WASHINGTON-Designated entities accounted for a historically low percentage of the government’s multibillion-dollar take in the recently completed advanced wireless services auction, even though they made up more than half of the winning bidders.
Indeed, an independent panel of the Small Business Administration recommended that the Federal Communications Commission analyze the impact on small businesses and explore regulatory alternatives before making any new changes to the DE bidding program. The commission in April sought further comment on options to prevent the DE program from being gamed by major cell-phone carriers and others following approval of controversial rule revisions extending DE license sale restrictions from five to 10 years and denying incentives to DEs that resell or lease more than 50 percent of their spectrum capacity.
The resurgence of the DE controversy at the FCC, a spat that reached fever pitch in the spring, comes at a time when the agency faces a legal challenge to new DE guidelines in the 3rd U.S. Circuit Court of Appeals in Philadelphia. The lawsuit was brought by Council Tree, Bethel Native Corp. and the Minority Media and Telecommunications Council. The FCC and quite likely top cellular operators are expected to file reply briefs Oct. 13. The appeal has the potential to overturn Auction 66 results.
With DEs eligible for bidding credits up to 25 percent, concerns have been raised by Democratic FCC members Jonathan Adelstein and Michael Copps and others about national wireless operators and others obtaining discounted spectrum through partnerships with small-business bidding applicants in past auctions. In July, a federal court in New York approved a $130 million settlement of a DE auction fraud lawsuit brought by the Justice Department against Wall Street money manager Mario Gabelli and 38 affiliated companies.
Noting President Bush’s 2002 executive order directing federal agencies to implement policies protecting small businesses when writing new rules and regulations, the SBA complained that the FCC’s latest DE rulemaking “does not contain any concrete proposal on how to handle the balance between promoting the involvement of designated entities and preventing unjust enrichment, but consists of a series of questions on possible action that the commission could take. … A series of questions does not serve the purpose of adequate public comment and notice.”
Overall, 57 of the 104 winning AWS bidders were DEs, most of them rural telephone companies.
But, according to Council Tree, DEs represented only 4 percent ($551 million) of the net total $13.7 billion bid for AWS licenses. Council Tree said the nation’s top four national cellular bidders-T-Mobile USA Inc., Verizon Wireless, Sprint Nextel Corp. (with cable TV operators) and Cingular Wireless L.L.C.-accounted for 78 percent, or $10.7 billion, of Auction 66 net winning bids. Other non-DE bidders filled in the remaining 18 percent ($2.4 billion) of net winning bids in the AWS auction.
In contrast, Council Tree said DEs won an average of 74 percent of wireless licenses by value (percentage of winning bids) in the six major wireless license auctions in which DE preferences were offered in the past decade. The FCC in the mid-1990s offered a variety of incentives and mechanisms to encourage greater diversity in the wireless industry in keeping with a congressional mandate. But Council Tree said the agency and U.S. lawmakers have since rolled back the DE program. One factor influencing that trend was the Supreme Court’s 1995 decision curtailing federal government affirmative-action programs.
“Contrary to this history of affirmative commission efforts to see that designated entities have the meaningful opportunity to become … licensees through competitive bidding, recent commission action has done grave damage to the ability of designated entities to succeed,” said Council Tree.
Before the AWS auction, Council Tree pointed out, the top five U.S. wireless operators had 90 percent of subscribers, 91 percent of cellular spectrum and 92 percent of industry revenue. “In Auction 66, this domination continued,” said Council Tree. The group has advocated rehabilitating DE rules to enable small businesses to attract capital and industry expertise, while limiting the ability of large cellular carriers to team up with DEs.
CTIA recommended the FCC leave the new DE changes intact because they are sufficient to deter DE program abuse.
“The commission should not adopt additional rules or expand the scope of existing rules, which could lead to confusion and further burdens on the industry and on the commission’s resources,” CTIA stated. “However, should the commission determine that additional modifications to the DE rules are necessary, it should adopt rules that are non-discriminatory, it should eschew rules that favor one type of carrier over another, and it should not adopt a net worth test.”
Leap Wireless International Inc., which helped its own cause by spending $710 million on 99 licenses and backing a DE that picked up a Great Lakes regional license for $365 million, said any new rules for future auctions should address “the core problem of spectrum concentration in the initial dissemination of CMRS (commercial mobile radio services) spectrum licenses.”
Paging Systems Inc., which obtained licenses in previous FCC auctions, highlighted a different problem: commonly controlled applicants. According to PSI, commonly controlled applicants in Auctions 57 and 61 executed bidding strategies based on prior agreements that gave them advantages over single bidders. “Even if the commonly controlled entities do not bid in the same market, there is potential for collusive activity,” said PSI. “The focus is and has always been in connection the commission’s competitive bidding rules that collusive conduct is detrimental not only to the competitiveness and integrity of the auction itself, but equally important, to the post-auction market for service to the public. It must be assumed that commonly controlled entities with the same management will not compete with each other in the marketplace.”
