most promising outcome appears to be some sort of settlement between the FCC, NextWave and the winners of the licenses during the re-auction. A settlement plan could call for the FCC to use some of the money from the re-auction to “buy off” NextWave’s interests in the licenses, allowing the re-auction winners to claim the licenses. Unfortunately, there is some debate as to how much authority the FCC has in making a financial payment to NextWave for a settlement.
“I’d have a lot of questions [about a potential settlement],” Rep. Fred Upton (R., Mich.), told the Wall Street Journal. Upton heads the House Telecommunications Subcommittee.
While conceding the court decision was a “major blow to the legal and regulatory foundation of our auction policy,” and going so far as stating “it’s a mess,” Powell said the commission planned to work non-stop to find a way to resolve the situation.
“I’d like to see a solution, one that really gets licenses in the market being used so consumers can get the benefits,” Powell said.
“A settlement needs to be done,” said Jeffrey Nelson, spokesman for Verizon Wireless. “While different parties have different goals to achieve, they are not mutually exclusive. If there are some basic goals that can be agreed to, a deal can be reached. Options need to be kept open.”
Verizon has the most to gain from a settlement since it was the big winner during the re-auction, picking up 113 licenses for nearly $9 billion.
“We obviously want the licenses, but we have leveraged them as a long-term strategic position and not a short-term solution,” Nelson added.
Verizon President and Chief Executive Officer Dennis Strigl said last week the FCC and NextWave needed to settle the situation as quickly as possible.
“Time is of the essence,” Strigl said during a keynote address at the Financial Times World Mobile Conference in London last week. “The FCC must move quickly to settle this matter and allocate the spectrum to the winning bidders so it can be put to use sooner rather than later. Part of the value we place on this spectrum, and the amount we are willing to pay, is attributed to the speed with which we are able to use it. We’ve waited long enough: the FCC and NextWave need to settle this.”
Most analysts also see some sort of settlement as the most logical conclusion.
“We expect that the FCC will settle with NextWave by offering a cash payout to simply walk away, so that bigger carriers that have already bought the licenses, like Verizon Wireless and AT&T Wireless, can carry on with business as usual,” said Todd Bernier, wireless analyst with Morningstar.com. “Otherwise, NextWave would need to hold on to the licenses because no secondary markets exist for transacting licenses, making the American consumer the big loser.”
According to Reuters, Verizon had held preliminary talks last week with NextWave about the licenses, though Verizon said they were not meeting and that the FCC and NextWave would have to work on a settlement.
While a settlement seems to have backing from some wireless operators, NextWave has said it is not looking to settle, and plans to go ahead with its network build out.
“We have had no talks with the FCC about a settlement, and we have no intention of starting talks because we want to build out the network,” Michael Wack, deputy general counsel for NextWave, told the Wall Street Journal. “I don’t know how much plainer we can be about that.”
Late last week, Wack again bolstered NextWave’s plans for network deployment.
“NextWave expects to make a major vendor and technical announcement soon, perhaps as early as this week,” Wack said.
Many see NextWave’s hard-line approach as its attempt to wiggle as much money as possible out of an eventual settlement, which while not making the U.S. treasury happy, would satisfy the company’s backers who have had to write off their investment in NextWave numerous times over the years.
“NextWave has always played a hard hand, and I expect that to continue,” Hamilton said.
The other road the FCC could follow would be to appeal the case to the Supreme Court. While the FCC has not decided whether to appeal the case, many in the industry support that option.
“I expect it to be appealed to the Supreme Court,” Hamilton said. “If the FCC appeals the decision, NextWave still can’t do anything until the appeal is ruled on.”
Conrad Bagne of Arctic Slope Regional Corp., managing member of Alaska Native Wireless and winner of 44 licenses during the re-auction earlier this year, told Reuters the company would support an FCC appeal of the decision and looked forward to it finally awarding the licenses.
AT&T Wireless, Alaska Native’s partner in the re-auction, sent a letter to the FCC noting that while a settlement with NextWave was a worthy goal, failure to pursue an appeal would undermine the auction process and affect the federal budget, which has come to depend on revenue generated from the auctions.
Unfortunately, if the FCC does decide to appeal, the li
censes could be in limbo for up to 2 years, a result the wireless industry would like to avoid.
“If these licenses get tied up for
some time, other auctions will get delayed. If they are not delayed, I will eat something disgusting,” Marsala offered.
Other winners of licenses during the re-auction are taking a wait-and-see approach. Leap Wireless International Inc., which won 22 licenses, said the ball is now in the FCC’s court and that it would wait to see what the commission’s next move is. Cingular Wireless, which won 79 licenses in conjunction with Salmon PCS L.L.C., did not want to comment on the decision, but noted it would extend the uncertainty surrounding the spectrum issue the wireless industry has been operating under for some time.
RCR Wireless News Washington reporter Heather Forsgren Weaver contributed to this article.
