C block second-rounders struggle

Some might say the C block re-auction was as unsuccessful as the original C block auction. The first auction resulted in a slew of bankruptcies and about 50% of the original spectrum returned to the FCC.

"Did the C block re-auction increase competition?" asked Harvey White, chairman and CEO of Leap Wireless. "If you look at the re-auction, you'd be impressed by the number of surrogates - people bidding for others." Many of the winners of the 300 licenses in the C block re-auction were somehow affiliated with existing operators.

The reason that few independent companies participated in the re-auction is likely because of the number of service providers that already exist. "Now that we're three, four, five years down the road, you're faced with people with brand recognition. You're faced with skepticism in the financial markets," White said.

Still, some companies - Leap included - are taking a shot at launching new networks. The FCC recently awarded Leap designated entity status after a nine-month wait. Now Leap can build out in markets covered by the 36 licenses it won in the re-auction, plus other licenses that it has acquired.

New licensees must offer unique services in order to succeed, White said. "We have a set of wireless operators still competing for the same set of customers - those that already have a phone," he said. Leap's offering, called Cricket, will be aimed at local users. Already available in Chattanooga, Tenn., the service doesn't offer roaming and allows long-distance calling only when prepaid. "We found that 13% of high-end revenue is roaming. That tells you that most people don't roam," White said.

AT&T Wireless also had some words of advice for new licensees at the PCS C-Block Re-auction Winners Forum in July in San Diego. "I recommend you be sure you can deliver on your promises," said John McDonough, senior counsel for AT&T Wireless. AT&T Wireless stumbled a few years ago and lost market share when it couldn't offer the superior level of customer service that it promised, he said. The operator also felt a "rude awakening" after the launch of Digital One Rate because its network couldn't handle all the traffic.

"We're building out more now than in the past 10 years," McDonough said.

The conference representatives from the financial community shared a few tips for new entrants on raising capital. In addition to a unique service offering, one of the first things investors will look for in a small operator is partnerships.

"There's implied support from affiliates," said Jerome Fowlkes, director of domestic consulting at BIA Consulting.

Joining an affiliate program with AT&T Wireless or Sprint PCS could be difficult, though. Companies that own only a few licenses or licenses in small markets say that the national players regard them as too small. Also, Sprint PCS's program particularly has the reputation of being extremely complicated to comply with, said Jeff Hale, assistant vice president for COBank.

Small license holders can find a good source of capital in vendor financing, but Fowlkes cautions such relationships. Licensees should consider the history of the vendor to ensure that the vendor won't pull out unexpectedly. In addition, operators lose leverage when negotiating equipment prices from vendors that offer them financing.

One of the most important factors for new players may lie in the markets that they own. Although it may seem like a good strategy to buy a license in a market where no other PCS player exists, "there's probably a reason that no one else is there," Fowlkes said. Very niche plays, such as fixed local loop services, might be ideal in such markets.