NextWave Win Ripples Eerily Through Industry

Communications Today, June 27, 2001

By Marisa Torrieri, mtorrieri@pbimedia.com

NextWave's coup against the Federal Communications Commission last week not only sent winners of its seized loot into a furious rage, the industry also is piping mad and demanding changes in the way spectrum is allocated.

"The fact that NextWave went bankrupt after making this multi-billion dollar bid for spectrum says something negative about the due diligence process of the FCC," said Jeff Giesea, senior analyst with research group FierceWireless.

On Friday, the U.S. Court of Appeals for the District of Columbia ruled that the FCC violated the law by seizing and reselling wireless spectrum licenses that belonged to NextWave, which had bid $4.7 billion for those licenses in 1996 before defaulting on payments.

In 1998, after NextWave filed for bankruptcy protection, the FCC repossessed the licenses, even though a bankruptcy court ruled NextWave could retain the licenses. However, the U.S. Court of Appeals for the Second Circuit in New York reversed the ruling.

In November, the U.S. Appeals Court for the District of Columbia agreed to hear NextWave's appeal of the Second Circuit's ruling, but refused to delay the FCC's auction of the repossessed licenses.

In January, the FCC re-auctioned 1900 MHz licenses repossessed from NextWave. The top bidder in the auction was Verizon Wireless [VZ], which agreed to pay $8.8 billion for 133 licenses covering 150.7 million POPs.

Less than seven months later, the decision was reversed again.

Although Friday's ruling could be reversed again in a higher court, Giesea said a multi-million dollar settlement is likely between the new spectrum winners and NextWave.

"I think the biggest problem is uncertainty," Giesea said. "That's the most difficult thing for the industry to endure. Hopefully, a settlement will be swift."

Giesea said the whole NextWave situation could have been avoided if smaller companies weren't forced to pay money they didn't have for spectrum, in order to compete against more financially stable and larger carriers.

He also said the FCC is hypocritical when it says it is trying to reserve licenses for small entrepreneurs, but lets small entrepreneurs heavily financed by larger carriers compete.

The commission reserved 174 licenses for entrepreneurs with less than $125 million in each of the last two years and total assets of less than $500 million. However, the commission placed no limit on the financial support small companies could receive.

"I don't think we should give special treatment to small businesses at all," Giesea said, calling spectrum auctions a big joke. "The FCC reserves swaths of spectrum for these businesses and also offers favorable financing, allowing them to put down as little as 10 percent on their spectrum bids. The FCC has not exactly been a very good creditor."

Giesea suggested the FCC should structure the allocation of spectrum to minimize what he called politically driven behavior that does not serve the needs of consumers.

Summit Strategies Analyst Warren Wilson told Wireless Today that obtaining spectrum licenses in North America is just one of many problems and potential setbacks for carriers that want to roll out 3G services.

"3G is wrought with challenges," Wilson says. "Finding spectrum is one challenge, devising profitable services and applications and business models is another. The delays in rolling out 3G capabilities may end up working to carriers' advantage allowing them more time to assess the business model issues."

The Bottom Line

NextWave may have the last laugh after all if it manages to secure several million dollars in a settlement from carriers that want the spectrum licenses. >TK