Wireless Spectrum Auctions

UBS Warburg said in research note Tues. that if Cingular and VoiceStream were to merge, other national operators such as Sprint PCS, Nextel and AT&T Wireless also would benefit. Wall St. Journal had reported last week that VoiceStream was in early talks with Cingular about possible merger. On regulatory front, brokerage said first merger application made after FCC’s wireless spectrum capped sunsets in Jan. was likely to pass antitrust review more easily than subsequent requests. “Moving from 6 carriers to 5 is simply not as big of a loss to the competitive landscape as a move from 5 to 4,” firm said. “At a certain point, consumer advocates will call into question the point of the original PCS auctions should industry consolidation get taken too far.” UBS Warburg said it expected FCC would adopt procedures and rules for evaluating wireless mergers that were similar to those in place at Justice Dept. It said it expected rules to be “issue-oriented and less formulaic in nature.” Point will be to focus on maintaining wireless competition in market, note said. Report said with one fewer competitor, customer turnover or “churn” rates would be expected to decrease industrywide. UBS Warburg said that with one fewer rivals, remaining carriers also would have to spend less on advertising to keep high profile in industry. It estimated national operators spend $50 to $75 per gross subscriber addition for ads and promotions. “However, we believe advertising spending on an absolute dollar basis could decrease as a result of consolidation, because less spending will be required to advertise one brand versus 2,” report said. Wireless consolidation could yield capital expenditure savings, UBS Warburg said, citing areas such as capacity additions, footprint expansions, network upgrades. In market such as Boston, VoiceStream and Cingular have networks, although Cingular “may be hitting capacity limits in the market” given its high penetration rate because it was incumbent operator. Cingular also will have to carve out more spectrum to overlay its TDMA network with GSM, note said. VoiceStream has excess capacity in that market because it is new operator with all-digital network, firm said. “A combination would save Cingular the trouble of upgrading its network to GSM since VoiceStream already deployed the technology.”

Congressional Budget Office (CBO), in revised economic outlook, said Tues. that recent repeal by Congress of statutory auction deadlines would mean lower revenue projections from proceeds in 2003-2005 but higher in 2006 and 2007. In June, Congress delayed bidding on all but C- and D- block licenses of lower 700 MHz band, postponing indefinitely rest of auction for upper and lowers bands of that spectrum. (Auction for C- and D-block licenses began Tues.) Law, which President Bush signed after quick passage in both chambers (CD June 20 p1), also put off indefinitely auctions for licenses at 1.7 GHz and 2.1 GHz, which had been under consideration for advanced wireless services. “Although the law is expected to have little net effect over the 2003-2012 period (increasing offsetting receipts by less than $1 billion), CBO estimates that it will change the timing and amount of offsetting receipts likely to be collected over the next 5 years,” report said. Compared with March baseline, CBO projected $3 billion less in auction proceeds in 2003 and $1 billion less in 2005, with additional $4 billion combined in 2006 and 2007. CBO said budget deficit expected for this year overall had grown and surpluses that had been anticipated for coming decade have shrunk under new baseline projections.

FCC Wireless Bureau dismissed as moot requests by Central Wyo. College (CWC) and Idaho State Board of Education (SBE) for exemption from auction of lower 700 MHz licenses because they were noncommercial educational (NCE) broadcasters. Auction of C- and D-blocks of lower 700 MHz band is set to start today (Tues.) after Congress passed legislation indefinitely postponing June 19 start of lower and upper 700 MHz band auctions, with exception of smaller licenses in Ch. 52-59 spectrum. In Aug. 23 letter from Margaret Wiener, chief of bureau’s Auctions & Industry Analysis Div., agency turned down requests by CWC and SBE that their short-form applications to participate in auction be accepted and processed outside of FCC’s competitive bidding process. CWC and SBE, state agencies that operate public TV stations, also had sought waiver of requirement that they submit certain financial information to establish their eligibility for bidding credits. In June, U.S. Appeals Court, D.C., turned down request by same state agencies for emergency stay of auction of licenses at issue in FCC petition. They argued they should have access to spectrum without having to undergo competitive bidding in light of D.C. Circuit’s ruling last year in National Public Radio v. FCC. In that decision, court decided that denial of auction authority to FCC was based on noncommercial educational attributes of station that would receive license and not where it operated in spectrum. CWC and SBE cited part of Sec. 309(j) of Communications Act, which indicated FCC’s competitive bidding authority shouldn’t apply to licenses issued for NCEs. In June order, FCC decided NCEs weren’t eligible to apply for initial licenses for new services in lower 700 MHz band, saying that allowing such licensees were allowed to apply for spectrum in band would create uncertainty about what licenses would be available for auction. Bureau letter Mon. said CWC and SBE claims were moot as result of earlier FCC decision that NCEs weren’t eligible to apply for initial licenses in that band. Because CWC and SBE as NCEs weren’t eligible to apply for those initial licenses, Bureau said FCC didn’t have to consider whether Sec. 309(j) auction exemption would apply. Separately, Bureau turned down request for emergency waiver by Coleman County (Tex.) Telecommunications that FCC waive upfront payment deadline for lower 700 MHz auction because its investment broker had failed to transfer funds to FCC in time. Coleman said it had exercised due diligence in making arrangements for wire transfer of funds. Bureau said it was unpersuaded that Coleman laid out circumstances warranting waiver of deadline and that carrier had enough time to meet it. “The Commission has repeatedly cautioned auction participants regarding the importance of planning ahead to account for unforeseen last-minute difficulties,” it said. Coleman also argued that because Bureau had decided to allow qualified bidders not departing from lower 700 MHz auction to augment their upfront payments, that meant deadline was extended for nonqualified bidders. “The Bureau’s actions to maximize competition within the pool of qualified bidders do not alter the limitations the Auction Reform Act imposes on which entities are eligible to participate” in remaining 700 MHz auction, FCC said.

Legg Mason said in research note Wed. that while govt. won in 70% of cases before U.S. Supreme Court, there were some vulnerabilities in govt.’s legal argument in NextWave case that “could tip the balance in NextWave’s favor.” Firm also said it appeared unlikely that winners of Jan. 2001 NextWave re-auction ultimately would have to pay for spectrum at total $16 billion set in that bidding. Pending high court review, FCC has refunded all but 15% of deposits paid by winning bidders, who would be required to pay full amount they bid on spectrum if court reversed U.S. Appeals Court, D.C., decision that had ruled against Commission’s cancellation of NextWave licenses for missed payment. Meanwhile, Wall St. Journal editorial Wed. took FCC to task over “ongoing NextWave spectrum fiasco,” arguing Commission decision to not release re-auction winners from their bid obligations “is paying havoc with an industry already in chaos.” Editorial said Verizon Wireless had $8.7 billion liability, “money it can’t effectively touch because of the 10-day future payment obligation.” It said FCC booked $4.8 billion that NextWave bid on those PCS licenses in federal budget in 1997 and then booked $16 billion from 2001 re- auction, as well, minus money lost from NextWave. “Chairman Michael Powell keeps promising a telecom revival, but this FCC money-grubbing doesn’t help,” editorial said. “The re- auction is tying up much-needed investment capital.” Journal referred to recent study by American Enterprise Institute economist Gregory Sidak that concluded that if released, $16 billion in NextWave re-auction overhang would increase gross domestic product by $19-$52 billion. Separately, Legg Mason cited mounting pressure for FCC to remove $16 billion re- auction overhang. CTIA and group of economists have urged FCC to cancel auction or allow winning bidders to opt out of obligations, citing drag on carrier finances. “Although the FCC may not act until after the Supreme Court decision, we believe that the FCC will find it increasingly difficult to stand by an abstract commitment to the integrity of the auction process in the face of mounting claims that such a position stands in the way of contributing to economic recovery,” Legg Mason said. Analyst report said it believed re-auction winners ultimately wouldn’t be compelled to pay prices set in bidding. Among vulnerabilities in arguments in case govt. has laid out to Supreme Court, Legg Mason cited: (1) Congress has carved out exceptions for other govt. actions taken to promote regulatory objectives, but not for spectrum auctions. (2) Justices may follow reasoning of D.C. Circuit, which focused on Sec. 525 of U.S. Bankruptcy Code, which stipulates federal agency can’t cancel license solely for nonpayment of debt dischargeable in bankruptcy. “It’s difficult to argue that the FCC cancelled the license for a reason other than solely because of NextWave’s failure to pay a dischargeable debt.” (3) High court could conclude that FCC created tension between Communications Act and bankruptcy law “by permitting the C-block auction winners to pay off unguaranteed debts in installments over 10 years.” However, report said that among factors that weighed in govt.’s favor in Supreme Court case was strong argument that D.C. Circuit’s decision placed Sec. 525 in conflict with Communications Act provision directing FCC to allocate spectrum by auction. Sidak study, set for Mon. release, is expected to say economic stimulus of releasing carriers from re-auction would free $12-$38 billion by end of 2005, date by which NextWave- related litigation is expected to play out if FCC wins at Supreme Court because of outstanding issues that would be taken up at D.C. Circuit.

FCC Wireless Bureau requested comment on waiver request by Qualcomm to use auction discount voucher (ADV) to pay off existing auction debt instead of future bid obligations. In June 2000, FCC awarded Qualcomm $125 million voucher that could be used in any spectrum auction for up to 3 years. Commission did so as result of 1999 U.S. Appeals Court, D.C., decision that directed FCC to designate company under agency’s pioneer’s preference program. Qualcomm sued FCC in 1992 after it was denied pioneer’s preference for developing CDMA technology for PCS systems. In its waiver request, Qualcomm said it had had limited opportunity to use ADV, now valued at $114 million. Voucher expires in June 2003. Qualcomm asked that FCC waive any requirement that voucher be used in auctions occurring after June 8, 2000, and allow voucher to be used to pay debt owed by licensees using CDMA technology in 3 auctions. Those auctions are No. 5, PCS C- block licenses; No. 10, C-block re-auction; and No. 11, PCS licenses for D-, E- and F-blocks. In NextWave re-auction in Jan. 2001, Leap Wireless reached agreement with Qualcomm to provide $125 million in financing to support its bidding by transferring ADV to Leap. Those licenses have since been returned to NextWave after U.S. Appeals Court, D.C., ruling overturned results of re-auction. In Aug. 1 waiver request, Qualcomm told FCC that original ADV order contained assumption that it would be used in what was then upcoming 700 MHz auction. “It is noteworthy that the ADV order does not reject use of the ADV in previous auction, i.e., for installment payments,” Qualcomm said. It said value of voucher now was $114 million because it transferred $10.8 million of voucher to Summit Wireless for payment on Jackson, Miss., license that wasn’t in dispute as part of NextWave re- auction. One caveat of voucher is that it be used to build system that uses CDMA technology on which Qualcomm’s pioneer’s preference is based. Of 13 auctions since June 2000, only NextWave re-auction involved licenses for which CDMA technology would be appropriate, Qualcomm said. Smaller 700 MHz auction that starts Aug. 27, after larger block of bidding that had been set to start June 19 was delayed indefinitely by Congress, doesn’t appear to involve bidders who will use CDMA, Qualcomm said. “Finally, the Supreme Court’s acceptance of certiorari in NextWave v. FCC places the spectrum in Auction 35 in a legal limbo that is not likely to be resolved for several years,” Qualcomm said. “Thus, the opportunities for use of the ADV anticipated by Qualcomm and the Commission in early 2000 have simply not come to fruition.” Since June 2000, financial challenges facing wireless sector also have increased substantially, company said. Ability to use ADV to help “undercapitalized companies” retire past auction debt would put voucher to good use, it said. Qualcomm said it had no specific carrier in mind, but had been approached by several. Bureau is seeking comments by Aug. 30, with replies due Sept. 9.

Amid dire warnings of economic fallout for U.S. wireless industry, 14 economists called on FCC Chmn. Powell Thurs. to cancel bids made in Jan. 2001 NextWave re-auction or to release winning bidders from financial obligations. “In short, the FCC’s current policy toward Auction 35 is a negative stimulus package for a wireless industry desperately in need of a recovery,” they wrote. Letter came within days of similar missive from CTIA Pres. Tom Wheeler, who urged Commission to pull pending NextWave re-auction obligations of carriers out of “legal limbo” (CD Aug 15 p5). Verizon Wireless and other carriers have urged FCC to return small portion of deposits from NextWave re-auction that brought in $16 billion in bids and to release carriers from bid obligations. FCC hasn’t taken that course pending U.S. Supreme Court case, for which oral argument will be heard in Oct. Commission is challenging U.S. Appeals Court, D.C., ruling that led to return of disputed PCS licenses to NextWave and overturned results of re-auction. Carriers have complained overhang of those bid obligations as litigation plays out has created credit problems and financial uncertainty because they could be obligated to pay for spectrum if govt. ultimately prevailed in court on issue. Letter from economists, some of whom are wireless industry consultants, told FCC that costs of policy outweighed benefits. That worsens financial problems already facing industry, they said, particularly because economy has faltered since bidding closed in Jan. 2001. Equipment makers have laid off “tens of thousands” of workers and have lost substantial market capitalization, they said. Even if FCC won Supreme Court case and prevailed in further litigation over licenses, Treasury Dept. isn’t likely to collect winning bids until 2005 at earliest, economists said. That would leave carriers without access to spectrum on which they bid, letter said. Problem is that winning bidders have to treat obligations involving licenses as contingent liabilities, without being able to use spectrum, economists said. That has raised cost of capital for carriers, hurt credit ratings and led to conclusions by investment bankers that auction had increased uncertainty in sector. “The Commission has said that its current policy toward Auction 35 seeks to ‘protect the integrity’ of the spectrum auction process,” letter said. “We, however, believe that the opposite is already occurring. The Commission increases uncertainty in the wireless market if it holds carriers accountable for winning bids for licenses that the agency cannot deliver.” Letter was signed by Peter Cramton, U. of Md.; Robert Crandall, Brookings Institution; Robert Hahn, AEI-Brookings Joint Center for Regulatory Studies; Robert Harris and David Teece, U. of Cal., Berkeley; Jerry Hausman and Robert Schmalensee, Mass. Institute of Technology; Thomas Hazlett, Manhattan Institute; Douglas Lichtman, U. of Chicago; Paul MacAvoy, Yale U.; Gregory Sidak, American Enterprise Institute; Hal Singer, Criterion Economics; Vernon Smith, George Mason U.; William Taylor, National Economic Research Assoc.

In reply brief at U.S. Supreme Court filed late Mon., FCC disagreed with what it called NextWave’s efforts to treat regulatory license conditions as dischargeable debts under U.S. Bankruptcy Code, saying that would “inappropriately convert” Sec. 525 of Code into barrier to regulatory goals. High court is set to hear oral argument Oct. 8 on FCC’s appeal of U.S. Appeals Court, D.C., ruling that overturned results of Jan. 2001 re-auction of NextWave’s PCS licenses and returned spectrum to bankrupt carrier. Commission took exception to contention raised by Urban Comm, another bankrupt C-block bidder, that it altered its position as market conditions changed. FCC stressed Sec. 525 of U.S. Bankruptcy Code doesn’t bar agencies from ever cancelling licenses of debtor. Rather, Sec. 525 prohibits govt. agencies from revoking licenses of debtor or bankrupt entity solely because they haven’t paid dischargeable debt, Commission argued. FCC told court that all that Sec. 525 bars agencies from doing is revoking licenses only because debtor has not paid debt that is dischargeable under Bankruptcy Code. Instead, FCC said it cancelled NextWave’s licenses for regulatory reasons, specifically its assessment of public interest. “Nor were the licenses cancelled because respondents failed to pay a debt ’that is dischargeable’ in bankruptcy,'” FCC said. “The full and timely payment condition is a critical regulatory term of FCC licenses. It is not a debt, let alone dischargeable in bankruptcy.” Commission had cancelled NextWave licenses after carrier failed to make installment payment. NextWave had told Supreme Court in June that Commission’s revocation of its PCS licenses for missed payment was “obvious” Bankruptcy Code violation, because Code doesn’t contain regulatory exception for FCC. But Commission countered Mon. that NextWave doesn’t explain “how the auction system can be reconciled with a regime in which a winning bidder can have its bid altered in bankruptcy, or hoard FCC licenses indefinitely in the hope that the market will eventually support its bid.” Agency stressed Sec. 309(j) of Communications Act requires prompt utilization of spectrum without administrative or judicial delays and that Bankruptcy Code “generally avoids intrusion on agency regulatory activities.” FCC argued that it cancelled NextWave’s licenses partly because it failed to make payment, but that this wasn’t only reason. “It also occurred because the FCC, after considering respondents’ circumstances, concluded that further relaxation of the regulatory conditions of full and timely payment would injure the public interest,” FCC said. Alaska Native Wireless filed friend-of-court brief that echoed public interest spectrum issues raised by Commission. “NextWave focuses only on its own interest in reaping a perceived windfall in order to solve its financial woes, all the while seeking to blame the FCC for those problems and its inability to yet provide service to a single customer with the spectrum,” said Arctic Slope, which, along with AT&T Wireless, is among backers of Alaska Native Wireless (ANW). ANW was 2nd largest bidder in NextWave re-auction behind Verizon Wireless. It argued that NextWave shouldn’t have had expectation that it would be able to keep licenses without meeting all regulatory obligations.

Wireless equipment-makers and carriers stressed to FCC that more than 90 MHz earmarked in recent NTIA report for 3G is needed by industry, with several urging policy-makers to find way to clear 1755-1770 MHz now used by Defense Dept. In Bush Administration 3G viability assessment released last month, DoD agreed to clear most of 1710-1755 MHz but said freeing 1755-1770 MHz wasn’t tenable by 2008. NTIA Dir. Nancy Victory said this means that last 15 MHz is off table for “foreseeable future” (CD July 24 p3). But with varying degrees of urgency, numerous commenters told FCC decision is needed on pairing 1755-1770 MHz with block of spectrum in 2.1 GHz band, such as 2155-2170 MHz. Meanwhile, other industry segments that would be affected by relocations to make way for advanced wireless services at 1.7 GHz and 2.1 GHz also made case to FCC. NAB and Assn. Maximum Service TV (MSTV) urged that relocation of certain DoD operations to Broadcast Auxiliary Service spectrum at 2025-2110 MHz not diminish BAS operations. Mobile satellite service (MSS) operators cautioned against clearing entire 2110-2170 MHz for 3G services or using 1990-2025 MHz as relocation spectrum for displaced MDS operators.

Qualified bidders for Aug. 27 auction of licenses in lower 700 MHz band made $64.5 million in upfront payments, down from nearly $154 million before Congress scaled back auction and allowed participants to opt out of competition for licenses, FCC said late Wed. Earlier this summer, Congress delayed June 19 date for upper and lower 700 MHz auctions. Bidding for smaller C- and B-block licenses in lower band was delayed until at least Aug. 19, with FCC ultimately setting Aug. 27 date for that remaining auction. New auction date for rest of spectrum hasn’t been set. Law stipulated that only bidders that could participate in remaining lower 700 MHz band auction this summer were those already qualified to take part in original lower band bidding. Based on that law, FCC Wireless Bureau allowed previously qualified bidders to leave auction altogether and receive return of down payments. Bidders choosing to stay could select additional licenses and supplement upfront payments. Based on original block of licenses that had been part of lower 700 MHz auction, including larger A-, B- and E- block licenses, Council Tree Wireless had made original upfront payment of $40 million, matched by Spectrum Holdings with same amount. Council Tree’s upfront payment, according to FCC public notice released Wed., has been revised to $6.5 million. Spectrum Holdings now has upfront payment totaling $10,000. Based on revised list of qualified bidders, highest upfront payment still is that of Council Tree. Of 125 remaining qualified bidders who chose to stay in lower band auction, only 12 made upfront payments exceeding $1 million, including Paul Allen-backed Vulcan Spectrum, $1.5 million, and Omega Communications, $3.3 million, compared with $18.9 million in original lower 700 MHz band application. Among authorized bidders for Omega is Mario Gabelli, chmn. of Gabelli Asset Management, whose media holdings have included stake in Black Entertainment TV. Spectrum Holdings, whose upfront payments went from $40 million to $10,000, had petitioned FCC for reconsideration of decision to allow previously qualified bidders to select licenses to pursue other than ones originally identified in their applications. Spectrum Holdings had filed petition for reconsideration, which recently was rejected by Wireless Bureau, at around time of July 3 deadline for seeking return of upfront payments.

U.S. Appeals Court, D.C., turned down request by Verizon Wireless to accelerate schedule of its challenge to FCC decision to retain small amount of deposits from Jan. 2001 NextWave re-auction and to hold carriers to their bid obligations until pending U.S. Supreme Court case plays out. On Fri., D.C. Circuit set out schedule that included Nov. 22 filing date for appellant brief, Dec. 9 for friend-of-court brief, Jan. 8 for FCC brief. Final briefs are due Feb. 27 and oral argument remains scheduled for April 15, 2003. Court granted permission for Salmon PCS, which has some financial backing from Cingular Wireless, to file friend-of- court brief. Verizon Wireless had filed motion, unopposed by FCC, to expedite court proceedings at D.C. Circuit, so final briefs would be filed by Aug. 30, with oral argument soon after that. Verizon Wireless had sued Commission earlier this year in D.C. Circuit and Court of Federal Claims over pending NextWave license obligations. In Court of Federal Claims, U.S. govt. has sought additional time, until Aug. 26, to respond to Verizon’s complaint, which was filed in April. Govt. already had received 60-day extension from June 4, making its response due today (Mon.). Verizon told Court of Federal Claims on Fri. that it opposed anything other than 2- week extension of time for agency to file. “We understand -- contrary to our expectation when we stated our nonobjection to a 14-day further enlargement -- even on August 26 the United States plans to file only a motion to stay proceedings, rather than a response that joins the issues in this action,” Verizon told court. Verizon reiterated its concerns that it must pay full $8.4 billion in its NextWave re-auction obligations if FCC ultimately prevails in Supreme Court appeal in reclaiming disputed PCS licenses from NextWave. “The FCC’s threat to require Verizon Wireless to pay the remaining $8.4 billion on 10 days’ notice freezes Verizon Wireless from taking the steps it would otherwise rationally take to meet its need for more spectrum to serve its growing business,” carrier said. “The licenses it sought to buy in the auction contract are unavailable because the FCC cannot deliver them.” In its filing at D.C. Circuit, FCC said it was seeking until Aug. 26 to file motion to stay proceedings, partly because there were 3 “procedurally complicated,” related court actions pending before D.C. Circuit, Court of Federal Claims and Supreme Court. Govt. said delay also was warranted because of high degree of coordination needed among and within Justice Dept. and FCC. Govt. said “Verizon’s action in this court is only the latest in a long series of litigation maneuvers which Verizon has undertaken in multiple fora,” which are tied to upcoming Supreme Court proceedings and D.C. Circuit decision. Supreme Court has scheduled oral argument for Oct. 8.