Court rules, but money talks

FCC staff members are scratching their heads contemplating the commission's next move in the NextWave Telecom saga. But it is bankrupt NextWave that holds all the marbles.

Late last month, the U.S. Court of Appeals for the D.C. Circuit said the FCC violated bankruptcy laws when it repossessed NextWave's licenses, canceled them last September and reauctioned them. NextWave's licenses accounted for the bulk of the almost $17 billion bid in the January spectrum auction (see Table below).

From winners to losers Top bids for C and F Block wireless spectrum that revert to NextWave as a result  of the June 22 appeals court ruling  (in billions)
Market	Bidder	Net bid
New York	Verizon	$2.06
New York	Verizon	2.04
New York	AT&T	1.48
Los Angeles	Verizon	0.51
Chicago	Verizon	0.49
Los Angeles	AT&T	0.44
Los Angeles	Cingular	0.41
San Francisco	Verizon	0.40
Total		$7.83
Source: FCC

The ruling means Verizon Wireless, AT&T Wireless, Cingular Wireless and others now lose their rights to the spectrum they desperately need to fill in coverage gaps and boost capacity. Even some forgotten small business owners—for which the original C Block auction was intended—find their business hopes ruined.

“After 10 years of trying, once again, my dreams are demolished,” said Vincent McBride, a former mailman from Brooklyn who has now bid in three C Block auctions but holds no licenses. McBride won a license for Evansville, Ind., in January, bidding $1.5 million. He recently signed a term sheet with a group of investors who were going to give his business $20 million in cash to build the market out.

The FCC has said it's reviewing the court decision and will decide what action to take. Meanwhile, Verizon, which won 113 licenses for $8.8 billion in January, has been vocal about its desire for the FCC and NextWave to settle the matter quickly. AT&T Wireless won 44 licenses and is pressuring the FCC to appeal the decision to the Supreme Court or settle.

Ultimately, it's NextWave, which originally bid $4.7 billion for 90 licenses in 1996 and 1997, that can make a difference by agreeing to settle with the FCC—although it's unclear what power the commission has to settle because the appeals court effectively ruled that the FCC doesn't have authority over the licenses. NextWave said all settlement offers it made prior to the court ruling were denied.

“Typically, one settles before a court rules,” said Michael Wack, deputy general counsel of NextWave. “The company was formed to build and operate wireless networks. That is our intention.”

The bad blood between the FCC and NextWave has faded. New Chairman Michael Powell has opposed the FCC's move to reclaim the licenses and reauction them, so the FCC may walk away from the mess.

Former Chairman William Kennard and his staff were frustrated consistently during the last five years when C Block licensees turned to bankruptcy courts for relief rather than negotiating with the FCC. General Wireless, now Metro PCS, paid only a fraction of its C Block bid. Last week the Supreme Court refused to hear the FCC's appeal of the matter.

In 1999 the FCC was prepared to arrange transfer of NextWave's licenses to Nextel Communications. Kennard, today a Nextel board member, stood fast against NextWave's $1 million lobbying effort with Congress.

“There was definite animosity at the staff level,” said Kelly Cameron, a former FCC attorney and partner with the Washington, D.C., law firm of Powell, Goldstein, Frazer and Murphy. “There were people in the bureau who felt NextWave circumvented the process and that it was the FCC's job to set it right.”

If the FCC appeals the ruling to the Supreme Court, a resolution likely would be at least a year away. Even if the FCC wins, NextWave could appeal again.

Industry sources say the reauction's top bidders have approached NextWave for possible settlement discussions. Analysts say it's in the best interest of NextWave to settle with carriers because it likely would receive much more than the $4.2 billion it owes the federal government, as it controls the only significant spectrum the mobile wireless industry may see in several years (see Chart below).

How the spectrum breaks down 700 MHz Auction is set for Sept. 12. But broadcasters don't have to vacate the spectrum until 2007, or when 85% of U.S. households adopt digital televisions 1710 to 1755 MHz FCC is required to auction this unencumbered spectrum by 2002 1755 to 1850 MHz The Department of Defense holds this spectrum. A mandate from President Clinton calls for spectrum allocations by July 2001 and auctions by fall 2002. FCC Chairman Powell has agreed to delay the allocations 1900 MHz FCC auctioned 433 C and F Block licenses in January for nearly $17 billion. NextWave's win in court voids most of the auction results 2110 to 2150 MHz FCC is required to auction this unencumbered spectrum by 2002 2500 to 2690 MHz Broadband wireless operators and religious and educational broadcasters hold this spectrum. This falls under Powell's decision to delay allocation of 3G spectrum

“NextWave will likely settle and is posturing right now,” said Tole Hart, senior wireless services analyst with Dataquest. “Money talks.”

But publicly, NextWave is holding firm. Wack said it plans to roll out a 3G data network in all its markets by 2002. The company, which has yet to make a technology decision, plans to pursue its original strategy of becoming a carrier's carrier and reselling minutes to other companies.

NextWave's $90 million in interim financing will fund it until its bankruptcy reorganization plan is accepted by the court, Wack said. Many investors jumped on the bandwagon after hearing NextWave's convincing oral arguments before the appeals court in March.

“We hope to have [the reorganization plan] confirmed later this summer, whereupon we'll emerge with billions in financing,” Wack said. “We're not hurting for suitors.”

Many analysts question NextWave's viability. NextWave's licenses don't cover all the U.S., and the company lost most of its employees as it fought to keep its licenses.

“The whole carrier's-carrier strategy has gone away because of consolidation,” said Ira Brodsky, president of Datacomm Research. “On the other hand, if NextWave can be aggressive in building out 3G and have capabilities others aren't prepared to offer, it's possible for them to create a unique service on behalf of other carriers.”